Stiglitz: The days of the euro are numbered
Nearly a decade after the financial crisis, the eurozone’s jobless rate still hovers around 10%, almost double that of the US.
But aggregates of the eurozone don’t tell the whole story. Austria’s unemployment sits below 6% while Spain’s has topped 20%. Between 2008-2014, Greek household disposable income fell by 24% while German households gained 15%, according to EU data.
The main culprit for the dichotomy is the shared currency, says Joseph Stiglitz, Nobel Prize-winning economist and author of the new book, The Euro: How a Common Currency Threatens the Future of Europe.
Yet, for Stiglitz, the problems were evident from the beginning. “[T]hose in Europe deliberating about adopting the euro should consider whether they should tie their fortunes to an institutional arrangement whose flaws are apparent,” wrote Stiglitz in 2003, as a handful of countries, including Cyprus, Slovenia and Estonia, sought to adopt the currency.
Now, a decade later, Europe’s great monetary endeavor has led to economic stagnation and severe inequality, he says.
“The euro is a man-made construction” writes Stiglitz. “Europe’s monetary arrangements can be reconfigured; the euro can be abandoned if necessary.”
While the reforms he proposes, including common deposit insurance, eurobonds and a move away from austerity policies, are relatively straightforward, the political climate needed to institute the change is not. The longer it takes to make reforms, the more fractured countries will become– a cycle which could eventually diminish political will to save the eurozone.
We sat down with Joseph Stiglitz to discuss critical missteps in the formation of the euro, currency reforms, and the EU’s path forward. Below is an edited section of our interview; the video interview is above.
YAHOO: It seems the crux of the issue is that monetary unity came before political unity. So why wasn’t that part of the equation when they first set out?
JOSEPH STIGLITZ: Well, the creation of the single currency was a political project. It was driven by the desire to be the next step in bringing the countries of Europe together.
But the politics wasn’t strong enough, you might say, to finish the project. To make a successful single currency, you had to realize that you were taking away, too, the most important instruments for adjusting when you had an economic shock, like the recession of 2008. So you took away the interest rate. You took away the currency adjustment mechanism, but they didn’t put anything in the place.
And instead, they made things even worse. Because they tied the hands of the countries of Europe by saying you have to limit the deficits and the debt. And then they said to the central bank, focus just on inflation. Don’t pay any attention to employment, jobs, financial stability. They believed, somehow, that all this would work out, that politically it would work out, that eventually, they would create the necessary institutions.
Economically, they thought markets would make sure things would work out, because if you maintain deficits and debt low and low inflation, automatically you’d be brought to full employment and rapid growth. Well, it hasn’t worked out. And theory said it wouldn’t work out.
YAHOO: As economic stagnation continues, there’s a lot more anti-EU rhetoric and populism. Do you see there being a tipping point at which the euro or the EU can’t be saved?
JOSEPH STIGLITZ: Very much so. And in fact, you almost see a beginning of that with Brexit. Now, remember, the UK was not in the eurozone. But when they looked across the English Channel at what was going on inside the eurozone, one of the things they saw was rigid bureaucrats. They saw a system that was not able to adapt to the differences in circumstances. It was imposing the same rules everywhere, rules that might make sense in Germany, but didn’t make sense in other countries. They saw a dysfunctional eurozone. And their trading partners in Europe were not doing very well. And so they said, do we want to be a member of that club?
Now, what’s going to happen, I think– and what is happening already– is that the parties in the center– the center-left, the center-right– that have been supporting the concept of the euro are losing support. You see that in poll after poll. And people are moving to the extreme parties. And that’s a danger.
Because eventually, unless they make the reforms that I describe in the book– unless they make the institutions that will make the euro actually work for most of the citizens– unless they do that, the discontent will grow. And eventually, there will be vote of a country within the euro that says– a party will get elected, one of the extreme parties, a coalition, that will say we’ve had it. And they will call for a referendum like the Brexit. And there’s a good chance– and I think it’s almost inevitable, eventually, unless the reforms occur– that there will be an exit. Whether it’s Italy or Spain or Greece, it’s hard to tell. But it’s hard to see it not happening.
YAHOO: Now, some of the reforms that you suggest include deposit insurance, euro bonds, and a move away from austerity policies. Do you see that possible now in this political climate in Europe? Is it almost like they’re in a catch-22, where they need to implement reforms but they can’t?
JOSEPH STIGLITZ: These reforms are not big in an economic sense. But you’re absolutely right– it’s the politics. And while they’re not big in an economic sense, they’re too big for the politics of Europe as it’s constructed today.
You don’t know what will happen when, as you say, push comes to shove. They see the light. They see Brexit. They see this discontent. And they say, look, we have to actually do what we’re supposed to.
Unfortunately, some of the response to Brexit was suggesting that rather than doing that, they were going to move in the other direction, a hard line attitude. Juncker, who’s the head of the European Commission, said we are not going to give UK a good deal. We’re going to treat it harshly, because we want to make sure that other countries won’t leave.
When you think about that for a minute, what he was saying– this is the head of the European Commission– was saying the benefits to the citizens of Europe were so low that the only way to keep them supporting the euro was to threaten them with disaster if they leave. Now, that’s not the way to create a partnership.
YAHOO: You’ve suggested the idea of a northern and a southern euro. How exactly would that work?
JOSEPH STIGLITZ: Well, the first thing to realize is that the regional work on the design of currency area by my colleague at Columbia, Bob Mundell, emphasized that currency areas were better when there’s enough homogeneity. And there’s a closer similarity– not perfect, but closer similarity– among the countries of the south, not only in economics, but in political philosophy, and so too for the countries of north. So the prospects of two or three currency areas working are far greater than the prospect of a single currency working for the whole world.
If you ask the question could America join with a currency area of Latin America and the United States, we would say, oh no. When we talked about NAFTA, nobody said we need to have a single currency, because they knew it would not work. We could have a free trade area, but making a single currency work with countries as different as Mexico, Canada and the United States was not going to work.
In fact, even Canada and the United States have different currencies. We get along well. We have lots of economic relationship. It’s beneficial to both of us. But there’s not a single currency. So that’s the key idea.
Now, once you recognize that, there’s not a flood of money to the United States or to Canada. The money allocates itself on the basis of where the returns are highest. And the exchange rates are just to equilibrate the returns. So that’s the whole point.
If you have flexible exchange rates, you don’t get the rush of money going from one place to another, because you get the exchange rate to make the adjustment. So everybody says the returns are reasonably the same in the different parts.
YAHOO: But initially, once you institute that change suddenly, say tomorrow, we’re going to have a southern euro currency and a northern euro currency. Wouldn’t there be some sort of issue in implementing that overnight?
JOSEPH STIGLITZ: Well, I try to address that in the book. And this is one of the more novel proposals in the book, where I try to take advantage of the advances of technology that have occurred. Those advances mean that that paper money that we all use has become a thing of the past. In fact, people don’t use paper very much. Most of the transactions are done electronically. 99.9% are done electronically in value terms.
So once you realize that, that means we could go to a fully digital currency. A lot of people have been saying we ought to do it. It has a lot of advantages in terms of record keeping, tax avoidance, monitoring people to make sure that there isn’t tax evasion– a lot of advantages. And if you did that, you would have the mechanism to circumscribe the kind of flight that you would worry about.
And so initially, you might have to put in those kinds of controls. Fairly quickly, things would equilibriate after that moment of panic. And this electronic currency has a further advantage– you don’t have to print all that money. You don’t need the printing presses. A lot of people in Greece were thinking about leaving. They say, who’s going to print the money, and how are you going to keep it secret?
Well, the point is, you can create this electronic platform. In fact, it’s almost there.