The Euro: How a Common Currency Threatens the Future of Europe
Jonathan Portes parses Joseph Stiglitz's analysis of the euro in the context of the global financial crisis.
Who killed the euro? With the spotlight now on Britain's relationship with the currency's crucible, the European Union, that question has an edge. Were the culprits the visionary politicians who ignored structural differences between European economies when they conceived the euro in the 1980s — most notably Jacques Delors, president of the European Commission at the time? Was it the neoliberal international economic and financial establishment, in Washington DC, New York and London as well as Frankfurt and Brussels, that thought markets (even financial ones) were rational and self-correcting? Was it Jean-Claude Trichet, governor of the European Central Bank during the 2008 financial crisis, who made the people of Ireland pay for the corruption of their bankers by forcing their government to stand behind their broken banks? Or perhaps the putative 'Swabian housewife' often invoked by German Chancellor Angela Merkel, who balances her budget and cannot see why the same logic does not apply to governments?Thanks to a reader.
In the first chapter of economist Joseph Stiglitz's The Euro, we learn that they all did it. And that it is all the fault of contemporary capitalism. Most of the book is devoted to this topic, and it serves as a useful guide to the many failures of eurozone policymakers in the past quarter of a century. Stiglitz speculates boldly and cogently about the zone's future, but The Euro is on the whole too scattershot either to diagnose the illness or to prescribe a viable cure.
Stiglitz's thesis — or rather, loose assemblage of theses — explains too much. The gross domestic product of the eurozone is now barely higher than it was immediately before the crisis, and the euro is indeed central to explaining why. There is, however, a lively debate over the inevitability of this failure. Some argue that the euro was always doomed because of divergences in income and economic structures between eurozone countries, and the lack of a US-style political union to make significant fiscal transfers possible. Sooner or later, a big shock — a rapid rise in unemployment, a sharp fall in capital inflows — would hit one country or more, and without being able to devalue their currency, nations would be unable to adjust without excessive economic damage. It was bad luck that when the shock did come (in 2008) it was as big as it was, especially for countries such as Spain and Ireland. It was also both predictable and predicted.
Others, such as economics journalist Martin Sandbu in his excellent Europe's Orphan (Princeton Univ. Press, 2015), argue that the eurozone's dismal economic performance is a result less of the currency's design than of a set of avoidable and entirely unnecessary policy failures. These include premature and excessive austerity measures, especially in southern European countries, and slowness in restructuring debts, in particular the Greek government's. Stiglitz leans towards the view that failure was inevitable. Unlike Sandbu, he doesn't provide much in the way of evidence one way or the other.
Similarly, he fails to explain what he thinks has happened outside the eurozone. It's true, as he shows, that the eurozone's productivity performance since 2008 has been abysmal. But productivity has grown even more slowly in Britain (which held onto its own currency), although employment has held up better. A more nuanced account would distinguish between two sets of factors. That is, those that have been present in most advanced countries to some degree (including excessive austerity and the still-unexplained productivity slowdown), and those specific to the eurozone and its institutions — in particular, the inability to adjust exchange rates, and the lack of a central bank able to act as a credible lender of last resort....MORE