‘The Euro and its Threat to the Future of Europe’ – some thoughts

I have just finished Joseph Stiglitz’s ‘The Euro and its Threat to the Future of Europe’. As one would expect from a Nobel Prize winning economist, the book is well researched, thorough, nuanced, and surprisingly gripping considering that at times it feels like a textbook.

Yet a textbook it is not. It is far too ideological for a textbook. This, in my view, is its biggest weakness. Even though I subscribe to much of Joseph Stiglitz’s world view, I am much too cautious to blame all of the world’s economic woes on the neoliberal establishment.

The aim of the book was to explain that much of the current state of affairs in Eurozone countries is due to the design of the euro.  The euro is said to be flawed from the start due to the elimination of automatic stabilisers and adjustment mechanisms (described in my previous post) that accompany adopting the euro. That economic policy in the Eurozone is constrained is a fact, well-explained in the excellent chapter 4. Yet, Stiglitz goes much further than that.

In chapter 5 the blame is shifted from the Eurozone to the European Union. Even though the chapter is called “The Euro: A divergent system”, all of the policy characteristics apply not only to the Eurozone, but the whole of the European Union. Free movement of capital and people, “the two most important sources of divergence” (page 136) are the founding blocks of the EU, not the Eurozone.

Soon enough, the neoliberal agenda – not the euro or the EU – emerged as the biggest villain. As much as that is, or isn’t true, the more I kept reading, the more leftist politics got in the way of what was supposed to be an economic argument. Instead, by the end I was being lectured about carbon pricing, corporate greed, and Jean-Claude Junker’s role in the tax evasion scandal in Luxembourg. Climate change, corporate interest and tax evasion are important topics which need to be addressed, but not in a book about the euro.

I’m allergic to correlation claims. Stiglitz himself claims that what he is describing is causation, not correlation, but I was not always convinced. Many countries in Europe follow a broadly neoliberal agenda, introduced austerity policies following the Great Recession, are members of the European Union, and are members of the Eurozone. It is therefore extremely difficult to know which one of these – if any – is the leading cause of the economic woes of a given country. As Martin Sandbu from the FT put it “Isn’t it as likely that without the euro Ireland would have looked much like Iceland (whose floating exchange rate facilitated a big trade deficit before the crisis), and Germany like Switzerland (whose flexible rate did not prevent a surplus)?”

Then there’s the issue of the Maastricht convergence criteria which Stiglitz paints as fiscal constraints to economic policy (page 136). The convergence criteria are requirements for a country which wishes to join the Eurozone. They do not apply to countries already in the Eurozone, hence they do not constrain a Eurozone country’s ability to use fiscal policy in stimulating the economy. Instead, rules, which apply to all countries in the European Union, are encompassed in the Stability and Growth Pact. It just happens to be the case that the convergence criteria and the Stability and Growth Pact overlap when it comes to the rules on deficits and debts (a country’s deficit should not exceed 3% (in absolute terms) and public debt should not exceed 60%). While there is a list of sanctions which can be imposed on countries which fail to meet these targets, it has been the case that they are not enforced with an iron fist.

Yet all things considered, the book is definitely worth a read. As Paul Krugman said, Joseph Stiglitz is an insanely great economist and it is evident throughout this book. The book is rich in knowledge and information, a rare combination for many economists. His discussions of internal devaluations, deficit fetishism, public vs current account deficits are a must read. So is his explanation of Germany’s current account surplus (recommended in conjunction with this memorable FT article). The chapter on the Troika’s policies towards Greece offers rare insight into the Grexit negotiations of last June, mostly missing from the contemporary news coverage.

While I may not agree with all of his arguments and propositions, I’d definitely recommend it to anyone interested in the economics of European integration. Overall, I’d give it a 4/5.

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‘The Euro and its Threat to the Future of Europe’ – some thoughts

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