THE EURO
How a Common Currency Threatens the Future of Europe
Joseph E Stiglitz
W W Norton & Company
416 pages; $28.95
The nasty headlines from across the Atlantic – Brexit, terrorism, debt crises – almost make us forget that these were supposed to be Europe’s salad days. With a common currency and increasing integration, Europe was, finally, bidding adieu to cross-border conflict and economic crisis. Turmoil and strife were so very 20th century; the future was to be only digital apps and polyglot cafes.
Instead, they have millions of migrants, rising nationalism, recurrent recessions and plummeting birthrates. What went wrong?
Joseph E Stiglitz, the former chief economist of the World Bank and winner of the Nobel in economic science, proposes a simple answer. In The Euro: How a Common Currency Threatens the Future of Europe, he argues that the chief source of Europe’s malaise is its 17-year-old currency experiment. “While there are many factors contributing to Europe’s travails,” he writes, “there is one underlying mistake: the creation of the single currency, the euro.”
Mr Stiglitz is not speaking about the obvious fact that 19 independent states use a common currency, but about their failure so far to create the quilt of institutions and shared regulations to make it work. This sounds wonky, and though Mr Stiglitz spews plenty of populist rhetoric, The Euro is thick with dense paragraphs. Still, the underlying idea is simple.
American states like Alabama and Vermont certainly differ from one another, but they benefit from a shared political fabric far more than, say, Belgium and Greece. Mr Stiglitz’s main point is that for the euro to work its nation-states will have to function more like American states.
If Americans think of the euro at all, it’s typically to marvel at its convenience for tourists, though those of a certain age may harbor nostalgia for the francs, lire and pesetas with which we trekked from hostel to chateau. But all those quaint notes were a planner’s nightmare. Depending on the rate of exchange, a German could afford to buy wine from Burgundy or olive oil from Tuscany one month but not the next. The euro fixed all that.
The problem is that currency fluctuations were a useful escape valve. What if France entered into a severe recession while the German economy remained robust? Thanks to the laws of Adam Smith, the franc would drop relative to the mark, and voilà, the imbalance would start to correct. Now, France has no currency to depreciate.
Europe lacks stabilisers. The common budget is only one per cent of Europe’s economy, a stark contrast to America, where the federal budget is roughly 20 per cent. Thus, countries like Greece have nowhere to turn. Mr Stiglitz argues for “more Europe,” meaning an expanded budget and common welfare programmes, and a mutualised system of deposit insurance.
This part of Mr Stiglitz’s argument is conventional. However, that textbook argument against the euro is only part of Mr Stiglitz’s brief. He also takes aim at the “troika” of policy institutions (the European Central Bank, the International Monetary Fund and the European Commission) for obsessing over inflation rather than job creation.
But his attacks on the troika devolve into a sort of rant against neoliberal capitalism. Markets ain’t perfect; they need to be regulated, and the losers in a market system need to be protected.
Yet the market remains the best social construct for pricing goods and rationing demand. Mr Stiglitz accuses the troika of being motivated by its supposed enmity for government. He, on the other hand, shows his mistrust for the market on practically every page. He wants bank credit decisions screened according to his own political criteria. He faults the troika for following a political agenda instead of a neutral policy, yet repeatedly urges European leaders to tilt the scales in favor of small and medium-size businesses as opposed to “big corporations.”
Far from the measured analysis that one might expect from a renowned economist, The Euro has the strident tone of a political pamphlet. Italics are everywhere, as if the reader were being screamed at. There is a numbing incantation of faults attributed to the troika. And Mr Stiglitz uses the unfortunate tactic of impugning his adversaries’ motives.
Mr Stiglitz generally presents Greece as Germany’s victim, rather than as an actor in its own depression; he says Germany’s trade surplus forces Greece, and others, to run deficits. It would be equally true to say that Greece’s deficit imposes on Germany the burden of running a surplus. The fact is, German industry is more productive.
None of this undermines Mr Stiglitz’s argument that Europe needs a redivision of currencies to rebalance trade. Although he would like to see “more Europe” – that is, common rules and institutions and even a common tax framework so the euro can work – he doubts that the political will exists. In its absence, he would splinter the euro into, say, two or three currencies, perhaps trading freely, perhaps (a less draconian break) trading only within limited bounds, until the day when the continent is ready to attempt a single currency again. Either way, Europe is having its Articles of Confederation moment. Its leaders should grasp that superimposing one financial system on 19 political fiefs cannot work.
How a Common Currency Threatens the Future of Europe
Joseph E Stiglitz
W W Norton & Company
416 pages; $28.95
The nasty headlines from across the Atlantic – Brexit, terrorism, debt crises – almost make us forget that these were supposed to be Europe’s salad days. With a common currency and increasing integration, Europe was, finally, bidding adieu to cross-border conflict and economic crisis. Turmoil and strife were so very 20th century; the future was to be only digital apps and polyglot cafes.
Instead, they have millions of migrants, rising nationalism, recurrent recessions and plummeting birthrates. What went wrong?
Joseph E Stiglitz, the former chief economist of the World Bank and winner of the Nobel in economic science, proposes a simple answer. In The Euro: How a Common Currency Threatens the Future of Europe, he argues that the chief source of Europe’s malaise is its 17-year-old currency experiment. “While there are many factors contributing to Europe’s travails,” he writes, “there is one underlying mistake: the creation of the single currency, the euro.”
Mr Stiglitz is not speaking about the obvious fact that 19 independent states use a common currency, but about their failure so far to create the quilt of institutions and shared regulations to make it work. This sounds wonky, and though Mr Stiglitz spews plenty of populist rhetoric, The Euro is thick with dense paragraphs. Still, the underlying idea is simple.
American states like Alabama and Vermont certainly differ from one another, but they benefit from a shared political fabric far more than, say, Belgium and Greece. Mr Stiglitz’s main point is that for the euro to work its nation-states will have to function more like American states.
If Americans think of the euro at all, it’s typically to marvel at its convenience for tourists, though those of a certain age may harbor nostalgia for the francs, lire and pesetas with which we trekked from hostel to chateau. But all those quaint notes were a planner’s nightmare. Depending on the rate of exchange, a German could afford to buy wine from Burgundy or olive oil from Tuscany one month but not the next. The euro fixed all that.
The problem is that currency fluctuations were a useful escape valve. What if France entered into a severe recession while the German economy remained robust? Thanks to the laws of Adam Smith, the franc would drop relative to the mark, and voilà, the imbalance would start to correct. Now, France has no currency to depreciate.
Europe lacks stabilisers. The common budget is only one per cent of Europe’s economy, a stark contrast to America, where the federal budget is roughly 20 per cent. Thus, countries like Greece have nowhere to turn. Mr Stiglitz argues for “more Europe,” meaning an expanded budget and common welfare programmes, and a mutualised system of deposit insurance.
This part of Mr Stiglitz’s argument is conventional. However, that textbook argument against the euro is only part of Mr Stiglitz’s brief. He also takes aim at the “troika” of policy institutions (the European Central Bank, the International Monetary Fund and the European Commission) for obsessing over inflation rather than job creation.
But his attacks on the troika devolve into a sort of rant against neoliberal capitalism. Markets ain’t perfect; they need to be regulated, and the losers in a market system need to be protected.
Yet the market remains the best social construct for pricing goods and rationing demand. Mr Stiglitz accuses the troika of being motivated by its supposed enmity for government. He, on the other hand, shows his mistrust for the market on practically every page. He wants bank credit decisions screened according to his own political criteria. He faults the troika for following a political agenda instead of a neutral policy, yet repeatedly urges European leaders to tilt the scales in favor of small and medium-size businesses as opposed to “big corporations.”
Far from the measured analysis that one might expect from a renowned economist, The Euro has the strident tone of a political pamphlet. Italics are everywhere, as if the reader were being screamed at. There is a numbing incantation of faults attributed to the troika. And Mr Stiglitz uses the unfortunate tactic of impugning his adversaries’ motives.
Mr Stiglitz generally presents Greece as Germany’s victim, rather than as an actor in its own depression; he says Germany’s trade surplus forces Greece, and others, to run deficits. It would be equally true to say that Greece’s deficit imposes on Germany the burden of running a surplus. The fact is, German industry is more productive.
None of this undermines Mr Stiglitz’s argument that Europe needs a redivision of currencies to rebalance trade. Although he would like to see “more Europe” – that is, common rules and institutions and even a common tax framework so the euro can work – he doubts that the political will exists. In its absence, he would splinter the euro into, say, two or three currencies, perhaps trading freely, perhaps (a less draconian break) trading only within limited bounds, until the day when the continent is ready to attempt a single currency again. Either way, Europe is having its Articles of Confederation moment. Its leaders should grasp that superimposing one financial system on 19 political fiefs cannot work.
©2016 The New York Times News Service