© REUTERS/Ana MartinezNobel Laureate in economics and former World Bank chief Joseph Stiglitz speaks to the media after his lecture “The Price of Inequality” at the Center for The New Economy Annual Conference at a hotel in San Juan, February 21, 2014.
Published in Britain ten days ago, Stiglitz's last book has reached top sales, according to its publisher. It is true that its subject matter is extremely current: the future of Europe and in particular the euro zone. For this critic of neoliberalism, harsh austerity and inequality, who also has been an adviser to several social democratic governments in Europe, the ill-conceived single currency has caused more harm than good. With the perspective that an American citizenship gives him, the 73-year-old Joseph Stiglitz, professor at Columbia University in New York, offers unorthodox solutions to Europe: divorce amicably with Greece or an even more original solution, Germany's divorce with the euro. "Le Figaro" originally published the interview with the economist.
- You recommend that several countries should abandon the euro. As a respected Nobel laureate in Economics, considered to be left, do you think that Marine Le Pen rightly wants France to part with the euro?
- No. One of the key moments in my book is that the euro must be a means to an end, in the case of a more integrated and prosperous Europe. But the euro has become an end in itself. It even became the antithesis of the purpose for which it was intended. The problem is that as it was built, the euro did not lead to prosperity but to stagnation, and it undermined solidarity between Europeans.
- You did not answer the question of Marine Le Pen ...
- My thesis is that it may be necessary to leave the euro to save the European project. The best solution would be to create institutions that will make the euro work, and on this issue I and Marine Le Pen are clearly in disagreement. I am for a more integrated Europe.
- You are very harsh toward the euro. Did the single currency not bring any benefits? For example, by facilitating trade?
- With some irony, the euro was set up right as the obstacles before the trade of goods and services had begun to almost disappear. With the digitalisation in the world, with e-currency, the difficulties of foreign exchange began to lessen. Example: I come to Europe, I use my credit card and the price of transactions is very low. Ultimately of course, the single currency facilitated trade, but the benefit did not compensate for the damage that it caused.
- Tell us more about the damage you think the euro caused.
- When talking about the euro, we are not just talking about the single currency but also about all the institutions that surround it, or are missing. In creating the euro, we put the cart before the horse.
One of the institutions that was missing at the outset was a general guarantee for bank deposits. As a result for example, if Spain goes through a banking crisis, only the Spanish Government is here to support the banks. If the government is weak, investors will not have confidence in the Spanish banking system. With the single market and free movement of capital in such a situation, capital flows from Spain to Germany, which further weakens Spain. The result is that Spain loses and Germany wins.
- This was not foreseen when the euro was created ...
- No, this is actually the opposite. In the beginning it was thought that money will flow from rich to poor. According to the original idea, the free movement of capital needed to promote convergence of economies. That did not happen. Instead of moving from top to bottom, the money went upstream, deepening the gulf between poor countries and rich countries in Europe. Proof of this is that the Troika's forecast totally lied.
- The most powerful institution in the euro zone is the European Central Bank (ECB). You are its stern critic. Did Mario Draghi fail to save the euro?
- He did a remarkable job, given the circumstances. But we can't have a system that relies on one person.
I think the biggest mistake the ECB made is during 2010-2011. After the financial crisis, the Fed, the US central bank cut interest rates and poured money into the economy with "QE" (quantitative easing). This was possible because the Fed was not obsessed with inflation but with growth and employment. Meanwhile, Jean-Claude Trichet raised interest rates of the ECB twice in 2011
- Why?
- Because he kept repeating: my mandate is inflation. If there is the slightest risk of inflation, my role is to raise interest rates to counter it, he said. But this is not good for growth in Europe. This mandate of the ECB, which focuses on price stability, rather than on employment and growth, is one of the structural deficiencies of the institutions managing the euro.
- In the end, do you recommend more integration of the monetary union?
- Absolutely. The first thing you need to do, is reform the rules. In some ways, Europe acknowledged the need to change, but it is moving too slowly. And because of that delay it becomes more difficult for the damage to be repaired.
The first reform that must be done, is the overall European guarantee of bank deposits, which I already mentioned. But I do not see Europe creating this mechanism soon.
- Germany is interfering, right?
- Exactly. I think uniting the guarantee of accounts is the most important reform that needs to be done in banks.
The other banking reform is a common mechanism for bank resolution. I'll explain: if Washington state had to save "Washington Mutual" it would go bankrupt. The US federal government saved this bank. Europe needs such a common system of banking resolution.
The other necessary institution: a solidarity fund against unemployment. This will allow you to share the price at the peak of unemployment.
- You are also favorable to the creation of Eurobonds. Why?
- The founders of the single currency did not graspe all the implications of it. They did not measure the risk of a sudden stopping of access to finance for a country. They thought that the accumulation of trade deficit year after year in a country would not be a problem. Greece, Spain and all European countries in crisis had problems in accessing finance, or an imbalance of their accounts.
Greece has a debt in euros, but it does not control the euro. This caused the state debt crisis. With eurobonds the loan is shared.
- Do you think the Europeans can agree on the reforms that you recommend?
- There is always resistance. I suggest reforms that I believe will enable the eurozone to function. In economic terms, they are not difficult to implement. They are not revolutionary. For example, the institution that guarantees the Europe-wide bank deposits is not necessarily synonymous with more state. It can be a private body, as in the US, which is self-financed from taxes.
These reforms are unacceptable to some countries. Especially for Germany, which repeatedly states that the euro zone can not be a "transfer union".
- How do you explain this German resistance?
- Germany is the country that most benefits from the single currency. It seems that the preservation of the euro is in the interest of Germany, and therefore so is the adoption of these reforms. But it seems to me that states are not always able to act in their interests.
- Germany does not want to back down from another issue: the famous limit of 3 percent of GDP government deficit. Were Alexis Tsipras, Francois Hollande and their counterparts from southern Europe right, when they asked for more flexibility in terms of the deficit?
- Yes for sure. We must remember that when the euro was conceived during Maastricht in 1992, just after the victory of the West over Communism. There was great faith in the market, designed to work when governments are not doing something stupid. The stupid were inflation and excessive deficits. History has shown that the belief it is sufficient to balance the budget to avoid problems is wrong. Spain and Ireland had surpluses before the crisis! Deficits are only one problem among many others.
- Since the reforms you recommend seem distant, you offer an alternative: some countries should leave the euro zone and we can have several smaller currency unions. What would be the benefit of that?
- The current system has too many economic differences and political divisions to operate with a single currency. There could be more convergence between countries of the North, on the one hand, and the countries of the South on the other. But I leave the door open for the unification of two, three or four countries that share the same goals. These countries will regain flexibility. If over time they can create the missing institutions, these countries will achieve stabilization of the exchange rate, and will prove that a single currency can succeed.
- The most incredible scenario you offer is for the separation of Germany with the euro! Is this a provocation?
- In economic terms, since I'm not talking about political dimension, this is the easiest solution! If Germany leaves the euro, the currency of the countries remaining in the euro zone will weaken. Then they will become more competitive, their exports will grow, as will their gross domestic product. For Germany it will be more difficult to export its surplus, which is a real problem for the European economy.
If, conversely, the South leaves the euro zone, they will still have debt in euros that must be paid, and they will be even more worse off because their currency will be weak and this could lead to insolvency, as happened to Greece in July 2015. This is why the separation of Germany from the euro zone is the easiest solution. The other parties can not continue to suffer because Germany refuses solutions through mutual assistance, which most economists today support.
- Do you predict a Grekxit scenario, of Greece leaving the eurozone. With an original idea: getting rid of coins and banknotes. It is not a science fiction scenario, given the Greek reality?
- The introduction of 100% electronic currency would facilitate the management of the economy. Cash is already obsolete! I'm slightly exaggerating. Before the crisis in the summer of 2015, the Greek government was working on such a solution. Today, most salaries and pensions are paid by bank transfer. Opening bank accounts for the last who resist, will not be very difficult.
- On the issue of Greece, you write that the German Economy Minister Wolfgang Schaeuble is weaker in Economics than any Greek. Too much?
- ( Laughter ). I do not remember to have said it so strongly. But the truth is that he continues to believe that austerity will work. As for Greece, the agreement in the summer of 2015 only made things worse.
- Bratislava will welcome the European summit of 27 on Friday. Do you expect something from the meeting?
- The disagreements over migrants, the euro and austerity are many. I do not see any common policy which can be agreed upon in Bratislava. The main challenge now, will be for the divisions to not break through and to have some semblance of unity. For the governments it will be even more difficult to engage in, or to begin negotiations, since most of them will be replaced after a few months. I'm pretty pessimistic about the outcome, even if I hope that the leaders will learn a lesson from Breit, to highlight the benefits that Europe can bring, and set policies for their achievement.
Source: Figaro. Translation from French: Galia Dachkova
Reader Comments
adopted it. What actually happened, is that when most European countries "locked" the exchange rates between national currencies and the euro a lot of extra money (theft) went into pockets in which they shouldn't
be at all.
It's a worldwide rule and I've witnessed it many times in my life. If you are in the position to steal and especially steal big time without getting caught you will do it.