THE EURO: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Norton, 2016.
Review by Hazel Henderso© for SeekingAlpha.com
Political economist Joseph Stiglitz, winner of the Bank of Sweden Prize in Economics (often confused with a Nobel) finally takes the gloves off in his critique of neoliberal, orthodox economics in this careful study of why and how the euro could fail. Stiglitz lays out in Part 1 the dimensions of the crisis of the euro as a straightjacket limiting the flexibility of the 19 countries of the euro zone. I remember in the late 1990s being in the city of Maastricht with executives of the Netherlands-based Rabobank, the largest cooperative bank in the world. All were excited at the impending launch of the euro in 2002 after the Treaty of Maastricht formalized the European Union in 1992. Like so many Europeans, I believed that the European Union was a beacon to lead the world in uniting former conflicting nations – a model governance structure based on human rights and democratic principles of subsidiarity. What went wrong?
In Part 2, Stiglitz shows how flawed economic theories and financial interests ran ahead of political realities, social imperatives, beyond the cultural task of melding so many cultures and languages. The bankers, financial wizards and their enabling macro-economists, schooled on Arrow-Debreu’s fantasies of competitive equilibrium and market completion, took the reins. Their vision of the single market and efficiency of commerce advocated the single currency: the euro as a means of driving political and social integration. Instead, Stiglitz shows how these narrow economic theories and the imposition of the euro without the needed fiscal underpinnings led to persistent current account imbalances, unemployment and rising inequality. After the financial crises of 2008, the same flawed macroeconomics forced European governments to impose austerity, cuts in jobs, pensions and social safety nets. Such obsolete recipes of “structural adjustment” applied by the IMF had brought misery in many developing countries.
Part 3, Misconceived Policies, describes in detail how such old-time religion worsened the 2008 financial crises effects in Europe. Stiglitz uses the lessons of Greece and the pain imposed by Germany’s surpluses on other peripheral countries, Spain, Portugal, Italy and Ireland. He shows how political leaders were forced to assume bank debts, leading to worsening their own deficits and value of their sovereign bonds. Stiglitz also warns of the political turmoil and emergence of right-wing nationalist politicians in France, the Netherlands and Britain. The later Brexit vote in Britain in July 2016 only proves Stiglitz’ case.
Part 4, The Way Forward, is logically laid out and eminently sensible, fully acknowledging how digitalized finance offers new pathways around the overpriced, undemocratic, incumbent banking and financial system. Failing fiat currencies can be side-stepped with electronic payment systems and all the proven systemical options offered by the FINTECH 100. (See also my contribution to the current UN Inquiry: Design of a Sustainable Financial System.) Some uncontroversial reforms Stiglitz recommends are widely debated: 1) a common banking system with deposit insurance; 2) Euro-bonds and 3) a common fiscal framework building on the model of the European Investment Bank. His “flexible euro” would allow each country to use a differential national euro for domestic use and floating within the EU-wide euro.
Stiglitz includes an option of Germany exiting the Eurozone instead of Greece. This will be more controversial. We can now observe the “in-vivo” experiment of Brexit, to learn lessons. Stiglitz also argues for making the ECB accept unemployment in a similar dual mandate with inflation as that of the Fed.
Stiglitz cautiously embarks on some of the Fintech 100 strategies now disrupting conventional finance, but doesn’t stray far beyond his advocacy of electronic currencies and payments. He favors managing trade using Warren Buffet’s idea for “trade chits” to help balance export and imports, quite conventional considering that over 20% of all world trade is already conducted in barter (see Countertrade, Barter, Offsets, Pompiliu Verzariu, 1985). Stiglitz acknowledges the dangers of allowing private banks to continue creating credit and debt-backed money out of thin air – but stops short of Adair Turner’s proposal to withdraw this privilege and restore money-creation to government treasuries. Instead, Stiglitz would create an auction market for credit-creation in which banks would bid competitively for rights to a share. The current issues of negative interest rates and helicopter money emerged after this book went to press. Stiglitz departs from most prevailing macro-economic models and their “confirmation bias” evident in their continued application. Indeed, this rambunctious economics profession suffers from theory-induced blindness and enables some of the worst kinds of human behavior. The Euro is a useful prescient look at the near future of the European Union.