The Euro: How a Common Currency Threatens the Future of Europe
By Joseph E. Stiglitz, W.W. Norton & Company, 448 pages, $29
The nasty headlines from Europe — Brexit, terrorism, debt crises — almost make us forget that these were supposed to be its 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 cafés.
Well, they still have Chartres, and they still have Goethe. They also 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.”
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 Stiglitz spews plenty of populist rhetoric, “The Euro” is thick with dense paragraphs (imagine an economics text written by Michael Moore). Still, the underlying idea is simple.
American states such as Alabama and Vermont certainly differ from one another, but they benefit from a shared political fabric far more than, say, Belgium and Greece. Stiglitz’s main point is that for the euro to work — and for “Europe” 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 harbour 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 voila, Germans would buy more Perrier and Peugeots, and the imbalance would start to correct. Now, France has no currency to depreciate.
Ah, the careful reader will say, then why do the individual American states (which are similarly locked into a single currency) function better? What’s the safety valve for Rhode Island or Mississippi?
Actually, there are several. If the price of oil is slumping, Texas oilmen will contribute less to the federal budget; some of the tab will be picked up by citizens in states that are doing better. And since more people in Texas will be eligible for federal welfare programmes, such as unemployment insurance, federal outlays will increase. These programmes act as automatic stabilisers.
Europe lacks such stabilisers. The common budget is only 1 per cent of Europe’s economy, a stark contrast to America, where the federal budget is roughly 20 per cent. Thus, countries such as Greece that are suffering hard times have nowhere to turn. Stiglitz argues for “more Europe”, meaning an expanded budget and common welfare programmes, and a mutualised system of deposit insurance (so that failing Greek banks are not dependent merely on other failing Greek banks, but on healthy German ones as well).
This part of Stiglitz’s argument is conventional. So is his diagnosis — that the European leaders who implemented the euro in the 1990s did so largely for political reasons (getting rid of the mark was France’s price for accepting a reunified Germany). And Stiglitz’s moral — “Be careful not to let economic integration outpace political integration” — is well stated.
However, that textbook argument against the euro is only part of 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. He is right to indict the drones in Brussels and the bankers in Berlin for imposing budget austerity and unrealistic debt repayment schedules (he likens them to “medieval bloodletters”). Herbert Hoover didn’t lick the Depression, and austerity hasn’t worked in Greece. Stiglitz is also right to fault the European project, in general, for its nondemocratic character.
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. 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 berates industry for investing in “capital-intensive techniques of production, contributing, over the long run, to unemployment”. (That was also said about the tractor.) He faults the troika for following a political agenda instead of a neutral policy, yet repeatedly urges European leaders to tilt the scales in favour of small and medium-size businesses as opposed to “big corporations”. If these are not political criteria, what are?
Many of his charges have a vague, rhetorical air. He throws around words such as “monopolist” without specifics. He writes that unnamed “Greek oligarchs” had “a controlling interest in banks and the media and were exploiting the linkages between the two”. Which banks?
And when he says, repeatedly, that the troika was wrong about government spending being a major cause of the crisis, because Spain and Ireland saw their economies implode over free-market errors, he runs into a problem. The problem is that Greece, which suffered the worst crisis, and is the example on which Stiglitz spills the most ink, was largely caused by its bloated public sector. Stiglitz admits this.
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 (did they do anything right?). And Stiglitz uses the unfortunate tactic of impugning his adversaries’ motives; the troika is not merely wrong, it is guilty of “hypocrisy”, of “dishonesty” and of “sheer hypocrisy” — and that’s all within two pages.
Stiglitz even descends to slurs evoking the Nazi era. Taking issue with Wolfgang Schauble, Germany’s finance minister, for emphasising economic rules, Stiglitz says, “Of course, many of the most heinous crimes have been committed by those who simply said they were just obeying rules.” His bias against wealthy European states, Germany in particular, subtly infects the book. 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 (if one country is a net seller, someone else must be a net buyer). 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 Stiglitz’s argument that Europe needs a redivision of currencies to rebalance trade. Although Stiglitz 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.
–New York Times News Service
Roger Lowenstein is the author, most recently, of “America’s Bank: The Epic Struggle to Create the Federal Reserve”.
