Published daily by the Lowy Institute

Where Stiglitz errs

Where Stiglitz errs
Published 29 Aug 2016 

Contrary to what American Nobel Prize winning economist Joseph Stiglitz claims, the Euro was, and is, no mistake but rather an indispensable part of one of the world's biggest economic powers, the European Union. 

Let’s recall why the single currency was introduced in the first place. The global economy is increasingly characterised by transnational chains of added value and the respective financial flows. This is especially true in Europe, where products like German cars are in fact a composite of deliveries from multiple countries, emanating from companies large and small. The Euro greatly facilitates such production processes by eliminating currency risk for all involved and allowing better comparison both inside multinational companies as well as between competing providers. Individuals, including tourists, profit from clear and comparable prices, as well as hassle-free currency usage across national borders (accommodatingly open thanks to the Schengen Agreement). 

It is often said, including by Stiglitz, that the common currency left European nations with not enough levers to pull when a crisis hits because it has taken away their ability to control exchange and interest rates. That’s turning things on their heads. Given the aforementioned transnational character of our economy, no country with a respective currency (except, to a certain degree, the US) has been able to control the two rates independently for quite some time now. The best examples are two Western European economies outside the Eurozone but clearly dependent on exchange with it: Switzerland and the UK. Their interest rates cannot escape worldwide trends and their exchange rates have to fluctuate around the Euro, lest they risk crippling manufacturing ability (by an overvalued Swiss Franc) or purchasing power abroad (by an undervalued Pound Sterling).

Within the Eurozone, the common currency has finally allowed a clear picture of what countries do, or don’t do, especially with regard to structural deficits resulting from clannish to outright corrupt economic and fiscal practice. Again, claiming that the Euro has allowed weaker economies in Southern and Eastern Europe to indebt themselves too freely is turning things upside down. Because of the common currency their grave structural deficits have now come to light and cannot be explained away any longer by ‘specific national traits’. [fold]

Historically speaking, Southern Europe had to be kept in the Western, broadly non-communist and later non-authoritarian realm after World War II, just as Eastern Europe after the implosion of the USSR. However, in both cases old and corrupt structures either remained in place or were replaced by new oligarchic ones. The respective adjustment process will take time and is often threatened by popular revolt (either genuine or fanned by populist irresponsibility) but is now finally underway thanks to the Euro. Shining examples of successful restructuring and adaptation can be seen from the three Baltic states to Ireland and, to a lesser degree, Portugal and Spain. The current equilibrium between expansive monetary policy (by the European Central Bank led by an Italian) and Northern, especially German fiscal prudence, as applied through the Councils of Ministers, appears just about right to bring the more notorious fiscal sinners into line, without creating too much hardship.

That the introduction of the Euro also had political reasons is undeniable; as if there would be any economic and fiscal decision in the public realm taken without regard to hard political facts. Such facts (wisely foreseen by those who created the Euro and defend it now) are, first, the declining global importance of Europe. Only as an economic bloc held together by the Euro can the EU effectively act on the same stage with other heavyweights. Without a strong EU, no TTIP, and thus no level playing field with the other new (and prospective) mega-regional trade agreements like NAFTA, the TPP and RCEP.

The second and probably most important political reason for an ever stronger and more united EU lies in facts laid bare since the end of the Cold War in Europe but conveniently overlooked by both the European side of NATO (eager to cash in on a peace dividend) and a US government still convinced of its ability to intervene anywhere, anytime. To put it into somewhat sweeping terms, the ‘Democratic Burden’ to counter and, where necessary, oppose the ever more visible authoritarian axis from Beijing to Moscow to Ankara must also be carried by Europe. Just as the respective discussion is heating up in the Asia Pacific on how to manage the inevitable decline of America's presence in the region, a unified Europe must turn away from the problems of its past and start shaping its future in a radically different world.

Normally Stiglitz is precisely the type of economist looking beyond ‘pure economics’ and is equipped on his journeys into political writing with an infallible moral compass. How he can be so wrong on such a monumental question is hard to explain. 

Photo: Getty Images/Ralph Orlowski

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