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“An Utter Failure”: Joseph Stiglitz on the Euro and Europe’s Uncertain Future

The Nobel Prize–winning economist discusses Brexit, globalization, and the perils of austerity.

Win McNamee/Getty Images

The European economy has been stalled since the 2008 recession, dragging the global economy down with it and leading to the rise of political extremism across the continent. Nobel Prize–winning economist Joseph Stiglitz thinks he knows the culprit. In his new book, The Euro: How a Common Currency Threatens the Future of Europe, Stiglitz argues with his customary force and lucidity that adopting a single European currency was a fatal error, since it prevents weaker economies from having the monetary flexibility they need in times of recession. Stiglitz proposes reforming the Eurozone, warning that the entire European Union project might have to be scrapped if reform proves impossible. Beyond the story of the euro, Stiglitz’s book also contends that neoliberalism is a stifling economic ideology that may have run its course.

In this interview, which has been condensed and edited for clarity, Stiglitz talks about his new book and the worldwide implications of the euro’s failure.

Jeet Heer: You attribute the problems that the European economy has had for the last decade—especially since the Great Recession started—to the euro. Why is the euro such a problem?

Joseph Stiglitz: It impeded or made impossible the ability to adjust when there was a shock. It was a big shock, 2008, and the basic idea was that exchange rate systems are part of the adjustment mechanism. And when they created the euro, they took away that adjustment to a shock, and they didn’t put anything in its place. It might have been able to work if they had completed the project, if they had done the other things they needed to do, but they didn’t. Instead they went in the other direction and compounded the structural mistakes with the policy mistakes of austerity.

So the combination of austerity with the euro’s structural problems is the bigger problem?

That’s right. The novel part is that it’s not the structural problems in individual countries, it’s the structural problems in the Eurozone. European officials thought that austerity was part of what they called their “convergence policies,” of trying to bring countries together. Instead, it actually made things worse. There’s more inequality within countries and more disparity across countries.

What reforms could be made?

They need a banking union. Right now, they have put the obligation of bailing out the banks in each individual country—this is becoming a real issue in Italy. They’ve agreed that they need a banking union, but the pace of doing it is so slow. Meanwhile, country after country is winding up with their banking system devastated.

They also need some form of mutualization of debt—something like a Eurobond, because under the current system, each country is borrowing, in effect, a currency they don’t control. You have the system of free migration, which has exacerbated what I call “place-based debt,” some of which is very largely inherited. Young, well-educated Greeks can avoid paying back the debt by simply moving to another country.

You see that happen all over Europe. These countries are aging rapidly, simply because young people move to other places.

Some of that would be happening anyway. But this place-based debt system can’t work. Also, with free mobility, and without a common tax system, there’s no way you can have effective, progressive taxation. Because if you try to increase the tax on the top, they can move away, as happened in France. So if they’re going to address the problem of inequality—which I think is necessary for a well-functioning society—they have to have a common progressive tax structure.

If a reform agenda can’t be passed, is abandoning the euro the best option?

Moving out of the system allows countries to choose their own interest rate and control their own monetary policy. The exchange rate is really the important one right now, because interest rates are close to zero. But in the absence of that, instead of changing your exchange rate, you lower your wages and prices. And when you do that, you simply increase your indebtedness in real terms, and make it more difficult to pay back what you owe. So you can’t dig yourself out. That’s why a political crisis broke out in Greece.

The euro really didn’t start until 1999, so it didn’t even have a decade of success before the crisis. The crisis period has now been almost as long as the period before the crisis, and you have to say it’s been an utter economic failure. Because of the structure of the Eurozone, there’s nothing the individual country can do to get out of the mess except to accept depression and this horrific kind of adjustment process, which really clearly undermines society. You see it happening over and over again. If it were one country, you could say the country was the problem. But it’s not only Greece. It’s Spain, it’s Portugal.

And now, in 2016, the European Commission is threatening fines against Spain and Portugal, demanding more austerity. And Spain and Portugal are saying, “If we have more austerity, given our inability to adjust our exchange rate, we’re going to go back into a deeper recession.”

Why does the ideology of austerity have such a hold on European policymakers?

It actually has a hold on Republicans in the United States as well. One of the things that happens when you have austerity is that wages get lower, and some people think lower wages in the short run can increase corporate profits. So the stock market did well, some people obviously did very well by austerity, even if our society as a whole did disastrously.

In the United States, I think there’s a broad consensus that excessive austerity is a bad thing, and even George Bush introduced the stimulus in 2008 when it looked like we were going into a recession. So, even the Republicans in the U.S. have recognized that the economy needs stimulus. But the ideology seems to have been much stronger in Europe for reasons I can’t fully understand.

What is peculiar is that the strength of particular ideologies differs across European countries. The austerity ideology is particularly strong in Germany. So even if a majority of people in Greece, Spain, and Portugal voted against austerity, the democratic vote was overruled by the predominance of German austerity.

There is a broad consensus, not only in the United States but in most of the world, that if you are in an economic downturn, you need to stimulate. Germany seems to be an exception.

But even in America, isn’t the Federal Reserve far more hawkish on inflation than the facts merit?

Very definitely. In the United States, while we’ve not gone to the extremes of Europe, we have about a half a million fewer public sector employees than we had before the crisis. So we’ve been practicing austerity without the rhetoric. But it’s still much milder than what has been demanded of countries like Greece, Spain, and Portugal.

What about the Trans-Pacific Partnership? If we see the problem with the euro as a sort of economic arrangement that gallops ahead of politics.

That’s right, that’s one of the points I wanted to emphasize actually. It’s very clear that TPP was promoted by corporate interests, it was driven by ideology, not by economic science. And when they started looking at the net trade benefits, they are miniscule. They said they needed regulatory harmonization, but there was no evidence that the lack of regulatory harmonization was impeding trade. And if it was, you needed to have some political system to deal with differences in regulations. You can’t just say, “Well, let the corporations set the regulations” or we’ll have a race to the bottom. So TPP is another illustration of an attempt at globalization that outpaced the economic integration, the political integration.

More broadly, there does seem to be a political revolt in both major American parties, to the extent that the Republicans are giving up on free trade altogether.

The euro was supposed to lead to prosperity and everyone being better off, and the data shows that the euro led to poorer economic performance, more inequality, and a lot of people suffering. So that’s a case where the ideology had a prediction and a promise that didn’t deliver. And the same thing is true about our trade agreements: The leaders in both parties argued that there were going to be these benefits, and the benefits didn’t accrue to a majority—or at least a very large minority—of our citizens. You don’t hear anybody in either party, interestingly, saying that it has actually made them better off, because there’s no evidence of that. Even people in the business community haven’t been able to say that this has actually worked.

Do you think there’s enough awareness in elite circles that if we’re going to have globalization, they are going to have to actually keep their promises in terms of helping people who are adversely affected?

I think there’s beginning to be. If you look at Scandinavian countries, they realized they were small countries, and they had to reopen, and so they had to make that social contract. That was explicitly part of the social contract, and it’s worked.

Can that sort of social contract be formed elsewhere?

We’ll have to move toward that, because the evidence about what has happened in the context of inequality is so great. What has been so vicious is the Republicans have actually opposed job assistance—even for those who lose their jobs because of trade. The irony is that they were the ones who pushed these trade agreements the most. Then, when people were hurt, they didn’t want to do anything about it. And the result is they wound up with a candidate who’s said, “Let’s get rid of all the trade agreements.” So you might say they’re getting their comeuppance.

It’s hard to wrap your head around. I think the Chamber of Commerce condemning Trump’s statements on trade must be the first time in history that the Chamber of Commerce has condemned a Republican candidate.

The other thing I’d say is that Brexit has shown that this anti-establishment, anti-globalization feeling, which is so strong in the United States, is also being felt elsewhere, reversing the arc of history of closer economic and political integration. And if people don’t get that lesson, I think there’s going to be more of that.

It’s interesting because the U.K. was not part of the Eurozone.

It was homegrown austerity, not imposed from abroad, and it was a somewhat gentler austerity than Greece had. But it illustrates again how the neoliberal ideology has not delivered for a large fraction of the population. It was inevitable that some day they would rise up and say, “We’re going to try something different.”

Could this revolt against neoliberalism have positive outcomes? Could we see more Bernie Sanders-type movements?

Yes, I do think there are alternatives. Sanders and Jeremy Corbyn have identified certain key elements, including abandoning austerity and doing something about the banks. But we actually need a much more comprehensive agenda that involves promoting competition, stronger antitrust laws, changing corporate governance, changing the bargaining relationship between workers and management. That’s an agenda that would actually lead to both more growth and more equality. So there is an alternative, a very strong alternative. We’ve given a third of a century to this failed neoliberal ideology. We ought to be striving to look for these alternatives.