Review: A Nobel Economist’s Plea to Save the Euro

The millions of Britons still reeling at the “shock” vote in the referendum on the UK's membership of the European Union should reflect on this stark fact: whenever they are given the opportunity, voters reject more Europe.

The Danish and Swedes voted against joining the euro, the French and Dutch against the European constitution and the Norwegians on joining the EU at all. Then in 2015 61% of Greeks rejected their crisis bailout package while the Portuguese and Spanish voted in similar numbers against austerity.

Yet on every occasion policy remained unchanged and the measures were put in place eventually (except for Norway which could not be forced to become a vassal of Brussels).

This point is made three times by Nobel laureate economist Joseph Stiglitz in his new book, which is a devastating indictment of the way that the Eurocracy established the European single currency.

The euro may not have failed but it has clearly not been the unalloyed success that their founders were sure it would be. Of the 17 years that the euro has been in existence as a currency - and indeed the 14 years people have had the notes and coins in their pockets - nine of those it has been in recession or crisis.

Five of its 19 members have had to be given a bailout. In the worst case Greece has suffered an appalling depression, with one in four people out of work, half in poverty, and shortages of medicines in what is a first world country.

Stiglitz does not necessarily break new ground with his analysis of the cause but he puts it with great clarity. Its founders were working within the neoliberal agenda of the late 1980s and early 1990s that failed to fit with the economy of the 00s. Their assumption that opening up the markets in goods, services, capital and labour would lead to greater efficiency and productivity proved to be false. Instead, it opened up avenues for financial institutions to take out large leveraged bets against individual members.

The other major failing was also economic but had a political cause: the decision to create a monetary union without a fiscal or banking union. Here Stiglitz blames Germany for insisting that there should be no system that might act like a transfer union - moving money from richer to poorer areas of the union in troubled times.

his diagnosis may not be new, his prescription is a lively addition to the debate

Stiglitz points to the United States - not that he sees this as the perfect economy by any means - where the federal fiscal system means that money can be transferred to states that hit economic turbulence and the FDIC, a national bank insurance scheme can oversee the bailout of a failed bank.

He contrasts the experience of Washington Mutual, where the burden of its rescue fell on the federal system rather than the north-western US state, with Spain. Once the eurozone hit the Iberian peninsula, depositors had no incentive to keep their money in Spanish banks as there was at the time no obvious rescue fund sitting behind them and every reason to move their euros to Germany.

But the overarching critique is of the insistence of Germany on its allies to believe that the response to a debt crisis was to cut spending and raise taxes to reduce the deficit. He accuses them of repeating the same mistake as US President Herbert Hoover who he says converted the Wall Street Crash of 1929 into the Great Depression.

But while his diagnosis may not be new, his prescription is a lively addition to the debate. The euro is flawed but not fatally so. It can be nursed back to health but only if policymakers prefer “more Europe” over “less Europe”. His list of reforms is long - 20 individual recommendations - which necessitate everything from banking union to an EU-wide tax of 15% on all incomes above, say, €250,000.

But while they fall far short of an attempt to recreate an American-style federal system, they almost certainly go too far for Germany and in any event the persistent euro crisis and the refugee crisis has not left leaders with much political capital.

In the absence of genuine reform Stiglitz says policymakers should opt for an “amicable divorce” that will see the 19 members revert to their pre-euro currencies.

He relies on the wizardry of electronic banking to make it work and a clever but complex system of auctions of the rights to create credit, and an equally complex system of trade “chits” that would encourage exports and discourage imports.

The alternative is a flexible euro with a bunch of new electronic euros used by individual or groups of countries and with variable exchange rates against each other. It would include greater burden sharing by Germany - higher prices and wages and so lower surpluses - and a solidarity fund to help weak countries.

The first idea seems too complex to be embraced by politicians while the second will simply be rejected by Germany. But even if his ideas are not embraced and the euro collapses, his book is likely to remain as the best-written charge sheet against those people who should ultimately bear the blame for the failure of the single currency.

The Euro and Its Threat to the Future of Europe is published by Allen Lane (£20).

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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