Why the euro cannot be saved

17 June, 2018 at 13:20 | Posted in Economics | 9 Comments

The euro may be approaching another crisis. Italy, the eurozone’s third largest economy, has chosen what can at best be described as a Euroskeptic government. This should surprise no one. The backlash in Italy is another predictable (and predicted) episode in the long saga of a poorly designed currency arrangement, in which the dominant power, Germany, impedes the necessary reforms and insists on policies that exacerbate the inherent problems, using rhetoric seemingly intended to inflame passions.

euroItaly has been performing poorly since the euro’s launch. Its real (inflation-adjusted) GDP in 2016 was the same as it was in 2001. But the eurozone as a whole has not been doing well, either … If one country does poorly, blame the country; if many countries are doing poorly, blame the system … The euro was a system almost designed to fail. It took away governments’ main adjustment mechanisms (interest and exchange rates); and, rather than creating new institutions to help countries cope with the diverse situations in which they find themselves, it imposed new strictures – often based on discredited economic and political theories – on deficits, debt, and even structural policies.

The euro was supposed to bring shared prosperity, which would enhance solidarity and advance the goal of European integration. In fact, it has done just the opposite, slowing growth and sowing discord …

The central problem in a currency area is how to correct exchange-rate misalignments like the one now affecting Italy. Germany’s answer is to put the burden on the weak countries already suffering from high unemployment and low growth rates. We know where this leads: more pain, more suffering, more unemployment, and even slower growth …

Across the eurozone, political leaders are moving into a state of paralysis: citizens want to remain in the EU, but also want an end to austerity and the return of prosperity. They are told they can’t have both. Ever hopeful of a change of heart in northern Europe, troubled governments stay the course, and the suffering of their people increases …

Germany and other countries in northern Europe can save the euro by showing more humanity and more flexibility. But, having watched the first acts of this play so many times, I am not counting on them to change the plot.

Joseph Stiglitz

The euro has taken away the possibility for national governments to manage their economies in a meaningful way — and in Italy, just as in Greece a couple of years ago, the people have had to pay the true costs of its concomitant misguided austerity policies.

The unfolding of the repeated economic crises in euroland during the last decade has shown beyond any doubts that the euro is not only an economic project but just as much a political one. What the neoliberal revolution during the 1980s and 1990s didn’t manage to accomplish, the euro shall now force on us.

austerity22But do the peoples of Europe really want to deprive themselves of economic autonomy, enforce lower wages and slash social welfare at the slightest sign of economic distress? Is increasing income inequality and a federal überstate really the stuff that our dreams are made of? I doubt it.

History ought to act as a deterrent. During the 1930s our economies didn’t come out of the depression until the folly of that time — the gold standard — was thrown on the dustbin of history. The euro will hopefully soon join it.

Economists have a tendency to get enthralled by their theories and model and forget that behind the figures and abstractions there is a real world with real people. Real people that have to pay dearly for fundamentally flawed doctrines and recommendations.


  1. Many economists did oppose the euro – especially American such as Paul Krugman and Martin Feldstein in the early 1990s – in their usual fashion by citing Mundel’s Optimum Currency Area model and other such gadgetary. Similar assertions are often repeated ad nauseum – such as the one that if only countries had their own currency the problem would be solved.

    There were actually some very good reasons why many countries went on to the Euro – we must remember the Drachma and Lira eras to understand why. We also have to understand the importance to many countries of being able to import crucial inputs in order to industrialise and exports. Contrary to what many mainstream economists assert, countries that got on the growth curve often had fixed exchange rates and tight capital controls.

    The latter point is crucial. The problem as I see it was high capital mobility. This led to credit bubbles and crashes in the Southern Periphery. The Bretton Woods system of fixed exchange rates with limited capital mobility, for example, functioned well until it was liberalised from the late 1960s. The Marshall Plan was successful partly because it operated under this conditions and there was some way of channelling these funds into the right type of investment.

    Similarly in Europe, there needs to be some sort of structure whereby German surplus funds can be channelled into the Southern periphery such that is directed at productive investment, rather than into real estate and other either speculative areas.

    I agree, however, with what you say about neo-liberalism in the EU. Europe is governed and advised by a cosmopolitan elite that is connected with places like MIT and Goldman Sachs who dominate key government and central bank positions everywhere.. Barosso became a Goldman Sachs lobbyist, Draghi went to MIT, three of the Bank of England’s Board of Directors, including its governor, were at Goldman Sachs. Europe is less ‘European’ than it was, and more part of this international neo-liberal elite that have for a long time pushed things like international capital liberalisation.

    However, while I was never in favour of European political union – and I think an independent European defence and foreign policy would undermine NATO, which may not be as good a thing as many might think – Europe has nevertheless been a force for tolerance and social liberalism and for a long time socialism: and with Trump at the helm and uncertainties about China, a strong Europe is probably something we need more than ever.


    • They are shutting out migrants. The ECB maintains a hard money stance that forces unnecessary austerity on individuals, while supporting private banks liberally through dollar swap lines with the Fed. German finance ministers propagate falsehoods about needing to build up a surplus, ignoring the fact that the Fed needed no build-up of reserves before bailing out world financial markets, by supplying unlimited dollar swap lines to the ECB so the ECB could supply Deutsche Bank with dollars it couldn’t get elsewhere to meet dollar obligations. The implications of the Fed’s rescue, without needing taxpayer dollars, has failed to penetrate the consciousness of European politicians …

      • “The implications of the Fed’s rescue, without needing taxpayer dollars…”

        You need to bring power into your analysis of money.

        For example, there is a difference between the US dollar and the Greek Drachma. The reason is that it the US dollar is a hegemonic currency that is ultimately backed by (in political science language hard and soft) power. That is why in the riskiest of times, say after a major financial crisis or the breakout of a war -two things go up in demand – the US dollar and gold – even if there are large US budget and external deficits. The size of the US fiscal deficit or its payments deficit does not matter so much to the US – it has a lot of leverage. It can simply print money, it does not matter. Germany admittedly does have more leverage than Greece, but this based on a strong economy (only one aspect of power) and in Germany’s case – credibility: the Deutsche Mark was built on this. OK, you might think Germany’s behaviour is excessive, but that comes from experience in knowing, without the soft and hard power the US has, how currency credibility has to be earned, what happens if it is lost, and how hard it is then to get it back.

        Germany wants to find a productive use for its surpluses to get higher returns, and it wants Europe to work. However it needs a structure for those surpluses to be channelled if we are to have a successful “Marshall Plan for Europe”. Otherwise Europe-wide credit easing will lead to repeat of the boom/bust inflationary/deflationary cycles (with political consequences) that we saw in pre Euro Italy, Greece and Spain. The long term underlying problem will not be solved and these cycles (both the booms and busts) have a terrible effect on the long-term real economy and the distribution of resources and wealth and they never get out of the trap they are in.

        Europe has to get moving on fiscal and banking union such that fiscal policy can be used as a redistributive stabiliser. If not, it needs a two speed Europe, where the southern periphery is released from the Euro, and a structure is put in place where they can be gradually re-let in. That must include large fiscal transfers that are directed towards capital investment that enable them to properly industrialise.(Although, with rapid and large scale eastern expansion, for many reasons, this task has actually been made more difficult – for example the eastern block has substituted for the southern periphery as a destination of German capital investment.)

        • Think of a country that wants to industrialise and get on the growth curve. It needs to export in order to purchase the inputs required for industrialisation and diversification.To purchase those inputs, it need dollars, because since WWI, and especially since WWII, the US dollar has denominated the international trading system. That is going to easier for a German firm with Duetsch Marks than a Greek firm with Drachma. On a national scale, for a
          a small country that needs to industrialise (such as Greece), or for a country heavily dependent on trade relative to its GNP (such as Germany), it is important it maintains its terms of trade. For the US, none of this matters; it does not have to buy dollars, it can simply print them, even with external deficits.

        • “how currency credibility has to be earned, what happens if it is lost, and how hard it is then to get it back.”
          I would say private consensus on the dollar as the preferred unit for international settlement is more important a factor in the dollar’s strength than US military power alone.
          Even if power is a factor, my point is that the ECB relied on unlimited Fed aid in 2008 and after to save private European banks. The ECB could have easily bailed out Greece. The ECB has a vast bias in favor of printing money to save private firms. I deplore the neoliberal assumptions of the ECB.
          “The long term underlying problem will not be solved and these cycles (both the booms and busts) have a terrible effect on the long-term real economy and the distribution of resources and wealth”
          The distributional problems are due to an imposed scarcity of money, not physical constraints.
          “capital investment that enable them to properly industrialise.”
          I have a very different vision. Stop overbreeding, focus on knowledge expansion, consume less as you learn more. I realize my life philosophy that less is more is sharply at odds with the dominant neoliberal philosophy of our times: more is better. Salesmen strive to keep you in ignorance to sell you more stuff you don’t need, filling up the oceans with garbage. Stop the capitalist madness.

          • “I would say private consensus on the dollar as the preferred unit for international settlement is more important a factor in the dollar’s strength than US military power alone.”

            We are living in a Pax Americana – still. It is natural for the hegemonic power to be the currency of choice for underwriting the international trading system. Rome continually debased its currency (reduce its silver content). It did not matter as long as it was clearly in charge and Ceasar’s head was on the coin and he said it was worth what it said it was. And to cut a long story short, the hegemony of Sterling ended once and for all with Britain’s Pyrrhic victory in WWII and its replacement by the US dollar was the result of the emergence of a clear winner in that conflict that brought about a new balance of power arrangement.

            I actually agree with your other comments – but to really deal with the underlying economic problems in Greece, Italy, and Spain – the Euro with fiscal integration and a properly though thought Marshall Plan for Southern Europe could greatly help, not hinder them. I also agree in principle with your views about ‘more is always better’. Many people I am sure just want some guaranteed economic security, but don’t know how capitalism can be reformed to deal with that.

            • “the hegemony of Sterling ended once and for all with Britain’s Pyrrhic victory in WWII and its replacement by the US dollar”
              England willingly gave up its role as foremost world currency. The US gave up control over dollar issuance, which England apparently didn’t want to do then, and China doesn’t want to do now. Today dollar-denominated assets are issued freely by private banks in a way that the Fed does not control. England, China, Switzerland retain more centralized control of their currencies. The dollar is being “debased” far more by the private sector; government “debasing” occurs primarily when the private sector gets itself into a panic and requires government support. However, with all the “debasing” of the dollar going on, it still retains its value, even gaining after the Fed printed trillions in 2008 and after. Such financial realities are difficult for “hard money” theorists to account for; generally, “hard money” proponents simply ignore the vast scale of dollar money supply increases, because including the real money supply growth would explode their inflation models leading to predictions of hyperinflation that have not materialized.
              “Many people I am sure just want some guaranteed economic security, but don’t know how capitalism can be reformed to deal with that.”
              I propose we recognize that hard money models are inappropriate when making public policy, then print money for a universal basic income. Print faster than prices rise, thus guaranteeing that real income purchasing power does not decrease. The central bank unlimited currency swap network already used to alleviate the 2008 crash’s aftermath eliminates foreign exchange risk. The currency swap network serves as a proxy for one world central bank, which can always issue more of the world’s best money so that there can be no bank runs on that bank ..

    • If we want a strong Europe, we should probably try to get rid of the regime that keeps us in a straight-jacket. We did much better before 1992 than we do now, and even better before 1975 when some politically decided support for the different countries’ economies were permitted.

      Rich countries usually try to forbid poor countries from supporting their economies with political means. That was once what colonialism was for. But Europe is unique in forbidding itself from supporting its economies with political means. US, Japan and China all do it – political contracts about products deemed as necessary for development. But we in Europe think we will get out of our mess starving us out of it, or trusting the holy “market”.

      It may be that we are tolerant, but this tolerance for idiocy goes too far!

  2. My resource page on the EU – http://homosociologicus.com/europe-today-2

    My resource page on MMT (Modern Monetary Theory) which explains, why it is essential for any state to have its own currency. It if shall be able to make its own political economic policies: http://homosociologicus.com/neoliberalism-3

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