The euro — more pain, more suffering, and more unemployment

9 Sep, 2018 at 16:08 | Posted in Economics | 3 Comments

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 …

matt-kenyon-illustration-009The 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. Even if growth eventually recovers, GDP never reaches the level it would have attained had a more sensible strategy been pursued. The alternative is to shift more of the burden of adjustment on the strong countries, with higher wages and stronger demand supported by government investment programmes …

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

3 Comments

  1. The Stiglitz solution (which many others have advocated) would work if, when Germany lets its inflation rise from say 2% to 4%, Italy, Greece etc don’t let their inflation rise by 2% as well. Problem is that they might well let that extra 2% inflation happen, in which case the extra inflation would be in vain.

    Comment by Ralph Musgrave— 10 Sep, 2018 #

    • The distribution of income between capital and labor — between wages and social transfers and financial returns — is a political question. A state with a sovereign currency can solve an impasse over income distribution by letting inflation and exchange rates square the circle. Back in the day, Sweden would effectively negotiate wages for the entire country and if the agreed schedule was infeasible, the krona would move until it was feasible. (Yes, I know that is a caricature.). Much the same process with less formality was in place in Italy before the Euro.
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      I think liberals like Stiglitz and Krugman do not even know that they are useful idiots, valued by the powers that be for their habit of offering only vague and unworkable policy alternatives.
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      The most basic abstract analysis of the Euro highlights the need to have a fiscal regime that can counterbalance the central bank and finance a “risk-free” bond to support the banking and payments system. But, imagining that having Germany buy public goods for Spain is a solution is idle fantasy. And creating a complex derivative, as the ECB proposes, is a form of insanity.
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      The European VAT system has been harmonized. It could easily be used to effectively extract a small tariff on trade between EU members to finance sovereign indebtedness. Greece could have used such a tariff on German imports to finance its debt to German banks instead of disemploying one-fourth or more of a generation and selling off its common wealth. But, such thoughts are unthinkable.

      Comment by Bruce Wilder— 10 Sep, 2018 #

  2. The central problem in a currency area is how to correct exchange-rate misalignments like the one now affecting Italy.
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    “optimum currency area” ?!? Really?
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    I am among those who think Robert Mundell got pretty much what he sought: a disabled state, or at least a state unable to pursue a social Democratic agenda in governance. Is the highly abstract analysis of OCA’s of any other political use?
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    Stiglitz does not show me that it offers a useful handle for politics or policy. What choice does Italy as a polity have?

    Comment by Bruce Wilder— 9 Sep, 2018 #


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