Seven
changes needed to save the euro and the EU
Joseph Stiglitz
Monday 22 August
2016 15.01 BST
Time
for EU reform or divorce? Unless Brussels makes seven changes, its
members will inevitably conclude they are trapped in an untenable
marriage
To say that the
eurozone has not been performing well since the 2008 crisis is an
understatement. Its member countries have done more poorly than the
European Union countries outside the eurozone, and much more poorly
than the United States, which was the epicentre of the crisis.
The worst-performing
eurozone countries are mired in depression or deep recession; their
condition – think of Greece – is worse in many ways than what
economies suffered during the Great Depression of the 1930s. The
best-performing eurozone members, such as Germany, look good, but
only in comparison; and their growth model is partly based on
beggar-thy-neighbour policies, whereby success comes at the expense
of erstwhile “partners”.
Four types of
explanation have been advanced to explain this state of affairs.
Germany likes to blame the victim, pointing to Greece’s profligacy
and the debt and deficits elsewhere. But this puts the cart before
the horse: Spain and Ireland had surpluses and low debt-to-GDP ratios
before the euro crisis. So the crisis caused the deficits and debts,
not the other way around.
Deficit fetishism
is, no doubt, part of Europe’s problems. Finland, too, has been
having trouble adjusting to the multiple shocks it has confronted,
with GDP in 2015 around 5.5% below its 2008 peak.
Other “blame the
victim” critics cite the welfare state and excessive labour-market
protections as the cause of the eurozone’s malaise. Yet some of
Europe’s best-performing countries, such as Sweden and Norway, have
the strongest welfare states and labour-market protections.
Many of the
countries now performing poorly were doing very well – above the
European average – before the euro was introduced. Their decline
did not result from some sudden change in their labour laws, or from
an epidemic of laziness in the crisis countries. What changed was the
currency arrangement.
The second type of
explanation amounts to a wish that Europe had better leaders, men and
women who understood economics better and implemented better
policies. Flawed policies – not just austerity, but also misguided
so-called structural reforms, which widened inequality and thus
further weakened overall demand and potential growth – have
undoubtedly made matters worse.
But the eurozone was
a political arrangement, in which it was inevitable that Germany’s
voice would be loud. Anyone who has dealt with German policymakers
over the past third of a century should have known in advance the
likely result. Most important, given the available tools, not even
the most brilliant economic tsar could not have made the eurozone
prosper.
The third set of
reasons for the eurozone’s poor performance is a broader rightwing
critique of the EU, centred on the eurocrats’ penchant for
stifling, innovation-inhibiting regulations. This critique, too,
misses the mark. The eurocrats, like labour laws or the welfare
state, didn’t suddenly change in 1999, with the creation of the
fixed exchange-rate system, or in 2008, with the beginning of the
crisis. More fundamentally, what matters is the standard of living,
the quality of life. Anyone who denies how much better off we in the
west are with our stiflingly clean air and water should visit
Beijing.
That leaves the
fourth explanation: the euro is more to blame than the policies and
structures of individual countries. The euro was flawed at birth.
Even the best policymakers the world has ever seen could not have
made it work. The eurozone’s structure imposed the kind of rigidity
associated with the gold standard. The single currency took away its
members’ most important mechanism for adjustment – the exchange
rate – and the eurozone circumscribed monetary and fiscal policy.
In response to
asymmetric shocks and divergences in productivity, there would have
to be adjustments in the real (inflation-adjusted) exchange rate,
meaning that prices in the eurozone periphery would have to fall
relative to Germany and northern Europe. But, with Germany adamant
about inflation – its prices have been stagnant – the adjustment
could be accomplished only through wrenching deflation elsewhere.
Typically, this meant painful unemployment and weakening unions; the
eurozone’s poorest countries, and especially the workers within
them, bore the brunt of the adjustment burden. So the plan to spur
convergence among eurozone countries failed miserably, with
disparities between and within countries growing.
This system cannot
and will not work in the long run: democratic politics ensures its
failure. Only by changing the eurozone’s rules and institutions can
the euro be made to work. This will require seven changes:
• abandoning the
convergence criteria, which require deficits to be less than 3% of
GDP
• replacing
austerity with a growth strategy, supported by a solidarity fund for
stabilisation
• dismantling a
crisis-prone system whereby countries must borrow in a currency not
under their control, and relying instead on Eurobonds or some similar
mechanism
• better
burden-sharing during adjustment, with countries running
current-account surpluses committing to raise wages and increase
fiscal spending, thereby ensuring that their prices increase faster
than those in the countries with current-account deficits;
• changing the
mandate of the European Central Bank, which focuses only on
inflation, unlike the US Federal Reserve, which takes into account
employment, growth, and stability as well
• establishing
common deposit insurance, which would prevent money from fleeing
poorly performing countries, and other elements of a “banking
union”
• and encouraging,
rather than forbidding, industrial policies designed to ensure that
the eurozone’s laggards can catch up with its leaders.
From an economic
perspective, these changes are small; but today’s eurozone
leadership may lack the political will to carry them out. That
doesn’t change the basic fact that the current halfway house is
untenable. A system intended to promote prosperity and further
integration has been having just the opposite effect. An amicable
divorce would be better than the current stalemate.
Of course, every
divorce is costly; but muddling through would be even more costly. As
we’ve already seen this summer in the United Kingdom, if European
leaders can’t or won’t make the hard decisions, European voters
will make the decisions for them – and the leaders may not be happy
with the results.
•Joseph Stiglitz
is a Nobel prizewinner, the chief economist of the Roosevelt
Institute, a former senior vice-president and chief economist of the
World Bank, and was chair of the US president’s Council of Economic
Advisers under Bill Clinton.
© Project Syndicate
Joseph Stiglitz’s
new book, The Euro (Allen Lane , £20) is available from the Guardian
Bookshop for £16.40. To order a copy, go to bookshop.theguardian.com
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