The Euro by Joseph E. Stiglitz
Two months after I purchased the original edition of The Euro, Stiglitz came up with a new edition with trenchant analysis on Brexit. Knowing that Stiglitz is a rambling polemist but there is always good stuff there if you persevere, I got the latest edition.
In this book, Stiglitz disassembles the prevalent consensus of what afflicts Europe, reveals the main culprit—The Euro, and examines palliatives that can rescue the economy from being crucified on the cross of Euro.
Stiglitz carried out a cogent and fervent analysis claiming that the euro is flawed at birth and bound for failure. He stated that the euro’s architects was to act as a lever to attain political integration and stimulate prosperity, but derailed its course and done the opposite. Since its launch, economically the Eurozone has been convulsed by debt crises and mired in prolonged stagnation; while politically, the gulf of divergence between stronger and weaker economies has been widening. There is no time for Troika to take the tranquilizing drug of gradualism. An immediate reform is required to prevent further devastation. In the absence of reform, an amicable divorce would be far preferable to the current approach of muddling through.
The book is structured in four sections. In the first section, Stiglitz sets out the sources and consequences of Europe’s economic crises. He then argues persuasively why the euro as a single currency is flawed in the second section. The third section elaborates on Troika’s misconceived policies; and the last section examines the reasonable next steps.
It is hard to cover everything so I’ll just note down what I like about this book.
I liked how Stiglitz compared the euro with the gold standard. If you think about it, among the kinds of currency arrangements, currency pegs have long been blamed and associated with depressions. The United States’ depression at the end of the 19th century was linked to the gold standard. Taking the words of William Jennings Bryan, the U.S would “crucify mankind upon a cross of gold.” Despite all this history, Europe proceeded to glue itself together with a single currency, inducing the same kind of rigidity that gold standard had inflicted on the economy. It’s mystifying.
Stiglitz also adroitly demonstrated how well intentioned efforts at the economic integration can backfire when questionable economic doctrines, shaped by neoliberal ideologies than by evidence, drive the agenda. I enjoyed his bashing of neoliberalism and the Expansionary Contraction concept. At its root, the Eurozone's calamities were the ramifications of deluded neoliberal ideologies on which the Eurozone's structure was established and that catastrophes emerge when political integration falls behind economic integration.
The aftermath of a pegged currency combined with neoliberalism was detrimental as shown with the example below:
After the creation of the euro, money rushed into the periphery countries and interest rates came down. Repetitive patterns were observed around the world where markets were liberalized: The rush of money into a country will be followed by a rush of money out, as markets abruptly grasped that they had been excessively euphoric. In this case, the global financial crisis was the exacerbating event: Suddenly, Greece, Spain, Portugal and Ireland found themselves with no access to credit-- a crisis for which the founders of the Eurozone had not planned. Normally, when sudden changes in investor sentiment reversed capital flows, exchange rates will plummet in the affected countries, helping the countries adjust. However, now with a single currency in the peripheral Eurozone, this couldn’t happen. The leaders of the Eurozone had not anticipated such an event, and such they had no game plan.
It is true that without the financial crisis mentioned above, things might not be as bad. Yet Euro was not the innocent victim of a crisis created elsewhere. Markets are always prone to irrational exuberance and pessimism. Mistakenly and irrationally presumed that the elimination of exchange risk meant the elimination of sovereign risk is the fatal mistake the founders have made.
As for what can save Europe out of this pit, I am not going to spoil it for you.
For the most part, Stiglitz’s analysis is sensible and backed with evidences. Every now and then, when he gets too passionate, the book veers off course. This shouldn’t be new to you if you’ve read his other books. This book is considered to be more leftist than a neutral economic book, If you’re German you can be mildly offended as Stiglitz accused Germany for self-aggrandizing at the expense of Greece. Other than those things, it is an excellent book.
