Can the eurozone be kept alive?

Joseph Stiglitz blames the single currency for the continent's financial ills, but also offers some bold remedies to save the euro experiment.

by Jeremy Cook
Last Updated: 09 Sep 2016

Reading a book on Europe and its economic issues in a post-Brexit world was certainly an interesting experiment in cognitive dissonance.

One cannot really overstate the trauma that Europe has felt since the advent of the global financial crisis, for while it may have started in the US mortgage market and spread around the world on a wave of panic, it is the Eurozone that has been at the epicentre of economic pain. While the initial skirmishes of the crisis may have been dealt with in a whimsical fashion by the film The Big Short, there is little joy or caprice in this assessment of the issues currently befalling Europe.

In his latest book, Joseph Stiglitz, winner of a Nobel Memorial Prize in Economics, adviser to former President Bill Clinton and professor of economics at Columbia University, lays the majority of the blame for the depression in Greece and the resulting swathes of unemployment, inequality and misery squarely at the door of the European single currency - and I must say it is a convincing argument.

The euro had always been pictured as an instrument of convergence; through greater cooperation and a shared currency, a continent that has so often split apart would become as one. However, as we all know it's the loftiest dreams that crash and burn the quickest.

Stiglitz's arguments fall into two issues with the euro; firstly, that the implementation of a single currency was wrong and, secondly, that the response to the global financial crisis exacerbated the issues enormously and risk tearing down the project entirely. Indeed, he posits that of all the crises the Eurozone has faced, the ones in Spain and Ireland were ones of inequality that could have only come to pass as a result of the euro. The convergence criteria that the countries had to adhere to were seemingly simple, all they needed to do was keep their fiscal deficit below 3% of GDP and maintain a debt to GDP level of 60%. Both countries however ended up with large deficits and high debt to GDP ratios despite having entered the euro with surpluses and low debt levels.

It is in the reaction of the Eurozone and European authorities once the crisis hit where you can tell that Stiglitz is almost incandescent in his criticism of austerity, rules-based central banking, the IMF and Germany.

Indeed, I wonder how well this book will go down in the halls of power in Berlin. Stiglitz makes sure the reader is left in no doubt that a policy of austerity, pushed by Germany and the IMF is what started the death knocking of the single currency and pushed Greece into a depression worse than it has ever experienced. Their reticence to allow any form of lenience in a plan that piles more debt upon debt and limits the ability of the country to grow has damaged the Greek economy almost beyond repair. Yet it is in the conclusions about what can be done to rescue the euro that Stiglitz's best work is done.

His economic and structural plans are far-reaching such as befits the issues and what is at stake. Stiglitz calls for a banking union with deposit insurance that allows money to remain within economies (as opposed to being sucked into safer countries when the skies get dark), a euro bond that raises money for supranational ends and channels funds to nations that need additional structural support, and a central bank that not only targets inflation but also makes sure that growth and employment fundamentals are in check.

He also argues for a tax policy that deals with the inequalities at both a national and a European level. He advocates getting rid of limits on government deficits, as well as making it unattractive for governments, such as that of Germany, to hold onto surpluses that rob export growth from other members of the currency union.

Needless to say, in any discussion of the euro there must be time devoted to a plan that sees a split of the currency; one for core nations and one for those that are on the periphery, or one that simply exists without Germany. I am not of the view, and I sense neither is Stiglitz, that the euro needs breaking up, but rather that it needs a concerted effort to save it.

German thinker Max Weber said 'politics is the slow boring of hard boards' and that 'anyone who seeks to do it must risk his own soul'. Change comes in excruciating increments, so when you try to move mountains you must be prepared to spend a lifetime doing it. Are European politicians willing to make those tough calls?

Stiglitz's book is by no means an obituary for the euro, but stands up as a mark of what needs to occur so as to keep the experiment, and some would say the continent, alive.

The Euro: And its Threat to the Future of Europe by Joseph E Stiglitz is published by Allen Lane, £20

Jeremy Cook is chief economist at World First


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