Joseph Stiglitz, American economist and winner of the Nobel Prize in Economics, has come out with a new book, The Euro : How a Common Currency Threatens the Future of Europe. In recent weeks, Stiglitz has appeared in several features in the press (see especially here in the Financial Times or here in the Guardian), advocating a ‘smooth exit’ from the euro. Still, he expects that ‘the end of the single currency does not mean the end of the European project.’ That position, however, betrays a deep misapprehension of the realities of Europe.
Like most American economists, who hold strongly to the theory of ‘optimum currency areas’, Joseph Stiglitz has been sharply critical of the single currency project from the outset, back in the 1990s. The idea of optimum currency areas was first explored in the early 1960s by Canadian Robert Mundell, who won the Nobel Prize in Economics in 1999 for his studies.
For an area to have an interest in adopting a single currency, Mundell wrote, it had to meet a number of preconditions: high mobility of factors of production (capital and labour), predominance of symmetric shocks (concordance of business cycles among countries), significant fiscal transfers, and homogeneous collective preferences among the citizens of that area (solidarity). In many ways, the future eurozone did not meet these requirements. But, as often happens with theoretical approaches, no area will probably ever meet all of such criteria: an ‘optimum currency area’ can, in practice, hardly ever be anything other than an area that has already had a single currency for several decades.
Robert Mundell himself, incidentally, has never considered that his theories actually implied that a single European currency is impossible or undesirable. Perhaps unexpectedly, he has actively supported the single currency project, with which he has been regularly associated since the 1970s, although he has also often criticised the positions defended by German politicians in pursuit of it.
What is irritating in this context, coming from a progressive economist like Joseph Stiglitz – and he is far from alone – is Stiglitz’s apparent misunderstanding of the political stakes of the matter: the euro is first and foremost a way to break with the neoliberal approach to the Europe market. Under that approach the single market was distinguished indeed not only by tax dumping and social dumping – which remain persistently troublesome issues today – but by monetary dumping as well. An attempt had been made to limit it by organising fixed but adjustable exchange rates between European currencies, but the mechanism had never worked out consistently.
The euro put an end to that by transferring a key element of sovereignty to the Union, allowing finally for common policies, monetary and exchange policies – not merely the sacrosanct policy of competition. Joseph Stiglitz clearly has the right to point out that the conditions laid down during the drafting of the euro by the 1992 Maastricht Treaty and then the rules during its actual creation in 1999 have been deeply inadequate and have contributed to the severity of the 2010 crisis. (This is what we have also been pointing out tirelessly in Alternatives Economiques for the last 25 years as well.)
The American economists of today, who derive much of their global authority from the dominant status of the dollar, have, however, an annoying tendency to forget how the history of the American monetary uniﬁcation was itself a complicated process: it took 137 years after winning independence (and then a bloody civil war) for the Americans to create a central bank (in 1913). It’s a tumultuous history that brings to mind a recent and highly pertinent publication of the Bruegel think tank that compares that ‘long, laborious, and politically conflictual process’ (the creation of monetary and financial union in the US) with the much shorter history of the euro.
What’s more, Joseph Stiglitz clearly underestimates the importance of the changes that have already been made to the architecture of the eurozone following the 2010 crisis. He explains, first of all, that it was necessary to make the Union a ‘common banking union’. Yes, of course: that was one of the essential elements that were missing from the start, and this has caused a lot of grief by feeding into a vicious circle between the difficulties of banks and those of the states. But since November 2014 this banking union has already been put in place, though it has not yet undergone the test of fire and remains highly imperfect. What it lacks in particular is common deposit insurance, as our Nobel prizewinner rightly points out.
The banking union is also missing, Stiglitz tells us, ‘rules to limit trade surpluses.’ There, too, he is correct: the excessive trade surpluses of Germany lie at the heart of the dysfunction of the eurozone. But such rules have already been introduced, in the ‘Six Pack’ of 2011, marking a major step forward for the eurozone. And what is conspicuously absent, for the moment, is sufficient political courage on the part of the European Commission to use those rules and publicly denounce these German surpluses.
Also needed, according to Stiglitz, are ‘Eurobonds or other mechanisms to mutualise the debts.’ Of course, but even if they are not named as such, for reasons of political circumspection, the European Stability Mechanism, which is likely to raise 700 billion euros of debt, and the 300 billion euros of the Juncker Plan, are those Eurobonds in embryo. And, above all, the policy of massive purchases of state debt instruments by the ECB is leading to a very quick de facto pooling of European debts on the bank’s balance sheet – which will also pose, eventually, some tough questions.
Another element missing, Stiglitz tells us again, is ‘a monetary policy that focuses more on employment, growth and financial stability, and not just inflation.’ French politicians on both the right and the left had called for the euro since the 1970s, to recoup some of the monetary sovereignty that was, de facto, being lost by the weakening of the franc. By this the French meant to avoid European monetary policy continuing to be determined unilaterally by the German Bundesbank, which in reality cared only about inflation and not about growth and unemployment.
On this score, regardless of what Joseph Stiglitz is saying, the euro has attained its objectives. The ECB is engaged today in an extremely expansive monetary policy, and its balance sheet now exceeds that of the U.S. Federal Reserve. Inside the ECB the fiercest critics of this policy were the representatives of the Bundesbank, two of whom resigned from its board in 2011.
Burst out in laughter
Even before the 2010 crisis, though, the main criticism that could be levelled against the ECB regarding the 1999-2008 period was that it was already conducting a too expansionary monetary policy, which was fuelling speculative bubbles in southern Europe. All these changes have been cobbled together at the edge of the precipice, following the ‘too little, too late’ modus operandi, and that too has prolonged the eurozone crisis.
Yet if early in 2010 one had told Angela Merkel and Wolfgang Schäuble that in the next five years a fund of 700 billion euros would be set up to help the countries in crisis, that a banking union would be formed and that the ECB would begin to buy back private and public debt securities on a massive scale, it would be hard to say whether they would burst out in laughter or anger. At the time, though, they were certainly convinced that none of this would happen in their lifetimes.
In practice, the so-called no-bailout clause, which was at the heart of the Maastricht Treaty and forbade any solidarity with countries in fiscal straits, was dumped overboard. Joseph Stiglitz rightly underlines, however, the persistent lack of industrial policies, not to mention an orientation of fiscal policies which remains structurally restrictive. This is the crux of the problems that continue to prevent the euro zone economy from entering a sustainable recovery. And this crux is very difficult to cut through politically.
Turning to the French plan, it is particularly regrettable that the five years François Hollande has been in power have been largely irrelevant here. Success was obviously far from guaranteed, but Hollande has not even tried to budge the figures.
Nonetheless, it is largely in the conclusions that our Nobel prizewinner draws from these inadequacies and these persistent political challenges where he is most in error. For him, given the inability of the Europeans to make sufficiently swift progress here, it would be better to go searching for ‘a smooth transition out of the euro and potentially go over to a flexible euro system’. In his view, after all, ‘an end to the single currency would not be the end of the European project.’ Such a wager would be an extremely perilous one.
First, it is unclear how an exit from the euro would help any country in the zone. That state would immediately see the interest rate at which it borrows leap upwards sharply. And right away there arises the sticky question of the debts that have accumulated vis-à-vis the rest of the world. If the state keeps the debt valuations in euros despite the depreciation of the national currency, their weight will be even heavier than before; if it decides to walk away from those debts unilaterally, at least in part, it will be shunned on the international markets for a very long time.
In any case it would certainly be forced to suffer, and for many years, an austerity out of proportion with that imposed (foolishly) by the Troika. Even Greece, the eurozone country that would undoubtedly have the least to lose from abandoning the euro, has stepped back from the brink of that temptation. And this has not been forced on the country by the Greek elites, but under massive pressure from the Greek public: the ones advising them to leap are not the ones who will pay, and the man in the streets of Athens prefer to have euros in his pocket over drachmas, whatever is said by Joseph Stiglitz, who need not worry about the strength of his dollars.
As for the idea of a smooth exit from the euro that does not undermine the European construction – well, that smacks of the most fanciful science-ﬁction. If countries were to leave the euro, obviously the smart thing to do first would be to regain their ‘competitiveness’ vis-à-vis their neighbours. That is, to steal a march on them by grabbing their neighbours’ share of the export market and encouraging their neighbours’ businesses to cross over their borders, drawn in by the lower cost of labour that would follow the devaluation of their new currency against the former euro – and all while reducing their own domestic consumption caused by the loss of purchasing power brought about by this same devaluation. In other words, such a beggar-thy-neighbour process can only and invariably intensify the economic war of all against all within the Union.
There is, in reality, no other exit from the euro but the one that Marine Le Pen promotes as a way of putting into question European integration itself, an exit that will plunge the continent back into the horrors of its past. Despite all those upbeat spirits who, like Joseph Stiglitz, want to shove them in this direction, the peoples of Europe are not mistaken: despite all the dissatisfaction they may legitimately have against the euro, they are nowhere near ready to take the plunge. Even Marine Le Pen has had to begin to soft-pedal on the subject of the euro exit, so strongly does this prospect – and rightly – worry French voters.
The task is difficult and the progress has been very slow. Still, once the commitment has been made, Europe has no alternative but to gradually close up the loopholes and fix the failures of the monetary union. The rest is merely literature, even if it is literature of high quality in terms of economic theory, like that written by Joseph Stiglitz. While his solicitude for Europe is touching, the way he approaches the topic illustrates how, in those subjects where the historical, social and political context plays a decisive role, such all too purely theoretical approaches are ultimately of limited appeal.
Can we really blame him? Any European who set out to write a book about what the Americans should do to limit inequality in the United States and bridge the growing gap between Republicans and Democrats, whites and blacks, or the states of the Bible Belt and those along the coasts, would surely be completely off the mark as well.
This article was originally published in Alternatives Economiques.