The Euro and its Threat to the Future of Europe
By Joseph E. Stiglitz
Allen Lane, UK
WITH the project of the European Union, humanity seemed to be striding in the right direction with the de jure elimination of borders and the forgetting of old animosities among historical rivals. But little did anyone fathom the economic shenanigans that formulating a currency union and convergence criteria would impose on the eurozone (countries that adopted the single currency of the euro). Then came the 2008 financial crisis, the economic hardships faced by Greece, Spain, and many other eurozone countries, and suddenly, the economic union under the banner of a single currency did not seem to provide any real benefit to these fledgling economies. Rather, it seemed that the very idea that was marketed as a sort of financial panacea was, perhaps, making the situation worse. Was the idea of a monetary union flawed at its core? This is the question discussed in Nobel laureate Joseph Stiglitz’s book The Euro and its Threat to the Future of Europe.
Stiglitz starts his discussion by claiming that “the eurozone was flawed at birth.” According to him, the adoption of a single currency by a region with enormous economic and political diversity is not an easy task. It is not that he is altogether against the idea of a monetary union for Europe; he just doesn’t agree with the way in which this union was implemented. The ideology of the founders of the euro is referred to as market fundamentalism or neo-liberalism; a belief that markets can function effectively on their own and there should be minimum regulation by the government. According to Stiglitz, these views were, and still are, prevalent in the eurozone’s dominant powerhouses such as Germany and France. These are also advocated throughout the world by the International Monetary Fund and the World Bank, leading to “a lost quarter-century in Africa, a lost decade in Latin America, and a transition from communism to the market economy in the former Soviet Union and Eastern Europe that was a disappointment.”
The basic premise of Stiglitz’s book is that creating a monetary union without augmenting it with allied institutions to adjust trade and budgetary deficits proved disastrous. For example, we have seen consistent trade deficits in some countries and surpluses in others. In the case of deficits, countries devalue their currencies to discourage imports and to make their exports more competitive abroad, thus curtailing the deficit. The monetary union took this option away from the eurozone. Countries were then forced to take loans which increased their budgetary deficits. Budgetary deficits were also curtailed under the terms and conditions of the eurozone in the name of “convergence criteria” put in place with a view towards ensuring economic stability. To maintain the budgetary deficit at the prescribed limit, these countries sought to increase revenues with enhanced taxation, often affecting the middle and lower classes. When the tax raises proved insufficient, they had no option but to curtail government spending, thus the mantra of austerity popularised by the neo-liberal economists. Decreased government spending caused cuts in social support programmes, again placing the middle and lower classes at a disadvantage. It further led to negligible investment in social development programmes which meant an economic downturn resulting in even less revenue for the government in the coming years. All this caused rising levels of unemployment leading to a vicious circle of poverty.
Although the theory of a single currency may hold weight, its practical implementations leave much to be desired
The European Central Bank (ECB), created to manage the monetary policy, was given a narrow mandate which was only to ensure low levels of inflation, although central banks worldwide are responsible for lowering unemployment as well. When unemployment in a country is high, its central bank decreases the interest rate it charges the commercial banks. This ‘quantitative easing’ leads to credit creation in the economy which stimulates entrepreneurship, job creation, and enhanced economic activity. The only side-effect of this strategy is an increase in inflation. This mechanism, however, was not available to the struggling countries in the eurozone because the decision of setting interest rates for the euro lay with the ECB, which was not concerned with unemployment in these countries, especially when the stronger economies were doing well.
Proponents of the euro often compare it to the United States, arguing that despite the differing economic conditions of American states, they function well with a single currency. What they forget is that the US is a federal state having an institution in the central government that comes into play when a particular state faces economic hardships; for example, social security benefits are paid by the federal government.
Stiglitz has ardently criticised vertical inequality (the gap between the rich and the poor in a given society) in his previous works. In this book, he addresses the issue of inequality in the horizontal dimension (the gap between rich and poor countries) as well. His concern is that the euro project has increased inequality between rich and poor countries by transferring capital and human resources from the less developed to the more developed countries in the region. Therefore, the project proved counterproductive as it economically starved countries with fewer resources, undermining the expectations of growth for the whole region. Instead of bringing peace and harmony, the eurozone led to an increase in distrust and anger.
The folly of the eurozone project became more visible after the 2008 financial crisis. The limit imposed on fiscal deficits did not allow the worst-hit countries to opt for government-induced stimulus though massive investment programmes. These countries were forced to follow the course taken by US president Herbert Hoover during the Great Depression beginning in 1929. His policy of lowering government spending and deficit was based on the confidence theory — a term coined by economist Milton Friedman. Following this confidence theory, Hoover, according to Stiglitz, “converted a stock market crash into the Great Depression.”
Keeping in mind the prescription of Abraham Lincoln on the eve of the American civil war — “A house divided against itself cannot stand” — Stiglitz suggests that “[t]he halfway house in which Europe finds itself is unsustainable: there either has to be ‘more Europe’ or ‘less’; there has to be either more economic and political integration or a dissolution of the eurozone in its current form.” The last section of the book discusses future options to correct the wrongs committed in the name of financial prudence under the eurozone scheme. Stiglitz analyses the pros and cons of recommendations ranging from instituting regulatory bodies common to the whole of the eurozone, to adopting different currencies for different groups of countries within the region, to a complete dissolution of the eurozone.
Although Stiglitz’s book is specifically about the workings of the euro, it discusses basic concepts of political economy as well. It delves deep into the complexities of monetary and fiscal policies, the peculiarities of international trade balance, and the intricacies of inflation and unemployment, especially when an economy is facing a recession or a depression. It cuts to the heart of neo-liberal economic policies and brings out their innate tendency towards the concentration of resources and their inherent reluctance to work for the welfare of the masses. Pursuing the wrong economic policies can result in hardship for millions of citizens. It is, therefore, not only important for politicians to understand these concepts, but also for the general public to have basic know-how of these issues, so that when electing their leaders they are able to evaluate their economic policies and programmes. To sum up in the words of Stiglitz, it can be said that “a key reason that globalisation has often failed to produce benefits for large numbers in both the developed and less developed world is that economic globalisation outpaced political globalisation; and so, too, for the euro.”
The reviewer is a civil servant and a freelance writer.
Published in Dawn, Books & Authors, February 5th, 2017