The Price of Inequality: How Today's Divided Society Endangers Our Future

by Joseph E. Stiglitz

Europe’s crisis is not an accident, but it’s not caused by excessive long-term debts and deficits or by the “welfare” state. It’s caused by excessive austerity—cutbacks in government expenditures that predictably led to the recession of 2012—and a flawed monetary arrangement, the euro. When the euro was introduced, most disinterested economists were skeptical. Changes in exchange rates and interest rates are critical for helping economies adjust. If all of the European countries were buffeted by the same shocks, then a single adjustment of the exchange rate and interest rate would do for all. But different European economies are buffeted by markedly different shocks. The euro had taken away two adjustment mechanisms, and put nothing in its place. It was a political project; politicians thought that sharing a currency would move the countries closer together, but there wasn’t enough cohesion within Europe to do what needed to be done to make the euro work. All they agreed upon was not to have too large deficits and debts. But as Spain and Ireland so aptly showed, that wasn’t enough. There was hope that over the years, the political project would be finished. But when things were going well, there was no momentum to do anything further; and after the crisis, which affected different countries so differently, there was no will. The countries could agree only on further belt tightening, which forced Europe into a double-dip recession.