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Faults and failures of the single currency

by John Nugée

Faults and failures of the single currency

Joseph Stiglitz is one of the grand old men of economics. Now in his 70s, he has been an adviser to governments (he was chairman of Bill Clinton’s Council of Economic Advisers and has advised the Greek and Scottish governments); been chief economist at the World Bank; and held numerous senior positions in academia. As well as being awarded over 40 honorary degrees from universities far and wide, he received the Nobel prize for economics in 2001.

Throughout his career he has been a voice on the left, a fierce critic of globalisation and laissez-faire economics, and a believer that economics should serve the common good. For Stiglitz, if the economics profession does not improve the lot of everyman, it has failed, however erudite the theories or well-constructed the policies they inspire.

Relentless high-octane attack

And now he has written a book, The Euro and its Threat to The Future of Europe. The first section is classic Stiglitz, full of passion and anger, a relentless high-octane attack on what he sees as a failed structure – failed, that is, not because it does not work economically but because it does not work politically.

For Stiglitz, this means that it has not improved the life of the average European, in particular citizens of the weaker countries.

How is it, he asks, that a currency which was designed to bring Europeans together and make them more prosperous, has instead divided them and made a substantial part of the European Union worse off? How is it that Europe’s political leadership, when surveying policy failures, has merely doubled down and demanded even greater austerity in the programme countries?

In the first book section Stiglitz does not delve too much into the history of the euro and why it was constructed as it is. Nor does he dwell too long on what the creators of the single currency were trying to achieve, or the political constraints they were under.

This is not a major omission – the history of the construction of the euro is well documented by others. But it leads to the slightly unexpected accusation, made repeatedly throughout this section of the book, that the euro is a neoliberal construct.

Stiglitz perhaps is using ‘neoliberal’ as an all-purpose term of disapproval here. But it would certainly have surprised Jacques Delors and his fellow founding fathers, most of them firmly to the left of the political spectrum, to learn that they had built a neoliberal order.

Stiglitz closes the first section with coruscating attacks on the imposition of austerity on the programme countries. This he likens to the old debtor’s prison: as he puts it, the programmes almost seemed to be designed to make it impossible for the weaker countries to recover.

Here his economic analytical skills briefly surface above the political polemic. He details in convincing manner how the euro has built-in destabilisers and how it tends to make the strong stronger and the weak weaker.

Applying the rules

He reserves particular venom for those who continue to ‘apply the rules’, despite all evidence that they are not producing the desired effects; those who hold to the mantra ‘the euro is not a transfer union’ to save their own taxpayers’ pockets; and those who declaim that if five years of austerity have not solved Greece’s problems, then what is clearly needed is a sixth.

So far, so good. There is not very much in this first section that the experienced student of the euro and its travails will not already know. But Stiglitz delineates the issues with a freshness and a passion which both informs and entertains.

It is the second part of the book, though, where this broad brush approach starts to be less effective, as Stiglitz moves from describing what is wrong to suggesting how to address the mess.

Solutions do require somewhat more thought and detail. None of the three proposals Stiglitz sketches out is entirely satisfactory. All three – fundamental reforms in the structure of the single currency and the policies imposed on the member countries; a well-managed end to the euro experiment (through the oft-suggested device of north-south split); or a bold, new system dubbed the flexible euro – are in varying degrees unpalatable or unworkable. 

But maybe this is Stiglitz’s intention. Given his political views, he defines ‘success’ for the euro as improving the lot of the average citizen. Given his economic views, he struggles to see a way of achieving this without some or all of devaluation, reflation and deficit spending.

The resulting contortions as he tries to design a way in which any of those, let alone all three of them, is consistent with the single currency seem more designed to prove to the reader that it cannot, in fact, be done. It is as if Stiglitz is parodying the man who was asked, ‘How do I get to X?’ and answers, ‘Well, I wouldn’t start from here.’

Ultimately, readers should be aware that this is more a political than an economic book. And – maybe no bad thing in itself – it tells us more about Stiglitz than about the single currency.

John Nugée is a Director of OMFIF and a former Chief Manager of Reserves at the Bank of England.

Joseph Stiglitz Book Cover