‘Flawed At Birth’ Euro Project Facing Endless Division, Recrimination

Nobel Laureate Joseph Stiglitz discusses his new book about how the euro now threatens Europe’s future.

The eurozone project was “flawed at birth” notes a new book by Nobel Laureate Joseph Stiglitz, the former chairman of the Council of Economic Advisors under President Bill Clinton who teaches at Columbia University and is a columnist for  The New York Times. He also was former chief economist for the World Bank.

In The Euro, How a Common Currency Threatens the Future of Europe, Stiglitz outlines the key problems in how the eurozone was structured, and how the politics of yesterday — and today – are smothering economic growth and causing deep social problems and steep unemployment, eight years after the financial crisis. He also offers some ideas for making improvements. [email protected] spoke with Stiglitz about his book, published this month, and about how the dominant economic consensus of the last 30 years is fast crumbling on the [email protected] Show that airs on Channel 111 on SiriusXM.

The Euro

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz

An edited transcript of the conversation follows.

[email protected]: Brexit has [raised] many questions [about] both the European and global economies. There have been several occasions during the run of the European Union when the question has arisen as to whether this partnership between its countries and regions would come apart at the seams at some point.

But first, I’d like to know whether you were surprised as to how [the Brexit] vote went.

Stiglitz: Remember, everybody thought it was going to be 50/50. They thought in the end that [Britain] would stay in [the European Union]. They underestimated the magnitude of the discontent. And the kind of discontent we’ve seen in our primary season in both the Trump and Sanders supporters. Given that level of discontent, which took the establishment of the United States by surprise, maybe the outcome of the Brexit vote is not a surprise.

[email protected]: The second line in the title of your book is How a Common Currency Threatens the Future of Europe. It’s a pretty ominous title. It notes that the euro was flawed at birth and, to quote here, “has failed to achieve either of its two principal goals of prosperity and political integration.”

You also write that since the financial crisis in 2008, things that should have gone down are up and things that should have gone up are down. So debt is up, absolutely, and relative to GDP in many countries. Inequality is up. You also note the social pathology [trends] — suicides are up. There is a lot of suffering out there with unemployment and so forth, but incomes are down. Could you talk about the aspects that are up that should be down and vice versa?

“The European Troika’s theory was that what they were doing would expand the economy, but that theory, called austerity, has been discredited.”

Stiglitz: The striking thing is that the crisis of 2008 originated in the United States. Normally, you would say the country [where] the crisis originated should be the one that symptomatically is worse off and ought to have the hardest time recovering. I wouldn’t say we’ve had a full recovery but we’re doing pretty well.

In Europe, that’s not the case. There’s a high level of unemployment. Youth unemployment is very significant, [which in Europe is] twice that of the average unemployment. In the “crisis countries,” the numbers are unbelievable. The [economic downturns] in these countries are greater than the Great Depression. Greece is the worst example where GDP is down by 25%, unemployment is 25%, [and] youth unemployment is over 60%. It’s a poster child of what should not have happened.

Interestingly, while the Troika, the group partnership between the European Central Bank, the European Commission [and] the IMF (International Monetary Fund), focused on getting debt down and pushing austerity to limit what governments spend, these countries have wound up with increasing debt/GDP ratios, so [they have] less debt-sustaining ability. The reason is very simple. The debt/GDP ratio has two numbers — the debt at the top and GDP at the bottom. And what they did is they shrank GDP. If you shrink the GDP, the debt/GDP ratio goes up and the debt becomes unsustainable.

[The Troika] focused on the numerator on debt and paid no attention to how [their] policies were going to shrink the economy. I should qualify that. Their theory was that what they were doing would expand the economy, but that theory, called austerity, has been discredited. It was what we tried in the United States under Herbert Hoover. Yet they went ahead and believed in that policy.

The really interesting thing to me is that even the IMF now says that … austerity is contractionary and leads to reduction in GDP. It’s only Germany, the European Central Bank and the European Commission that persist in this ideological view that these policies would work.

[email protected]: The problems that you point out in Greece and some of the other European countries persist eight years after the financial crisis. Usually, [following] a recession, you have some kind of spontaneous recovery after three, four or five years.

Stiglitz: Usually two years.

[email protected]: Eight years later I would think somebody has some explaining to do. I’d like to talk more about the larger economic ideas that you’re getting out there. But before we get to that, if we could focus just a little bit longer on austerity policies. Interestingly, some of the European countries, say in the north for the most part and Germany in particular, took a stand of blaming the victims. You write that [while] Germany and others have sought to blame the victims, these countries suffered as a result of flawed policies and the flawed structure of the eurozone. So it’s not just that, in your opinion, they have the wrong policies. They’re actually blaming the victims of these wrong policies.

Stiglitz: That’s right. There are points in that sentence that you read. The first is that they say, ‘Look, these countries misbehaved [and were] profligate, and they’re only getting their just rewards.’ The fact is that Ireland and Spain — two of the countries that went into deep crisis — actually had a surplus before the crisis, no deficit and a very low debt/GDP ratio. That crisis caused their current situation of deficits and debt, not the other way around. So it was so clear that their analysis of what would lead to success was absolutely wrong.

The critical point that I make — and this is where I differ from a number of other people who’ve studied what has gone on in the eurozone – is the broad agreement that something is wrong as you said after eight years of this kind of stagnation. Some people say it’s just the policies. If only we had not allowed Germany to dictate the terms. If only we had had better policies.

“Even the IMF now says that … austerity is contractionary and leads to reduction in GDP. It’s only Germany, the European Central Bank and the European Commission that persist in this ideological view that these policies would work.”

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