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NY Times, July 29 2016
How a Currency Intended to Unite Europe Wound Up Dividing It
By PETER S. GOODMAN
It was started in the name of forging a greater sense of union among the
disparate nations of Europe. It was supposed to enhance commercial ties,
erode borders and foster a spirit of collective interest, furthering the
evolution of former wartime combatants into fellow nations of a united
Europe.
But the euro, in the 17 years since the common currency came into
existence, has instead reinvigorated conflicts, yielding new crises,
fresh grievances and a spirit of distrust. So argues the Nobel laureate
economist Joseph E. Stiglitz in a timely new book, “The Euro: How a
Common Currency Threatens the Future of Europe.”
Italy’s banks teeter on the brink of crisis while the euro has become
the subject of ceaseless bickering over economic policy. By Mr.
Stiglitz’s reckoning, the common currency has made economic inequality
worse while dividing Europe into two adversarial camps — debtor and
creditor.
In his first interview about the book, Mr. Stiglitz described the euro
as a tragic mistake, a currency begun without the necessary political
integration or clear thinking about its fundamental flaws. The euro was
compromised from inception by an ill-conceived structure, and its
troubles have been amplified by wrongheaded economic policies imposed by
the most powerful countries as conditions for bailing out those worst
ensnared by crisis.
What follows is an edited and condensed version of our conversation.
Q: It is difficult to overstate the economic trauma Europe has suffered
in recent years — veritable depressions in Greece and Spain, alarming
levels of unemployment across much of the continent. You place much of
the blame on the euro. What happened?
A: The euro was an attempt to advance the economic integration of Europe
by having the countries of the eurozone share a common currency. They
looked across the Atlantic and they said: “The United States, big
economy, very successful, single currency. We should imitate.”
But they didn’t have the political integration. They didn’t have the
conditions that would make a single currency work. The creation of the
euro is the single most important explanation for the extraordinarily
poor performance of the eurozone economies since the crisis of 2008.
Q: Were there warnings when the euro was begun that maybe it wasn’t such
a wonderful idea?
A: Yes, but it was mostly Americans, and that may have colored the
reaction to it: “Oh, you don’t understand the value of the European
project.” But the criticism was not that we don’t agree with the
European project, but that you were undertaking something that will
undermine the European project, because it’s not going to work. Their
answer was, “We will create institutions as we go along.” A lot of
people pushing for this were not economists.
Q: You blame the euro for widening economic inequality. How has this
played out?
A: The idea was that for the euro to work, the countries had to
converge, and they formulated these ideas called the convergence
criteria. They put enormous pressure on the countries to keep their
deficits and debts relative to G.D.P. down. That was viewed as the
necessary and almost sufficient conditions for making the euro work.
Several of the countries that went into crisis, Spain and Ireland among
them, actually had a surplus before the crisis, and a very low
debt-to-G.D.P. ratio. But they still had a crisis. That tells us an
important lesson: What the people who were behind the creation of the
euro thought was going to be a critical condition was not.
The disappointing thing was that after the crisis, they didn’t learn a
lesson. What they did was double down on that same recipe — austerity.
The structure of the euro was at fault, and the policies they enacted
amplified the structural deficiencies. The result was that the countries
diverged.
Q: In your telling, Germany has imposed austerity across Europe out of
faith in a discredited economic idea, the notion that if policy makers
concentrate solely on preventing budget deficits and inflation, the
markets can be counted on to deliver prosperity. A lot of your book is
devoted to demolishing this idea. Does the German elite still really
believe in this philosophy, or is something else at play?
A: I’ve visited Germany often, and I’m shocked about how strong the
belief is in this view that has been totally discredited elsewhere.
But the policies are mixed together with interests. When the Greek
crisis broke out in 2010, what was really at risk were German and to
some extent French banks. And there was an enormous bailout that was
called a bailout of Greece but was really a bailout of German and French
banks. Most of the money went to Greece and then right away went back to
Germany and France.
When you look at other aspects of the program, you see that it is also
helping special interests within Europe.
Q: How so?
A: Let me give you an example of one of the really absurd things they
did. They demanded that Greece scrap a rule that fresh milk is no more
than four days old. If milk was older than four days, it needed to be
labeled.
Q: Of all the things that were going on, why would you have a debate
about that?
A: The German and the Dutch dairy industries wanted to ship their
factory-farmed milk across Europe and sell it to Greek consumers. That
would devastate the small Greek producers. Here was something that could
only be seen as benefiting special interests in the eurozone and
actually weakening the Greek economy.
Q: You argue that some European leaders secretly welcomed mass
unemployment as a means of adjusting to the crisis because this was the
only way they could see to spur investment — lowering wages. The
strictures of the euro took other options off the table: Crisis
countries could not let their currency fall or lower interest rates or
expand government spending. Was unemployment really embraced as a fix?
A: They wanted to break the back of workers. Their view was that workers
needed to accept a wage cut and we are going to change the bargaining
rules to make it more difficult for them to resist. And if we need to
add on a little dose of unemployment, well, that’s unfortunate.
Q: Doesn’t that goal predate the crisis?
A: It’s very clear that the euro was a neo-liberal project in its
construction. Employers like low wages. They have broken the back of the
unions in many of the countries of Europe. They would view that as a
great achievement.
The whole point of the European project has been to get past the
hostilities of World War II and build a sustainable community. Yet, in
your telling, the euro and the policies delivered to preserve it left
much of Europe nursing fresh grievances. How are these grievances
coloring politics?
The most important divergence is between creditor, Germany, and debtor,
the rest. The criticisms that you hear in Greece of the Germans, they
are reliving the horrors of World War II; the criticism in Germany of
the Greeks, saying that they are lazy even though the number of hours
that they work per week is higher than the Germans’. The flinging of
accusations, whether true or not, has been enormous and the divisiveness
has been enormous.
Q: We just saw Britain vote to exit the European Union — in part, a
reaction to the sense that the European Union is a place of weak
economic growth and poor leadership. In Italy, the so-called Five Star
political movement is gaining support with calls to abandon the euro —
in part, a backlash against German-led austerity. Is there any evidence
that these sorts of events are leading to a re-examination of the
economic philosophy guiding Europe?
A: I wish that were happening. Unfortunately, what I’ve seen is almost
the reverse. It’s doubling down on a failed experiment. It’s a hard-line
approach in which the European leaders in response to Brexit, people
like Jean-Claude Juncker, who is the head of the European Commission,
have said, “We’re going to be very, very tough on the U.K. because we
want to make sure that no other country leaves.”
To me that was shocking. You hope that people want to stay in the E.U.
because it’s delivering benefits, because there’s a belief in European
solidarity, the belief that it’s bringing prosperity. He’s saying the
only way we are going to keep the E.U. together is by the threat of what
happens if you think about leaving.
Q: You conclude that the best-case scenario from here is to reform and
save the euro. But absent that, you contend that it is better to just
scrap it as a failed experiment. What needs to happen to make the euro
viable?
A: A banking union with deposit insurance. Something like a euro bond.
An E.C.B. that doesn’t just focus on inflation — you want it to focus on
employment. A tax policy that deals with the inequalities. And you have
to get rid of limits on government deficits.
Q: What’s your sense of what will actually happen?
A: It is hard to believe that the muddling-through can continue for
another five years. Greece is still in depression, no better than it was
a year ago. The likelihood is there that in one country or another there
will be enough support for another referendum, and an exit will occur.
That will begin the process of a real unraveling of the eurozone.
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