Can the euro survive? – Progressive criticism (Joseph Stiglitz, part 1)
- “In most European countries the standard of living will almost certainly be never reach the level they would have reached without the euro… ”- Jos. Stiglitz [emphasis in the original]
The Economist Joseph stiglitz (and we are obviously bound by international law to mention that he is a “Nobel Prize-winning economist”) took a firm stand versus the euro and the euro zone, which he sees as a dangerous failure or, worse, practically a crime against the people. Indeed, here he is, several years before Brexit, a prominent center-left economist who explicitly advocates the breakup of monetary union (unless the EU adheres to its own broad and politically improbable prescriptions).
In his influential 2016 book, The euro and its threat to the future of Europe, which is available in French, German, Italian, Portuguese, Romanian, Spanish, Catalan and Korean (at least), Stiglitz reviewed the deplorable state of Europe’s recent economic performance and argued that “although ” there are many factors that contribute to the work, there is an underlying fault: the creation of the single currency, the euro. The book garnered a lot of attention as a battle cry against the establishment elite in the EU (along with the IMF and Stiglitz’s academic opponents) which – according to Stiglitz – caused structural catastrophe on the head. European citizens, at least those from the “poor South” (Italy, Spain, Greece, Portugal and perhaps also Ireland), and stagnation for almost everyone. The poorly engineered euro has (he says) directly fueled the rise in right-wing backlash across the continent.
This is a striking thesis. Stiglitz is a workhorse for the establishment Left in the economic profession (former chief economist of the World Bank and chairman of Bill Clinton’s Council of Economic Advisors), which makes his position both surprising (for an unexpected negativity towards the European project – he even offers advice on “How to get out of the euro and prosper“- yes, Brexit before the letter) – and unsurprisingly (for its animosity towards bankers and the private sector in general). He is, in fact, quite ready to view the euro in politico-conspiratorial terms:
- “There could have been a political agenda – to bring down left-wing governments, to teach voters about the consequences of electing such governments and to make it more likely that a conservative economic and social agenda will prevail in Europe. ” [p.21]
His diagnosis is superficial, precise, as far as he goes, and conventional. The main problem, according to him, is the concept of a common currency itself: the creation of the euro zone removed the option of devaluing the currency from the political toolbox of its member states. And so, Greece, or Italy, in the “old days” could have compensated for trade imbalances and other economic ills (for example, structurally uncompetitive labor laws) by allowing the currency to devalue, improving global competitiveness, stimulating exports and limiting imports. – this is how countries like Japan and lately China have climbed the economic ladder. But Europe’s “losers” can no longer avail themselves of this sort of “automatic stabilizer”. With monetary policy and monetary values set at the “federal” level, there is not much Greece (for example) can do – except to “devalue” its real economic output by cutting wages and income. national – in short, shrinking economically, becoming poorer. The result, directly attributable to the common currency (according to Stiglitz), has been a savage and persistent slowdown in the South and apathy in the eurozone – which he documents in detail.
Part of the problem is undoubtedly the loss of the exchange rate mechanism. The diagnosis, however, is superficial in the sense that it does not address the question of how Greek or Italian non-competitiveness arises in the first place. It simply indicates the removal of one of the traditional policy instruments to deal with it.
Beyond the monetary question, Stiglitz accuses political blunders (as he sees it) by what he calls the “Troika” – which refers to the IMF (Washington DC), the European Commission (Brussels) and the European Central Bank.
Again, this is quite true. German opposition to broader European federalism is undoubtedly a big part of the stalemate. But we also knew it. And one cannot say that Stiglitz offers a glimpse of the German position. For him, they are just fools … (or, excuse me, poor economists).
Indeed, if there is a root cause in Stiglitz’s model of European dysfunction, it is “neoliberalism” or “market fundamentalism” – that is, the theories of the economists with whom he is. disagree, who have somehow taken control of the levers of public policy. and screwed up with ideas and policies that are bad, wrong and downright stupid.
He would also accuse the Europeans of “insufficient solidarity” – but this notion is little developed (What is “Solidarity” exactly, in this context?) He attracts much less attention in his book than the rants against the Germans, the Friedman economists and the bankers.
And the American model? (Among others)
What is missing from this analysis is a meaningful explanation of why this monetary union is not working. The obvious counterexample is the United States, where the common currency works very well, where a transfer union works easily, automatically, without anyone even thinking about it, and where despite the long history of tension between federal and state politics –– The “rights of states” argument in all its manifestations, from the Tenth Amendment to the Constitution to the current disputes over voting procedures in Atlanta (for example) – despite this story, the United States has put in place almost all of the positive proposals that Stiglitz would like to see adopted by the Europeans, in particular
- a “banking union” – by which Stiglitz refers to (1) a common regulatory framework for the banking sector, (2) federal deposit insurance and (3) procedures at the federal level for dealing with troubled banks, which he called “joint resolution” “
- federal social assistance or transfer payment programs (such as social security or food stamps)
- a Central Bank with a double mandate, to balance policies aimed at controlling inflation with those aimed at promoting full employment
- strengthened corporate governance
- more liberal immigration policies, applied at the federal level …
Etc. The point is, in a federal system, the dollar works. But the question of how the United States managed to “shift” – psychologically and culturally – to a successful federal modus operandi and a common currency is not developed much in Stiglitz’s analysis. He admits that the eurozone “is far from the degree of economic and political integration that defines the United States” and admires American interregional solidarity (“there is no distinction between a native Californian and an ‘immigrant “South Dakota”) – but as to why this is and what to do in Europe, his answers are the conventional recommendations of the innocuous left – higher taxes, “better” regulation and more government . Smarter economists. (Like him.)
The American transfer union is remarkable. To consider.
The Red States are the American Germans – the grantmakers – and the Green States are the Italians and Greeks, the recipients of the grants. The system simply functions, without any real political or cultural angst, almost (one might say) invisibly.
A similar map of the 23 provinces, 5 autonomous regions and 4 municipalities of China would show similar transfers from the richest regions to the poorest regions.
There are in fact many historical examples of successful currency unions. Germany itself is one. Before unification in 1871, there was no common currency.
- “The German Confederation, established in 1815, did not have a uniform currency. The Confederation was made up of around 35 principalities and cities, and they each issued their own coins.
Italy, before its unification, also had several different currencies issued by different constant states (Naples, Florence, the Papal States…) – which were incorporated into the lira in 1861.
Canada went through a process of “merging” the French, British and American currencies to create the Canadian dollar.
In all of these cases, currency unions had to take into account important differences in language, culture and local government. “Solidarity” was not a supposed precondition (and may still be deficient in some cases – eg Italy, Canada).
Stiglitz is wrong
Stiglitz’s main thesis is that the euro – the common currency – is responsible for Europe’s problems. But that cannot be the case. Well-functioning currency unions, in large states that encompass various local jurisdictions, clearly exist and function well. In the EU, trade imbalances and the loss of adjustable exchange rates would be insignificant with a more comprehensive federal system. (Who cares about the trade balance between New York and Michigan?)
The difference between a successful monetary union and a failure is not a question of monetary mechanics. It resides in the tax provisions – taxation at the federal level, social protection provisions at the federal level, banking regulations at the federal level, etc. – not in the monetary system as such.
Stiglitz’s argument that the eurozone’s economic woes are due to the euro is specious. The EU’s “failure” (so far) to meet the goals of the European project is due to a reluctance to embrace the “Hamiltonian moment– a more robust federalism, and in particular a more global fiscal integration.