How (Not) To Think About The Euro (Joseph Stiglitz, Part 2)

  • “It was a mistake to start the euro … There will be a cost to breaking it up, but over the last 8 years the euro has generated enormous costs for Europe. The cost of keeping the Eurozone together probably exceeds the cost of breaking it up. It’s clearly a failure … There was no economic imperative to create the euro.” [Jos. Stiglitz, 2016]

Five years ago, Joseph Stiglitz made the case that the Eurozone is essentially a failure, and should be broken up.

Stiglitz was and is “a leading progressive voice in the U.S.,” to the left of most members of the economic profession. And yet – there he was, prepared to recommend a Brexit-like solution. He went as far as to call for Germany to “leave Europe” – he said it would be the “the easiest way” to achieve the reforms “that the eurozone needs.” As for Greece

  • “The divorce would restore dignity to the Greek people… it would restore democracy… and in the last two decades of the drachma [the Greek currency before joining the euro] Greece grew far faster with lower unemployment than in the almost two decades since entering the eurozone.” [pp. 273-274 from The Euro]

True, this was written before Brexit had actually happened, and Stiglitz (obligatory note: a “Nobel-prize winner”) was in gadfly mode – tossing off provocative suggestions without necessarily assuming that anyone could or would act on them. 

When Brexit became a reality, he began to equivocate. Asked later whether the UK would fare better or worse outside of the EU, he said 

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  • “Well, you can’t answer whether it would be better off or worse off because you don’t know what kind of deal you will be able to reach…there’s an inherent uncertainty in that. It’s not even clear…too much uncertainty” [etc. and so forth] 

The Brexit Vote is now usually seen as a symptom of conservative political tendencies. It was supported mainly by people with whom Stiglitz would disagree on almost every policy issue. This incongruity does seem to have somewhat discomfited him. He now concedes that Brexit “will be a long road to disorder” – but he hasn’t really revised his overall view on the Euro. (The fact that the UK did not actually share the common currency gives him wiggle room to argue both sides of the issue.) 

Reading his polemic – The Euro And Its Threat to the Future of Europe – the overriding impression is of a systematic incoherence, caused by… – well, we’ll get to that. 

The Stiglitz Program

If the Euro is a disaster, what – per Stiglitz – should be done? 

His analysis, and policy recommendations, mainly reflect the clichés of the Old Left. E.g., – 

  • He criticizes government measures of support for the financial system as mere “corporate welfare” – “the prioritization of banks over citizens…” – promoted by “well-paid lobbyists from the financial sector” [ p. 132]
  • Economists who support a free market are the enablers: “in their view, the private sector could do no wrong”[p. 108]
  • He thinks that labor unions should be strengthened, because of “evidence” that they “may actually increase productivity” [p. 56]
  • He argues that many(most) economic activities would be better organized as public utilities, run by the government, which is inherently better and smarter at it – he contrasts “wasteful private investment” with “productive public investments” [p. 115] – 
  • Even tough regulation is not enough; there should be government ownership of key industries (like steel). According to Stiglitz, this is a matter of settled science for economists: “Both as a matter of theory and practice, well-run government monopolies may do just as well as [i.e., better than] government-regulated private monopolies” [p. 55]
  • He blames the financial industry for feeding governments’ appetite for debt in countries like Greece or Italy: “if there is an irresponsible borrower, it means there is an irresponsible lender” [p. 112]
  • He would reverse financial market liberalization and allow regulators to impose whatever rules they “see fit”
  • Technological innovation is a problem – people have “bought into the idea that new technologies create new jobs as they destroy old ones.” [p. xvii] Investments that result in new intellectual property are another sign of market failure: “Markets by themselves will not result in efficient levels of investment… there will be too little basic research and too much research figuring out how to increase market power, including that derived from patents” [p. 40]  
  • He is alarmed by “the growth of stock options within the compensation packages of executives” [p. 259]
  • He calls for higher taxes, of course, and penalties on the wrong sort of consumption (he seems especially upset by the traffic in luxury automobiles)…
  • As to Germany – ever the villain – its policies towards Greece are so harsh and ill-intentioned that he compares them to the treatment of convicted felons in the United States [p. 60]  

Out of Ideas?

Most of the proposals are familiar and may seem a bit “tired” – this is more or less the same “millionaires and billionaires” indictment of the private enterprise that has re-surfaced American politics lately. 

The supporting analysis is shallow. There are no “facts and figures” to support most of these positions. Recommendations often amount to platitudes: “Better budget rules.” [p. 245] “A commitment to shared prosperity.” [p. 260] Sometimes it is dressed up in econo-speak: “Automatic destabilizers need to be replaced by automatic stabilizers.” [p. 244]

Incoherence 

The incoherence emerges at the big picture level. Stiglitz repeatedly excoriates the “market fundamentalists” (“neoliberals”), but then criticizes policy-makers for failing to follow market principles. For example, he is critical of the conditions imposed on Greece by the EU –

  • “Money is lent… with strong conditions. Unlike conventional loans, where lenders typically add conditions to make it more likely that the loan will be repaid, the conditionality imposed by the eurozone [is] not directly related to loan repayment… [They are designed] to ensure that economic practices [in Greece] conform to what finance ministers of the eurozone (in particular Germany) think the country should do.” [pp. 17-18] 

In other words – the process is insufficiently market-driven. If lenders behaved more like they do in the ordinary course of the lending business, things might have turned out better. 

Another example: Stiglitz argues that a big part of Europe’s problem is the fragmentation of the banking system. 

  • “Each country within Europe has been responsible for its own banks. This contributes to a downward vicious cycle: Weak banks lead to the government’s fiscal position worsening, and that in turn weakens banks further.” [pp. 91-92] 

But then – 

  • “There needs to be more flexibility in the way the eurozone’s banking system is run. Capital requirements can be tightened in those countries facing excess demand… Lending standards for mortgages should be tightened [in countries] where there appears to be risk of a bubble forming…” [p. 249]

It is a bizarre suggestion. First of all, think how chaotic it would be for the banking industry in the U.S. if every state were allowed to set its own capital requirements for banks. Stiglitz in fact elsewhere supports the idea of an EU-wide “banking union” – which is based on a common regulatory framework for the banking industry. How to square this with each country setting its own standards? 

Stiglitz is also afraid that the EU and the UK might sign a trade deal with the US — and argues that Brexit would be better than such a fate. This animus toward the U.S. lurks in the background of the entire critique, as the Financial Times discerned in its review.

  • “Mr Stiglitz seems to fear that Europe is going down a similar path to the US.”

(As though that were the worst thing imaginable…)

The outlook is generally reactionary, despite Stiglitz’s “progressive” credentials. Five years on, his message seems OBE (overtaken by events). Europe is now again “falling forward” (as Stiglitz disparagingly puts it) towards a greater degree of federal integration – and the interesting questions all point forward.

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