The Euro is Killing Europe

Joseph Stiglitz explains how a symbol of the dream of unity and peace in Europe became a living nightmare for the continent.

When it was established in 1992 through the Maastricht Treaty, the Euro was a powerful symbol of the realization of a centuries-old dream: peace and unity across Europe.

More than just a symbol however, the common currency was meant to allow investment capital to flow seamlessly over borders, serving as an engine of economic modernization along the European periphery and integration across the continent. It would create the world’s second-largest market and raise the standard of living in the continent’s poorer states to the level of its richer ones, as citizens of countries like Greece or Portugal would see their income and savings converted into a stable, globally exchangeable currency with the potential to rival even the US Dollar.

The Euro merged pragmatism with high idealism, but less than a quarter century after its establishment it’s become clear, according to Joseph Stiglitz, that the chief tool of economic integration is driving the European Union apart.

Stiglitz — a Nobel laureate, former chief economist at the World Bank, and now professor at Columbia Business School — recounts in his latest book The Eurohow, over the past decade, the Euro has created a cascade of escalating crises, pitting its most economically powerful members, like France and Germany, against its weakest.

The Euro’s original sin, Stiglitz writes, was “the creation of a single currency without creating a set of institutions that enabled a region of Europe’s diversity to function effectively within a single currency.” As executed, that is, the common currency assumed that continent-wide economic unity was possible without increased political integration, creating a dangerously fragile union, as the prolonged economic crisis made clear.

The Euro placed responsibility for monetary policy for the entire continent in the hands of the Frankfurt-based European Central Bank (ECB), stripping individual members of the ability to lower interest rates or devalue currency to spur the economy during an economic trough. With member states’ hands tied monetarily, the European Union further failed to provide structures for a fiscal response to a continental crisis. When, for instance, the Spanish economy failed, there was no built-in mechanism to provide stimulus or a bailout, no requirement that other Euro members to come to its aid, and no continent-wide social safety net, like unemployment insurance, to cushion the blow. With no procedures in place to leave the Euro, the system ensured that any economic hiccup would become a full-scale political crisis.

As Stiglitz explains, the Euro, as organized, proceeded from the now-discredited notion that controllable public debt and cautious monetary policy could ensure an entire region’s economic health. Today, the Euro’s core idea that a diverse set of economies would begin to look more like one another if debt and inflation could be centrally controlled now looks like a horribly flawed assumption, the relic of an earlier, more credulous era in economic thought. “The idea that keeping deficits, debts, and inflation low would lead to convergence if you had a common currency would now be viewed as nonsense,” Stiglitz bluntly put it during a September 28 symposium at Columbia University’s School for International and Public Affairs. “The hope was that the countries of the Eurozone would converge. In fact, they’ve diverged.”

As Stiglitz recounts in The Euro, the common currency created a system where “money flowed upward,” sharpening existing cleavages across the continent. The removal of trade and investment barriers created high prices and massive trade deficits in “peripheral” Eurozone members, while feeding ruinous real estate bubbles in countries like Spain and Ireland. Continent-wide, richer countries weathered the economic chaos while poorer ones suffered: between 2004 and 2014, unemployment rates declined from over 10 percent to 5 percent in Germany, while exploding from roughly 10 percent to over 25 percent in Spain and Greece.

When a crisis finally did hit, the member states opted for an ad-hoc response whose main objective seemed to be lessening the powerful countries’ exposure to the crisis and punishing the union’s smaller and allegedly more profligate members. Stiglitz recounts, for instance, how German leaders dictated punitive austerity conditions to resolve the now decade-long Greek economic crisis, imposing solutions that only made it harder for Athens to climb out from under a deep economic depression.

By the end of 2010, Stiglitz writes in his book, “a huge creditor/debtor schism had opened up, and political power within the Eurozone rested with the creditors, and Germany in particular.”

Stiglitz watched this dynamic play out up close: for much of the Euro crisis, he served as an advisor to various governments in Greece, which has accepted a series of austerity packages negotiated with the European Central Bank and the IMF in order to stay in the Eurozone. While the package was nominally designed to save Greece, Stiglitz argues, its true aim was to shore up the banks in northern Europe that had become overexposed to Greek debt.

Stiglitz says he saw first-hand “the lack of solidarity in how originally Germany sought terms on the loans to Greece that would have generated profits to the lenders, how they succeeded in getting the IMF to change its rules, to allow it to participate in the bailout, how (as I had seen repeatedly at the World Bank) the so-called Greek bailout was really a bailout of German and French banks.” Predictably, the bailout couldn’t lift Greece out of its still-ongoing depression: “I saw the disparity between the promise of a ‘growth’ package and what was delivered,” he says.

As Stiglitz explains it, the origins of the Euro’s current problems also long predate the current moment and lie in the immediate post-Cold War transformation of the global economic system. “The Euro was founded at a particular moment of history, when neoliberal ideas were ascendant,” Stiglitz writes. The time the Euro was first envisioned, in the 1992 Maastricht Treaty, represented a moment of elite economic consensus, marked by unbounded optimism in the potential of market-driven growth — a tendency that Stiglitz characterizes in his book as “market fundamentalism.”

In the years after the collapse of the Soviet Union, international trade barriers fell, dozens of countries privatized important state assets and converted to market-oriented systems, and global economic institutions like the IMF and the World Bank conditioned loans to emerging economies on the sound management of public debt and inflation.

The flaws of this model would be exposed by the end of the 1990s, as a number of economies that appeared to have public debt and inflation under control slid into a state of prolonged chaos. The bursting of a real estate and stock market bubble plunged Japan into its “lost decade” in the early ’90s. In the late 1990s, a chain reaction of currency devaluation and capital flight sent South Korea, Indonesia, Thailand, and other East Asian economies spiraling, even though these countries did not take on onerous public debts or follow particularly expansionary monetary policies in the run-up to the crisis.

The market system that gave birth to the Euro now seems to be under existential threat around the globe from a populist wave that earlier this month propelled Donald Trump to the US presidency. Great Britain’s June 2016 vote to leave the European Union, social and political pressures from the ongoing European migrant crisis, and the rising profile of Euroskeptic parties like France’s National Front are especially powerful evidence that the very notion of a common European future is unravelling.

In The Euro, there’s no easy answer to that question of how a full turnaround might transpire and the book sometimes gives the impression that the damage the Euro wrought is irreversible. In some countries, “standards of living almost surely will never reach the level that they would have hit had not been for the Euro crisis,” Stiglitz writes.

According to Stiglitz, the only way forward is either the end of the Euro or a more integrated union — one in which the obligations of member states towards one another are more clearly defined, and the inherent risks of economic integration are more equally distributed — that could take years or even decades to actually build. Stiglitz suggests that a “flexible Euro,” in which countries still trade in Euros but with differences in exchange rates between each member state, could serve as a bridge to a true monetary union. But even this intermediate step envisions a vastly different system than the one that’s currently in place.

Despite the seeming impossibility of reform and progress in the present moment of political stalemate, there are fleeting sources of optimism in Stiglitz’s work. By e-mail, Stiglitz notes that he’s observed “enormous commitment to the ‘European project,’ especially among young people, who feel European.” If the political impulse that created the Euro is still so strong, perhaps a similar enthusiasm for fixing it will emerge, regardless of how complex that fix may be. The pressures of crisis could create opportunities of its own — although Stiglitz writes that in Europe there’s concern that “in the moment of crisis, while there may be change, it is unlikely to be the kind of thoughtful change that could provide the basis for sustainable shared stable prosperity.”

Maybe the most compelling source of optimism is the possibility that economists and political elites learn something from the failures of the past decade. If anything, the Euro crisis is proof that widely shared assumptions about how societies and economies function can turn out to be disastrously wrong. And it isn’t the only semi-recent reminder of how off the experts can be. “There has always been some diversity in economic thought,” Stiglitz observed. “There were some people who had much better models and which gave much better insights into the Great Recession. But there was excessive conformity to the dominant model and too little tolerance for models based on other assumptions. Hopefully, greater humility will be accompanied by greater tolerance of a broader diversity of perspectives.”

Professor and Nobel Laureate Joseph Stiglitz accepted a joint appointment to a chaired professorship at Columbia Business School, the Graduate School of Arts and Sciences (in the Department of Economics) and the School of International and Public Affairs in the spring of 2001. Joseph Stiglitz also teaches in the open-enrollment online program Globalization: Strategies for Your Enterprise.

Ivy Exec is proud to announce its partnership with Columbia Business School, to bring an insightful collection of thought leadership pieces for the modern-thinking strategist in finance, leadership and more to its platform.