On May 5, Joseph Stiglitz spoke in Rome, Italy, at least on one level addressing the question: Can the euro be saved?
It’s worth paying some heed to Stiglitz’ argument if only because he has served in so many of the posts typically held by the more erudite members of the world’s ruling elite: chairman of the Council of Economic Advisers under President Bill Clinton, chief economist of the World Bank, etc. He is also the fourth most influential economist in the world today, as measured by the frequency with which other economists cite his work.
Digression alert: Is that a great measure? Economists cite each other’s work for a lot of reasons, and one of them may be the use of the cited party as a convenient straw man. That wouldn’t connote influence.
Second digression: Note that the question “can the euro be saved” seems to suggest that it should be. Indeed, Stiglitz’ speech shows no signs of any serious inquiry into whether the people of the nations involved would be better off with their own respective sovereign currencies.
Main line of discussion resumed: Stiglitz seems to think the euro can be saved, but that the “structure” of Europe as a political entity has to change. His ideas for a reformed structure sound a lot like a consolidation of Europe into a single nation state.
Before he quite gets to that, though, he is concerned to combat what he sees as the false doctrine of austerity that some in Europe are forcing upon others, to the detriment of the whole region. His argument is that austerity, which he also describes as that is, additional budgetary rigor “will not help to prevent the next crisis.”
In much of Europe today, Stiglitz said, there is cause for at least a somewhat restrained celebration, because the recession is at an end, there has been a resumption of growth. But that does not signify the success of the policies of austerity where they have been instituted. Rather, due to those misguided policies, Europe has lost half a decade or more, perhaps a full decade and, “unless there are marked changes,” this could stretch out and become a lost quarter century.
He said he doesn’t advocate abandoning the Euro, but rather moving ahead.
Moving ahead means a common fiscal framework, the mutualization of debt (for example through Eurobonds), a banking union (though one with “differentiated macro-prudential regulations”) and tax harmonization.
Perhaps most urgent in his eyes: the ECB needs a change in its mandate. At present, the policies at the Europe-wide level are aimed at heading off inflation. That must change to a focus on growth and employment.
In connection with the analyses of the European economy offered in recent years by the Troika, (the EC, the ECB, and the IMF) Stiglitz said that if the students at Columbia had submitted such work to him, he would have rejected it. The troika’s dealings in particular with Greece, Stiglitz said, constitute a model of how it shouldn’t work. Athens is now burdened by more debt than it was in 2010.
Not What It Sounds Like
The address sounds at first sight like a root-and-branch attack upon the elitist policies of the Troika. But I have to say, Stiglitz’ views are part of the problem, not the solution. First, one point that can and should be made on behalf of the existence of the single currency for the Eurozone is that it takes the size of the money supply out of the control of any one country’s legislature or central bank. Stiglitz seems to think that is a bad thing, something that wiser leadership might overcome.
Limits on the ability of politicians to toy with the money supply aren’t the problem. That toying is the problem. If austerity means: though shalt not emulate the Weimar Republic circa 1923, then austerity is a rather valuable bit of common sense.
The bottom line for Stiglitz seems to be that Europe will become stronger and more prosperous as it becomes more centralized, as it becomes in effect a single nation state with various provinces allowed some differentiated regulation, and as this single new nation state follows approved not-at-all-austere Keynesian policies, including inflationary monetary policies at the discretion of the leadership.
And that is a potentially ruinous piece of advice.