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The Euro: How a Common Currency Threatens the Future of Europe Hardcover – August 16, 2016
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“Much more than a demolition job. These chapters are full of constructive proposals - a glimpse of what the ‘rescues’ would have looked like had the troika, perish the thought, hired their critic Stiglitz to design them.”
- Marin Sandbu, Financial Times
“[Stiglitz] is surely right. Without a radical overhaul of its workings, the euro seems all but certain to fail.”
- The Economist
“Terrific and clarifying.”
- Peter Goodman, The New York Times
“Many of Mr. Stiglitz’s most damning observations are on target.”
- Wall Street Journal
“The euro is a modern tragedy.…As its embarrassments have mounted, its supporters club has teemed with political romantics and Europhile journalists. Stiglitz’s message to such people is that they are inadvertently destroying what they most cherish.”
- Paul Collier, Times Literary Supplement
“A cogent and urgent argument of compelling interest to economists and policymakers.”
- Kirkus Reviews
About the Author
Joseph E. Stiglitz is a Nobel Prize–winning economist and the best-selling author of The Great Divide, Rewriting the Rules of the American Economy, The Price of Inequality, Freefall: America, Free Markets, and the Sinking of the World Economy, and Globalization and Its Discontents. He is a columnist for the New York Times and Project Syndicate and has written for Vanity Fair, Politico, The Atlantic, and Harper’s. He teaches at Columbia University and lives in New York City.
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Nobel Prize-winning economist Robert Lucas declared in 2003 that the 'central problem of depression prevention has been solved.' Market fundamentalists believe that if the government would simply ensure that inflation was low and stable, markets would ensure growth and prosperity for all - this is especially true within the Eurozone's dominant power, Germany. Greece is now in a depression, with half its youth unemployed, the extreme right has made large gains in France, a majority of those elected to Barcelona's regional parliament support independence from Spain, and large parts of Europe have a lower GDP/capita lower than before the 2008 global financial crisis. Even what Europe celebrates as a success is actually a failure - eg. Spain's unemployment rate has fallen from 26% in 2013 to 20% at the beginning of 2016 - but nearly half of young people remain unemployed and that would be even higher if so many young workers hadn't left to look elsewhere for jobs. Why?
Stiglitz's answer is that the 1992 Euro adoption failed provide support for the institutions that would make it work - specifically, the fault lies in currency pegs,' where the value of one country's currency is fixed relative to another or relative to a 'commodity.
Continuing, Stiglitz contends that our depression at the end of the 19th century was linked to the gold standard - with no new large discoveries of gold, its scarcity led to a fall in the prices of ordinary goods in terms of gold. This made it increasingly difficult for farmers in America to pay back their debts. The gold standard is also widely blamed for deepening and prolonging the Great Depression - those that abandoned the gold standard early recovered more quickly.
In spite of this, Europe decided to tie itself together with a single currency, creating within Europe the same kind of rigidity that the gold standard had inflicted on the world. Worse yet, the structure of the Eurozone built in certain ideas about what was required for economic success - that the central bank should focus on inflation, ignoring unemployment, growth, and stability as well, as does the Federal Reserve.
Portugal, Ireland, Greece, Spain, and Cyprus were also importing more than they were exporting, with the resulting insufficiency of domestic demand depressing the economy. One needed to make import-substituting activities more productive and encourage consumption of local goods. In Greece, for example, the opposite - Greece was ordered to change milk labeling so that 11-day-old milk from northern Europe could still be called 'fresh' and undercut Greek producers.
Why were Europe's leaders even focusing on milk, the size of loaves of bread, and what OTC drugs could be sold outside of pharmacies as Greece's GDP plummeted about 25%? Stiglitz observes that special interests, eg. big dairy companies of Holland, appear to be behind the reforms, and the chairman of the Eurogroup is the Dutch Finance minister. Stiglitz also notes that hardly any of the money loaned Greece went to help the Greeks, but rather private-sector creditors - German and French banks.
Germany holds itself out as a success - an example of what other countries should do. Its economy has grown by 6.8% since 2007 - just 0.8%/year, a number that normally would be considered close to failing. (The U.S. growth rate in the same period averaged 1.2%.) Stiglitz also points that prior to the crisis (early 2000s), Germany adopted reforms that aggressively cut into ordinary workers' safety net, especially those at the bottom. Inequality increased, and real wages stagnated. Germany is a 'success' only by comparison with other nations in the Eurozone. Regardless, its strategy cannot be universally followed - based in part on strong trade surpluses.
Stiglitz also contends that the European Central Bank's monetary policy and the macroeconomic policies imposed by the official creditors on crisis countries have been largely responsible for the economic damages done. Tightening monetary policy during the credit crunch following the 2008 crisis, along with the imposition of sharp fiscal deficit cuts threw the Eurozone into a self-inflected second recession in 2011-12. In Greece, for example, measures intended to lower the debt burden have left it more burdened than in 2010 - the debt-to-GDP ratio has increased from 117% when the crisis began to 177% today. Many Germans insist it was hyperinflation that led to Hitler, and so tend to support central bank policies that guard against that problem rather than the more worrisome spector of joblessness - thus, Germany is the problem, not Greece.
Sitglitz endorses significant debt write-downs, raising both taxes and spending by the same amount (Stiglitz blames a hidden agenda of downsizing government for the latter), and banning excessive trade deficits. Instead, he believes the Eurozone will further unravel. He also criticizes the European Common Bank for 'resisting quantative easing,' yet argues that the most important effect of QE has been contributing to 'growing inequality,' which he says hurts growth
Bottom-Line, per Stiglitz: The Euro has failed to achieve either of its two principal goals of prosperity and political integration. European countries now view each other with distrust and anger.
The author does take some liberties in his assessment of the underlying cause of the eurozone's problems. He blames neoliberal ideology but doesn't spend any time wrestling with the ideas or explaining how they might have been implemented differently to help them work. The free market is a great asset to an economy; unfortunately the orchestrated approach set into place by the eurozone's powers is what made this experiment suffer as it has. With that said, the book discussed a very trying time in our world's economy being the aftermath of the Financial Crisis; I think a little more caution is in order before making the conclusion that free market capitalism was the cause of the crisis (pg 247) and therefore shouldn't be trusted.
The real value of this book is in the early sections on pointing out what the eurozone's current problems are and walking through the poor policy making done to remedy the situation. The latter part of the book is what the author thinks ought to be done to make things better. His system of import/export chits is interesting, but almost sounds too simplistic and a means of government trying to manipulate trade levels in order to fine tune economic health. Centrally planned options like this almost never succeed. Country or region specific euros? How is this much different than going back to separate currencies? I found entire chapters (e.g. Ch 10) unhelpful as the author attempts to explain, for example, how Greece can reestablish its own credit market despite not having any savings to jumpstart the system. His answer is that credit nowadays is just often created out of thin air so...it'll be alright. He builds a lot of suggestions off of shaky assumptions throughout the last third of the book.
With all this said, it is overall a decent book and will sit on my shelf for some time. It's an interesting read and will help you hold your own should someone bring up the pretentious question of "will the eurozone survive?" at a cocktail party. Just look at them stupefied and say "not if the Troika thinks internal devaluations will ever truly replace the benefits of exchange rate flexibility!"
For content the book deserves five stars plus But as an author Stiglitz acknowledges he requires assistance with his writing. So readers have to pay attention.
Of course two generations were spoilt by Paul Samuelson, who not only was a leading economists but an extraordinary explainer of complicated issues. One could do well on advanced exams in economics by just rereading Samuelson's relevant chapter in his introductory book.
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1. Euro was a mistake (true).
2. Austerity measures are wrong (probably).
3. Markets fail (questionable).Read more