by
N. Peter Kramer
But since the common currency came into existence, it has instead reinvigorated conflicts, yielding new crises, fresh grievances and a spirit of distrust.
According to the Nobel laureate economist Joseph E. Stiglitz, in his new book ‘The Euro: How a Common Currency Threatens the Future of Europe’. Mr Stiglitz is University Professor at Columbia University, New York City and a former Vice-President and Chief Economist of the World Bank.
Stiglitz: the euro is a tragic mistake
In an interview with The New York Times, prof. Stiglitz described the euro as a tragic mistake, a currency begun without the necessary political integration or clear thinking about its fundamental flaws.
The euro was compromised by an ill-conceived structure, and its troubles have been amplified by wrongheaded economic policies imposed by the most powerful European countries as conditions for bailing out those worst ensnared by crisis, he stated. By prof. Stiglitz’s reckoning the common currency has made having the countries of the Eurozone share common currency.
They looked across the Atlantic and said: the US, big economy, very successful, single currency. We should imitate! But the problem was that they didn’t have a political integration. They didn’t have the conditions that would make a single currency work. For the euro to work was the idea was, the countries had to converge.
The converge criteria were that countries had to keep their deficits and debts relative to their GDP down. That was viewed as the necessary and almost sufficient conditions for making the euro work. Several of the countries that went into crisis, Spain and Portugal for instance, actually had a surplus before the crisis and a very low debt-to-GDP ratio. But they still had a crisis. That tells us an important lesson: what the people who were behind the creation of the euro thought was going to be a critical condition was not!
In the NYT interview Prof. Stiglitz continues, saying that ‘the disappointing thing was that after the crisis, they didn’t learn a lesson. What they did was double down on the same recipe, austerity. The structure of the Euro was at fault, and the policies they enacted amplified the structural deficiencies.
The result was that the countries diverged. The divisiveness in the EU is enormous; flinging of accusations between member states are also enormous. In Greece they are reliving the German horrors of WWII; the Germans say that Greeks are lazy; even though the number of hours that Greeks work per week is higher than the Germans do.
Stiglitz: you have to get rid of limits on government deficits
Shocking was the response to Brexit of European Commission President Jean-Claude Juncker, who said: ’we are going to be very, very tough on the UK because we want to make sure that no other country leaves the EU’.
You hope that people want to stay in the EU because it’s delivering benefits, because there’s a belief in European solidarity, the belief that it’s bringing prosperity. Juncker says, the only way we are going to keep the EU together is by threatening of what will happens if you think about leaving.
On the question, what needs to happen to make the euro viable, prof. Stiglitz answers: a banking unions with deposit insurance; something like a euro bond. An ECB that doesn’t just focus on inflation – you want it to focus on employment; and… you have to get rid of limits on government deficits.
