An Agenda to Save the Euro
By Joseph E. Stiglitz Mareeg.com-NEW YORK – It has been three years since the outbreak of the euro crisis, and onlyan inveterate optimist would say that the worst is definitely over. Some, noting
that the eurozone’s double-dip recession has ended, conclude that the austerity
medicine has worked. But try telling that to those in countries that are still in
depression, with per capita GDP still below pre-2008 levels, unemployment rates
above 20%, and youth unemployment at more than 50%. At the current pace of
“recovery,” no return to normality can be expected until well into the next decade.
A recent study by Federal Reserve economists concluded that America’s protracted
high unemployment will have serious adverse effects on GDP growth for years to come.
If that is true in the United States, where unemployment is 40% lower than in
Europe, the prospects for European growth appear bleak indeed.
What is needed, above all, is fundamental reform in the structure of the eurozone.
By now, there is a fairly clear understanding of what is required:
· A real banking union, with common supervision, common deposit insurance,
and common resolution; without this, money will continue to flow from the weakest
countries to the strongest;
· Some form of debt mutualization, such as Eurobonds: with Europe’s debt/GDP
ratio lower than that of the US, the eurozone could borrow at negative real interest
rates, as the US does. The lower interest rates would free money to stimulate the
economy, breaking the crisis-hit countries’ vicious circle whereby austerity
increases the debt burden, making debt less sustainable, by shrinking GDP;
· Industrial policies to enable the laggard countries to catch up; this
implies revising current strictures, which bar such policies as unacceptable
interventions in free markets;
· A central bank that focuses not only on inflation, but also on growth,
employment, and financial stability;
· Replacing anti-growth austerity policies with pro-growth policies focusing
on investments in people, technology, and infrastructure.
Much of the euro’s design reflects the neoliberal economic doctrines that prevailed
when the single currency was conceived. It was thought that keeping inflation low
was necessary and almost sufficient for growth and stability; that making central
banks independent was the only way to ensure confidence in the monetary system; that
low debt and deficits would ensure economic convergence among member countries; and
that a single market, with money and people flowing freely, would ensure efficiency
Each of these doctrines has proved to be wrong. The independent US and European
central banks performed much more poorly in the run-up to the crisis than less
independent banks in some leading emerging markets, because their focus on inflation
distracted attention from the far more important problem of financial fragility.
Likewise, Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the
crisis. The crisis caused the deficits and high debt, not the other way around, and
the fiscal constraints that Europe has agreed will neither facilitate rapid recovery
from this crisis nor prevent the next one.
Finally, the free flow of people, like the free flow of money, seemed to make sense;
factors of production would go to where their returns were highest. But migration
from crisis-hit countries, partly to avoid repaying legacy debts (some of which were
forced on these countries by the European Central Bank, which insisted that private
losses be socialized), has been hollowing out the weaker economies. It can also
result in a misallocation of labor.
Internal devaluation – lowering domestic wages and prices – is no substitute for
exchange-rate flexibility. Indeed, there is increasing worry about deflation, which
increases leverage and the burden of debt levels that are already too high. If
internal devaluation were a good substitute, the gold standard would not have been a
problem in the Great Depression, and Argentina could have managed to keep the peso’s
peg to the dollar when its debt crisis erupted a decade ago.
No country has ever restored prosperity through austerity. Historically, a few small
countries were lucky to have exports fill the gap in aggregate demand as public
expenditure contracted, enabling them to avoid austerity’s depressing effects. But
European exports have barely increased since 2008 (despite the decline in wages in
some countries, most notably Greece and Italy). With global growth so tepid, exports
will not restore Europe and America to prosperity any time soon.
Germany and some of the other northern European countries, demonstrating an unseemly
lack of European solidarity, have declared that they should not be asked to pick up
the bill for their profligate southern neighbors. This is wrong on several counts.
For starters, lower interest rates that follow from Eurobonds or some similar
mechanism would make the debt burden manageable. The US, it should be recalled,
emerged from World War II with a very high debt burden, but the ensuing years marked
the country’s most rapid growth ever.
If the eurozone adopts the program outlined above, there should be no need for
Germany to pick up any tab. But under the perverse policies that Europe has adopted,
one debt restructuring has been followed by another. If Germany and the other
northern European countries continue to insist on pursuing current policies, they,
together with their southern neighbors, will wind up paying a high price.
The euro was supposed to bring growth, prosperity, and a sense of unity to Europe.
Instead, it has brought stagnation, instability, and divisiveness.
It does not have to be this way. The euro can be saved, but it will take more than
fine speeches asserting a commitment to Europe. If Germany and others are not
willing to do what it takes – if there is not enough solidarity to make the politics
work – then the euro may have to be abandoned for the sake of salvaging the European
Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at
Project Syndicate, 2013