Fri, Jun 15, 2018 - Page 9 News List

More humanity and German flexibility could save the euro

By Joseph Stiglitz

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.

Italy has been performing poorly since the euro’s launch. Its real (inflation-adjusted) GDP in 2016 was the same as it was in 2001.

However, the eurozone as a whole has not been doing well, either.

From 2008 to 2016, its real GDP increased by just 3 percent in total. In 2000, a year after the euro was introduced, the US economy was only 13 percent larger than the eurozone; by 2016 it was 26 percent larger.

After real growth last year of about 2.4 percent — not enough to reverse the damage of a decade of malaise — the eurozone economy is faltering again.

If one country does poorly, blame the country; if many countries are doing poorly, blame the system.

As I put it in my book The Euro: How a Common Currency Threatens the Future of Europe, 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. It has done just the opposite, slowing growth and sowing discord.

The problem is not a shortage of ideas about how to move forward.

French President Emmanuel Macron, in two speeches, at the Sorbonne in September last year, and when he received the Charlemagne Prize for European Unity last month, has articulated a clear vision for Europe’s future.

However, German Chancellor Angela Merkel has effectively thrown cold water on his proposals, suggesting, for example, risibly small amounts of money for investment in areas that urgently need it.

In my book, I emphasized the urgent need for a common deposit insurance scheme, to prevent runs against banking systems in weak countries.

Germany seems to recognize the importance of a banking union for the functioning of a single currency, but, like St Augustine, its response has been: “O Lord, make me pure, but not yet.”

Banking union apparently is a reform to be undertaken sometime in the future, never mind how much damage is done in the present.

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.

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 programs.

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