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Economics

Réforme ou rupture de la zone euro

Aug 22, 2016 Joseph E. Stiglitz

NEW-YORK – Dire que la zone euro ne va pas bien depuis la crise de 2008 est un euphémisme. Les performances économiques des pays qui en font partie sont inférieures à celles des autres pays de l'UE qui n'en font pas partie, et elles sont très inférieures à celles des USA qui ont été l'épicentre de la crise.

Les pays de la zone euro qui s'en tirent le moins bien sont soit en dépression soit en pleine récession ; ils se trouvent dans une situation pire sous de nombreux aspects (notamment la Grèce) que les pays touchés par la Grande dépression des années 1930. Même ceux qui s'en tirent le mieux, comme l'Allemagne, ne sont pas en si bonne situation. Leur modèle de croissance est basé en partie sur le "chacun pour soi" dans lequel le succès s'obtient au détriment de ses "partenaires".

On peut avancer quatre d'explications à cette situation. L'Allemagne accuse les victimes en pointant du doigt les prodigalités de la Grèce, la dette et les déficits des autres pays. Mais ce faisant, elle met la charrette avant les bœufs : avant la crise de l'euro, l'Espagne et l'Irlande connaissait un excédent budgétaire et leur taux dette/PIB était faible. C'est donc la crise qui est à l'origine des déficits et de l'endettement - non le contraire.

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Joseph E. Stiglitz

Writing for PS since 2001
320 Commentaries

Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, is a former chief economist of the World Bank (1997-2000), chair of the US President’s Council of Economic Advisers, and co-chair of the High-Level Commission on Carbon Prices. He is a member of the Independent Commission for the Reform of International Corporate Taxation and was lead author of the 1995 IPCC Climate Assessment.

The IMF Still Misunderstands the Euro Crisis
Stephen Jaffe/IMF/Getty Images

Economics 9

The IMF Still Misunderstands the Euro Crisis

Anders Åslund says a new self-evaluation by the Fund fails to explain why it dropped the ball in Europe.
The Silent Death of Eurozone Governance
Fuse/Getty Images

Economics 21

The Silent Death of Eurozone Governance

Daniel Gros asks why no one is protesting the non-enforcement of EU fiscal rules in Spain and Portugal.

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0 Comments on this paragraph, 77 Comments on this article

Chris Nicolo Sep 29, 2016

What is that meaning and implementing in economics?
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Doubting Rich Sep 27, 2016

Most of the explanations for the crisis that is dismissed in this article are dismissed based on the assumption that they harm the economy immediately and uniformly, and that they do not affect the economic impact of the Euro. You are also making the assumption that none of those factors are worse now than before the Euro, which over-regulation certainly is.

Many of these weaken an underlying economy, and in the long run cause under-performance. Others have different effects depending on what the country produces and in what proportions, depending on the political culture and depending on the culture. Some of these factors interact, so factor A might not affect country X because factor B does not apply, but does affect country Y where B does apply.

The Euro is a common thread in an under-performing economic region, and it is a major, in most countries probably the major cause of the economic malaise. However to some degree it was a trigger that exposed underlying economic weakness.

The problems are a combination of the Euro with other bad policies. using the same argument as you use to imply those factors are not important I could say that the Euro is not important because France is doing OK and Greece is not, and that each economy must be growing or receding through its own strengths and weaknesses.

The Euro is a terrible idea, badly implemented. It has caused more misery, despondency, death and destruction than any EU politician will ever admit. However there are other bad policies, some of which are worse in the context of individual nations. This is why policy should be made at the smallest possible level, both to allow appropriate policy for the circumstances and to allow competition to encourage the best policies. The EU is openly, deliberately opposed to this.
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Jaap Bosma Sep 4, 2016

I don't understand Stiglitz cause of the crisis: " wrenching deflation elsewhere". If you look up inflation in different euro-countries the trends are very similar. Greece has deflation only since 2013 (and the difference with Germany is small) so this is certainly not the cause of the crisis.
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Barry Rosenfeld Sep 1, 2016

Do the "leaders" of Europe want to preserve the Euro or the EU?
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Philip Palij Aug 30, 2016

The Eurozone is unworkable, its break up inevitable. Many scenarios for its demise have been put forward but the one I like the most is for Germany to exit so 'normal' economic forces can kick in to Germany's surpluses through a revaluation of the Deutchmark up.

As a previos commenter said the 6 ORIGINAL members had compatible economies. Perhaps a Northern Euro and Southern Euro is possible in the present day.

Britain operating outside the EU (as the EU breaks up into sustainable chunks, Eastern, Southern and Northern) will act as a stabilising force AND TRADING HUB as the ideoligically driven EU nut-house falls apart as its members look to trade amicably without the EU's alarming financial incompetence.
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José Malpica Aug 30, 2016

Any analysis that ignores the real estate bubbles in Spain and Ireland cannot lead to any correct conclusions. One might argue that the euro made it easier to inflate them through cheap financing, but these bubbles were, at least in the case of Spain, the consequence of deliberate national policies that had little to do with the euro itself. Spain and Ireland are mired in a classic debt-deflation of their own making. Would being outside of the euro have helped Spain or Ireland avoid the bubble bursting? I don't think so. Would it have allowed them to run a less austere policy after the burst? Hardly, they would have had to allow a banking crisis or indebt themselves to the hilt in foreign currency to save their banks (who would have lent them the rescue money in their local currencies?) with much harsher conditions. Both scenarios would have likely led to worse outcomes than the current situation.
Greece, France, Italy have other problems with other causes, but It's so easy to blame everything on the "Eurocrats", the Euro or "zee Germans" and throw blanket solutions at such a diverse set of problems...
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François Dupont Aug 29, 2016

The 4 "explanations" are certainly real defaults, but don't explain why was the Werner Plan not applied correctly to make a really drivable Europe. It indicated the three logical steps for a functionally working Eurozone : 1- fiscal 2- budget 3- monetary Union. You can insert so 2 or 15 or 19 or more countries : it works. If you don't do 1 and 2 and jump directly to 3, it has chances to work very poorly in good times, and hawfully in bad ones.
Summer 2007 : the subprimes crisis starts. Winter 2007 : the UE is designed as a juridic person in the Lisbon Treaty. But...it's the EU without any correction of the bug. So, the machine able to produce all sorts of crisis inside thanks to intergovernmental stresses and fights, and unable to face global or neighborhood crisis is installed. Who did that : a group of PMs and their governments. Why ? Because the egoistic love of each own private state and administrative power prevals in nearly all european elites. Did they respect the European Citizens, appeared as the multicultural people, the master in sovereignty of the continental tool of power ? They didn't, and they still refuse to do it. It's not only a technological fault in their power building they made in 1992 and never corrected since, but a democratical one. So they betrayed their predecessors, the founding fathers, the European Citizens, the principle that a State of Right only may manage there a regalian competence such as the money. Add that the "Lisbon strategy" of 2000 is a big sad joke, because to run a strategy, you need ONE PILOT, and not 28 : of course they validated to have separated 28 rival strategies, despite they indicated the opposite.
Can you face a big financial crisis, can you recover and protect real economy when you get 1 only of the 3 competences you need to work with in the same hand, and when you haven't ONE BRAIN to do it, but many who don't want ?
Therefore, the future of Europe cannot be divorce : politically it makes national demagogues affairs. You know how this ends in Europe, usually.
Only achieving the construction of USE fits the need that a legitimate, clear and efficient power serves the global interest of all its EUROPEAN CITIZENS.
That's why I wrote they have to themselves provocate the Spring of Europeans to get it.
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Elliott Morss Aug 28, 2016

To highlight problems with the Eurozone, I compared the situation with US states. In both cases, the same currency is used so inter-country differences cannot be adjusted for by changing exchange rates. And this is a real problem - keep in mind the US dollar weaked fro 300Yen to 100 yean between the '70s and now.

But what distinguishes US states from Eurozone countries is the lack of migration in the latter. In the US, when there is an oil boom in North Dakota, workers go there. Not so much in Europe - http://www.morssglobalfinance.com/can-anything-save-the-eurozone/
- Jason H Aug 29, 2016
  
  Elliott also imagine if after hurricane katrina the debt was unplayable by Louisiana due to ridiculous interest rates. At least in that crazy instance they can default unlike the euro which seems to be the eternal debt trap.
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- Jason H Aug 29, 2016
  
  There's many US states that will never run a surplus is my point. There will always be transfer payments to them via social security etc. No one complains it just happens yet Europe can't function on its current path of debt that can never be repaid.
  
  i think the eurozone is going to create a war out of the pure need for Keynesian stimulus it creates not to mention far right parties swelling in larger numbers all across Europe. There's only so long you can have mass unemployment before something breaks. 50% youth unemployment in the south is theft from the future and absolutely immoral.
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- Elliott Morss Aug 29, 2016
  
  Jason:
  I am not sure I follow your logic. US states (and municipalities) regularly borrow $s. If they needed foreign currencies, they could just sell dollars they raised for needed foreign currency. Of course, a federal system gives states a backstop. But keep in mind, the Eurpean nations survived for a long time w/out EU or Eurozone. As an American, I support the EU - after all, no European nation has started a world war since it came into being....
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- Jason H Aug 29, 2016
  
  Reasonable analogy as all US citizens speak the same language etc. I think a simpler argument is imagine if Louisiana had to borrow a foreign currency via US bonds at high interest to deal with its hurricanes and floorings again recently. Only a central fiscal policy is the answer a single federal government.
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Allan Bleiken Aug 28, 2016

EU YES - EU NO

Stiglitz is right. The EU is not working as it should. The original concept was right and still is. However, the original concept involved six compatible countries with similar economic structures, histories, and traditions. In other words, they were compatible. As such, uniform rules, regulations, and directives, we're possible and beneficial.

Then, the EU decided that bigger was better. It expanded its membership to countries that were not economically compatible, such as Greece, Portugal, and Spain. As well, it took advantage of the collapse of the Soviet Union, to expand into Eastern Europe at any cost. Many of the 28 countries which now comprise the EU, have vastly different economic structures and philosophies than the original six countries.

The problem is that one size does not fit all. To provide some countries with vast amounts of unconditional funding without consequences for the misuse of this funding was irresponsible. To expect countries which had no experience in a free market economy to convert to a new economic system in the short term was unrealistic. To punish Britain for voting to leave the EU, ignores the need to reform the EU.

While the EU should have been the new economic model for Europe, it's greed and obsession with power, served to defeat it's primary goals and objectives. Now, the EU is locked into a bureaucratic nightmare that may be impossible to fix. It needs to place a moratorium on further expansion and listen carefully to its member states to address the existing problems within the EU. If it does not, it will only be a matter of time before the EU unravels and falls apart. That would not be good for Europe and it would not be good for the world. It's time to abide by the old saying - haste makes waste.
- Jason H Aug 29, 2016
  
  "If it does not, it will only be a matter of time before the EU unravels and falls apart. That would not be good for Europe and it would not be good for the world"
  
  I hear this stated a lot yet no one explains why it would be a bad thing. As Stiglitz explains things were going better economically for nearly all countries prior to the single euro currency. A floating exchange rate and fiscal capacity of individual countries could solve most of he problems overnight yet it's a bizarre gold standard currency like Union with an arbitrary 3% deficit limit? Why 3%?
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Angel Gavieiro Aug 28, 2016

Thanks Professor Stiglitz for the brave position of suggesting solutions (not many articles by fellow authors adventure much into that terrain), which at the light of the response has definitely steered thinking (and, in some cases, feelings too!).
With humble respect, I believe the Eurozone does not have any way forward (i.e. solution) that will not entail huge pain. Let's consider the scenarios:

Sc.1) Move-forward into further integration: the brave country/ies that would attempt to lead in doing so will face the full opposition of Germany (and probably others) since that integration requires, in whatever shape or form you could device it, "solidarity" and so transfer of money, period. There will not be political, and I would venture neither popular democratic backing, for that transfer. Thus, the "integration dialog" would only serve as a catalyser to arrive at the Sc. 3) below.

Sc.2) Drag "as it is": as you properly anticipate, this one is not sustainable either for long. Why? Because the current EZ framework will not be able to sustain a potential EZ markets crisis similar to 2010-12; and as a kind of global financial crisis is overly due as we speak (i.e. unsustainable fundamentals in equities and bonds, artificially but decreasingly held by QEs), once this gets going it will surely derive in another EZ crisis (since EZ countries are now in record high Debt/GDPs vs 2010-12, ECB much more depleted of ammunition, and the overall political will quite deteriorated to "intervene" again). Thus, under another type of EZ 200-12 crisis, this time there will not be powerful enough response (if any), and so will likely spiral into Sc.3 below (as it was about to the last time).

Sc.3) Partial/full dissolution: it is the only possible outcome, either forced by Sc.1 or 2 above or originated by the post-Brexit dynamics as other countries push out of EU, perhaps dragging, depending on how dynamics go, some EZ members.
Moreover, as markets eventually realize that this is the case, they may accelerate (as per mechanism explained in Sc.2) the fulfilling prophecy... so this will guarantee that there will not be any "orderly" exit out of the EZ, it will necessarily be in "disorder" (ie huge pain).

Thus, if you ask me to bet (if I were a hedge fund), it would be "against" the Euro... only uncertainty is the time horizon of the bet (I would guess that is why the hedge funds are not yet betting!).

Apologies, especially to Europeists (I still consider myself one of them) for the negative forecast.
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eusebio manuel Aug 28, 2016

I do not see the EU break anytime soon Brexit will ensure the will to hold together and strengthen problems immediately strive for an europe democratically and not destroy
- Jason H Aug 29, 2016
  
  Naive. Only the slackening of the fiscal rules for Portugal and Spain for political reasons behind the scenes is the only way for Germany to sway the voters uprising and leaving across many euro countries.
  
  https://www.ft.com/content/45cf2eb2-1ce2-11e6-b286-cddde55ca122
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Michael Hullevad Aug 28, 2016

"The Fossils of Brussels" will make sure that nothing changes. GB will be punished at any cost to prevent more exits. The euro is to blame for the austerity caused by the EU budget rules. The ECU were a much better solution as it allowed currency fluktuations. If a miracle does not appear on the horizon, the voters of Europe will put an end to the misery. A divorce is never pretty but can be cheaper than muddelig along.
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Brent Beach Aug 28, 2016

"Anyone who has dealt with German policymakers over the past third of a century should have known in advance the likely result."
Ouch!
- Jason H Aug 29, 2016
  
  It's economic warfare. Easier than the traditional messy type.
  
  Watch this by a former German banker: http://www.imdb.com/title/tt3129484/
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John Ellis Aug 28, 2016

Another Stiglitz Jeremiad about the Euro. He's been predicting its demise for years but it shows no sign of falling in with his wishes. We know exactly why places like Greece, Spain, Ireland and Portugal got into difficulties, what Stiglitz calls blaming the victims as if the "victims" had nothing whatever to do with the events that occurred in their own countries. And as if some of them wouldn't revert to recidivism given half a chance. Every one of these situations is somewhat different and all of the countries concerned are essentially muddling through (the usual democratic approach) the painful adjustments needed to getting out of their difficulties. It may not be perfect but it's infinitely preferable to the economic chaos that would ensue from a break up of the Eurozone with its massive devaluations and dramatic increases in the cost of public and private borrowing for the weaker Eurozone economies none of which Stiglitz ever addresses when peddling his simplistic remedies.
- Jason H Aug 29, 2016
  
  What world do you live in? Neo-liberal brainwashed much. The euro countries were doing much better than they are now. Appalling. Read about the flawed monetary system at least before commenting.
  
  http://bilbo.economicoutlook.net/blog/?p=33511
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- John Doyle Aug 28, 2016
  
  What a ridiculous reply! Straight out of neo-liberalism central casting.
  This is the sort of rubbish that prolongs and renders forlorn any chance at resolution. Stiglitz pre-answers the criticisms here before you even voiced them. Appalling!
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Stephen Pain Aug 28, 2016

I think that the Euro is necessary. It is the economic glue that maintains the unity and future of Europe, it is needed as an economic bulwark against the US dollar and Chinese yen. Its failure is the failure of management of economies and refusal to adopt a more prudent approach. The exposure to external speculation was due to the failure of governments to create an economic firewall between the sovereign wealth and the outside. Itis equivalent of putting up your house as collateral or borrowing against your life. If the EU member states adopted a more cautious approach and circular economic principles they could bring down their debt levels and create a more dynamic economy. The central bank should be decentralized and have regional banks. Germany has a big say because it has assumed the debts of other nations. It should lessen and distribute this burden. I think that the Euro has so much to offer and part of the problem is the invidiousness of credit rating services which impact negatively on the EU. This can be countered by the sovereign wealth firewall.
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Henk Crop Aug 25, 2016

What I like most in your article is your advice: An amiable divorce would be better than the current stalemate. This applies not only to the economy but also to the political situation in the EU as a whole. The dream of the EU superstate should be moved a hundred years into the future. The EU dreamers should develop less and better procedures.
Procedures that directly benefit the citizen and which gain their appreciation.
The Euro has manifested itself as a tool to transfer money from the North to the South. There have to be set limits there also.
- Henk Crop Aug 29, 2016
  
  Jason
  The countries in the South created a deficit because they spend more than they could afford. They could loan cheaply with the Euro. They could not compete because they have an inefficient economy. Money is/was spent on : early retirement, overpaid government workers, bureaucracy, airports or roads built without a need, housing bubbles, inadequate tax system, mismanaged banks.
  The peole suffer with unemployment and the North has to foot the bill.
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- Elliott Morss Aug 29, 2016
  
  Henk:
  I think it is worth distinguishing between Eurozone and EU. Eurozone, with single currency and little migration, puts "underachieving" countries in a real bind. Ultimately, the underachievers will run out of Euros, borrow as much as they can and end up like Greece.
  
  The EU, on the other hand, creates a large free trade zone that is beneficial to member countries. Right now, the problem is that with growing terrorist threats, no EU country wants to leave visas into their countries to other EU countries. But to an outsider, I am grateful: The EU has kept some EU country from starting another world war.
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- Jason H Aug 29, 2016
  
  Someone's surplus is someone else's deficit by pure accounting. How else can Germany run a continuous surplus with the south without them being in deficit? Particularly without their own currency that can be devalued and a German Mark worth it's much higher real value?
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Jose araujo Aug 24, 2016

Daniel, your post is a sign on how little we have evolved since the start of the crisis. No matter what has really happen we still find that the most prevalent narrative of what happened is the one anchored on prejudice and racial superiority, instead of looking at the facts, people prefer to go with the tale of the southerner lazy and the northerner blue collar.

Now, even if you don’t grasp the complexity of an optimal currency zone, nor the problems of fixed exchange rates in less competitive economies, you should grasp and acknowledge the path many countries have traveled. Labeling the investments made in our infrastructures, namely roads, health system, education systems has irresponsible spending is absurd. Labeling the desire of the populations of the south to increase its income and standard of living and converge to the EU average has irresponsible is an insult.

In the end solving the southern crisis would have “cost” the EU circa 100 billion Euros, but Northern countries didn’t want to mutualize the debt (whatever in the hell that means in a shared currency area), so in the end the costs of this recession is on the order of several trillion euros and counting.

Let’s see what happens when the northern banks go bust, and the incorruptible German and Swiss CEO’s are found to be has corrupt if not more corrupt then the Southerners…
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ROHIT CHANDAVARKER Aug 24, 2016

The objective of European Union based on political unanimity was a success but economic integration is pregnant with a variety of variables & prone to finicky market forces. The centralisation of policies in Brussels overriding individual countries' legislative powers accorded undue powers to the bureaucracy with little accountability. Common market across Europe meant a paradigm shift in mindsets. The going was good when growth was buoyant, much like, everything floats when there's high tide. However, the 2008 crisis unraveled the foundations of the edifice & laid bare the shortcomings & follies. To begin with, a uniform currency across the continent was bound to create problems as individual countries' economies were vastly different. The inherent strengths of each member country got subsumed into one whole thereby forcing painful adjustments. Crises brings out shortcomings & these failings get amplified. Hence the excuse of blaming Greece alone is fallacious.
Today most of Europe is reeling under recession or depression. External factors are exacerbating the situation. Europe no longer boasts of innovation, high productivity, economies of scale & high stable growth rates. China seems to have taken the place as the powerhouse of global growth & with its economy floundering, the contagion effect has spread. Disruption is the new normal but its effects are deleterious in the short term. There is a distinct possibility of the EU becoming a relic with many countries contemplating going the Brexit way, though it is too early to predict such an outcome. The real effects of Brexit may not be known for a while to extrapolate those to other countries within EU. However, the murmurs have started & also given rise to an ominous development, rise of right wing nationalism. Reform will be painfully slow while divorce will be excruciatingly messy.
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Daniel Esmond Aug 24, 2016

There is very little I would disagree with in Prof Stigliz’s article. However, there is no suggestion for clear political path forward, which is very problematic. There seems to be an absence of an elementary survival instinct in the current European political establishment. One could establish how this came about and then maybe start putting in place a solution. Clearly, the experience with some EU governments in the past, primarily Berlusconi in Italy and the PASOK/New Democracy alternation in Greece, has undermined trust and respect between governments. Profligacy, corruption, irresponsible economic and fiscal policies have generated a justified level of resentment in some Northern countries, primarily in Germany. On the other hand, we have seen a rise of domestic nationalism in these Northern countries that have pushed too far the rejection of the principle of European solidarity and common purpose. It was pretty clear to everybody from the beginning that the Eurozone was going to include very different economies and that the real convergence will take a very long time and that this process will not be straightforward. So it is time for some countries to put aside their righteous anger at others and do the right thing, i.e. implement the list from Stiglitz’ article (and many of these points have been already been made by many others, too). There has to be a political decision that revalorises solidarity at the heart of the EU project. Equally, there has to be a greater degree of responsibility in member states regarding their economic and fiscal policies. But the current crisis was a serious wake up call to many and there seems to be a much more responsible behaviour. It won’t be possible to have complete guarantees for everything, but now we need flexibility from Germany where politicians need to have the guts to explain that the country benefits from its EU membership and it is able to show solidarity with others (who have now learned their lessons). There is no sign yet of this happening, maybe after the elections next year. And by some miracle, we might also have a credible and effective French leadership after the next elections, which could push the process forward.
The EU as political entity is still too important as it does far more good than the current shortcomings and dysfunctionalities. But if nothing is done, these dysfunctionalities will tear it apart.
- M M Aug 24, 2016
  
  Daniel, it takes two to tango, the greeks, Italians, spaniyards Portuguese, etc. did not tango by themselves, they were bribed, incentivised, and in some cases bullied at taking the path that they did. There are numerous examples, I shall state only the one in here, Siemens..
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Mark Stannis Aug 24, 2016

It is of key importance that the European Union gets the incentives right. Debt mutualization, through Eurobonds and common deposit insurance cannot stand by itself in this regard.

National politicians owe responsibility to their citizens. When their citizens instruct these politicians to borrow and spend, they have to comply. When these debts lead to financial crises it is unacceptable that another country picks of the tab, because the voters/tax payers of these countries did not approve nor get the original benefit from the borrowing and spending, and debt mutualization takes away some of the incentive to borrow prudently. A common deposit insurance is debt mutualization through the back door, because national regulators lean on national banks to buy national bonds, and national politicians are incentivized to make national lending as loose as possible.

The only way it is acceptable for a country to borrow with debts that are guaranteed by the European union is when the european union has the budgetary power to block financial mismanagement, just like the federal government in the States. Further still, the convergence criterion is supposed to mimic the balanced budget constraint of the states in the USA, something that was enforced after repeated financial crises.

Alternatively, there is Stiglitz' option nr. 2: Get out of the euro-zone and you can be as financially irresponsible as your own currency can bear. And then your voters only have themselves to blame when things go south.

Anything else is unacceptable.
- Jason H Aug 29, 2016
  
  You seem to be saying all government fiscal spending is wasteful. The IMF has even come out to say they were wrong and fiscal spending has a multiplier close to 1.5x every dollar spent. Ie. It pays for itself and more! Most countries didn't have high public debt prior to the GFC it was a result of automatic stabilisers like welfare kicking in and saving Europe from the queues for soup kitchens like the Great Depression.
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Димитър Димитров Aug 23, 2016

There are no such reforms that could save the global pigsty of deep depression.In the system has strong positive feedbacks that create instability. With the advance of globalization they are growing, but the ability to control and offset declining rapidly. The strongest positive feedback is through the labor market.Its share in the GDP of the global economy decreases.The competition in economic efficiency becomes a global championship misery by removing tax, depreciation of the currencies, printing money, cutting benefits and reducing the employment protection. The Great Depression knocking on the door since 2008.The door to Europe can be barred only if it become a country with a very closed economy.In a sufficiently closed economy is no problem to have strong unions that raise salaries, no problem highest minimum wage. Businesses can not operate at a loss and merely raises prices, causing inflation.
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lakshma reddy Aug 23, 2016

Why Present EU constitution is misfit for economic and political challenges it is posing? What went wrong and how can it be minimised if not cured? What reform? Is the divorce a remedy in the face globalisation challenges?

The economic laws and political laws work for cross purposes often to produce maximum of GDP and social welfare.the private rights copulate with public interests when complete political integration not mere currency union.

the EU political constitution without political integration in the context and surrendering of economic freedom without political equality and freedoms of member nation states is the fertile ground for discontent and disintegration unless it moves to greater nay total political integration as one economic and political entity.

Even the total political integration of unevenly endowed and developed member states appears a mirage in the light of historical suspicions and aspirations summed together in the European continent including UK and parts of Russian federation and Turkey and more particularly individual national interests in the face global economic and political challenges and has become unequal and may not produce the desired objectives.but it may be second best option over the first: the EU nations fitted in the global governance structure in sovereign federal constitutional democratic UN.
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Bernhard Kopp Aug 23, 2016

Yes, Spain and Ireland had relatively low debt-to-GDP-ratios before the crisis. Profligacy was and is not the priority issue there, but it is in Italy and France- Both countries had the hidden agenda since the Maastricht Treaty in 1991 to hi-jack the monetary policy in the currency union through the EZB and indirect debt mutualization. Both countries wanted to maintain a maximum of national sovereignty in doling out entitlements and in running their states most inefficiently with frivolous overhead expenses from pay-scales to pensions. But funding those goodies should then become a European responsibility. Both countries have already achieved a lot since 2010.
- Jason H Aug 29, 2016
  
  Bernard, social security is a safety net that is an automatic stabiliser when there is an economic crisis so people don't starve. It's a result of the crisis not the cause.
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- Jose araujo Aug 23, 2016
  
  Do you think Germany or any other country in the worl can honnor the obligations of its financial sector, nobody can.
  
  That's why you have central banks, that's why central banks are the pinnacle of the financial system, because issuing banks are the only ones that can assure the stability of the system.
  
  Money generates so many externalities that the value it creates can assure the system itself, its not called debt mutualization, its called Fiat money, one of the greatest, if not the greatest, invention of mankind.
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- Jose araujo Aug 23, 2016
  
  Indirect debt mutualization, that's the most absurd aberrant ignorant statement in economics.
  
  That shows that you don't understand the mechanisms of monetary economy. Germany should still be in a barter economy.... How ignorant can one be...
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Paul Daley Aug 23, 2016

Basically, a call for a fiscal and banking union, as well as a German embrace of higher inflation. If these are small steps "from an economic perspective," then I would like to meet the economist who can make it happen.
- Jose araujo Aug 24, 2016
  
  When Deutsche Bank goes belly up, then this will be evident for many economists ;-)
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Peter Schneider Aug 23, 2016

This piece has to be read as a request to Germany to leave the eurozone. People from other potential donor countries like the Netherlands, Finland or Slovakia will in their majority probably think likewise. From the seven proposals presented in this work the first, third, fourth, fifth and sixth are quite obviously unacceptable for Germany and in contradiction to our democratic constitution as they all remove the budgetary right from German parliament and allow foreign institutions to transfer wealth out of Germany without democratic legitimation by the German people. The second proposal could be a point for further discussion if the expressions "austerity" and "solidarity" were deleted and if the term "under complete control of the German national parliament" was added. The seventh proposal is too vague to immediately assess its legal and economic implications.

In spite of the unfriendly tone towards Germany and the apparent lack of knowledge about the German economic model (the fifth proposal alone would turn the German model upside down - to speak of "small changes" is thus rather brave), the piece could be helpful in our struggle to prove the impossibility of EMU and to bring back democracy and the rule of law to Europe. With this regard, the presentation of seven proposals in a possible future article would be warmly welcomed on how the amicable divorce of the eurozone could be organized.
- Jason H Aug 29, 2016
  
  @ricardo the nation state is very real. Your comment is the very epitome to me of the naivety of the euro zone as setup now with free flow of people. People are tribal by nature and language is a huge barrier. Look at most of Africa and the constant wars between nations for are a reality check.
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- Ricardo Lemos Aug 28, 2016
  
  @Peter Schneider As Hobsbawn demonstrates, the concept of Nation State is a relatively new one, the criteria used to define it are themselves fuzzy, shifting and ambiguous, "and as useless for purposes of the traveller's orientation as cloud-shapes are compared to landmarks". "Defining a nation by its members consciousness of belonging to it is tautological and provides only as a posteriori guide to what a nation is. "Nations as a natural, God-given way of classifying men, as an inherent political destiny are a myth". Nationalism, enforced by the organized state, comes before nations. Standardized and unified language is a consequence of State intervention with the enforcement of the 'nation-ideal' as a goal. Not the opposite. The idea of the 'German nation' as this eternal, indissoluble and unchanging entity works for Right Wing propaganda (with its well known and tragic consequences) but does not fit with historical reality.
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- jagjeet sinha Aug 26, 2016
  
  EUROPE CAN ACHIEVE THE DREAMS OF ITS PEOPLES
  
  There is as much common heritage in Europe as say in India China or Arabia.
  After all, European migrants to The Anglosphere have assimilated.
  Whether they are from Germany Italy Ireland Britain, they are all Americans and Australians once they get there.
  The problem is they can't subsume their Nationalisms inside their Homelands.
  Indians have the same predicament - Gujarat Punjab Tamil Bengal in the Homeland but Anglophones outside.
  One Language perhaps the Key - Mandarins understood the lessons of English.
  Rome failed in implementing Latin. Greece failed in implementing Greek.
  Hence English now the World's Lingua franca.
  Europe perhaps will speak English, one day.
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- Peter Schneider Aug 25, 2016
  
  @Mathieu:
  Are you fully aware of the implications of much deeper integration? What does democracy mean? Democracy means that the people are the sovereign. What constitutes a demos? Same language, similar ideas on economy, cultural values, similar historic experience and much more which all leads to a very deep feeling of togetherness. And only this feeling of togetherness allows for solidarity, for fiscal transfers from richer to poorer regions because you know you belong together and thus you trust each other. If you consider all this then you will notice that there is no European demos. Our views on economical, social, financial, monetary or cultural issues are more often than not very different while the most common ground might still be found in the area of culture and arts. We can only communicate with each other in a foreign language which is frustrating because we cannot hide all the inevitable malignancies behind subtle nuances like we would do in our monther tongue. Communication is difficult. We don't understand each other. Expressions like "inflation" or "debt" or "market economy" sound very different to a German or an Italian soul. The ones prefer direct unambigious communication which appears brutal and aggressive to the others. And so on. As we don't understand each other we don't trust each other. So we are simply no demos. There is no European demos. And without demos there can be certainly no democracy. So there can be simply no European democracy.
  
  You would have to say much more. But the overall consequences become clear: much deeper integration would not happen under a democratic manifestation. It would have to be forced from above. There would be institutions like a central "government" and maybe a pseudo-parliament but noone would trust them because they would appear foreign and far away. They would speak to you in a foreign language (probably English) and would try to impose social and economic programs that would not suit your society and would trigger instinctive rejection. These institutions that nobody would trust then would have to organize large scale fiscal transfers between people that would not know each other and would not trust each other. And so on and so forth.
  
  Then the question remains: Why all that? Why sacrifice democracy to save a dysfunctional monetary union? We must save democracy. Not the monetary union.
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- M M Aug 24, 2016
  
  Peter, although unrealistic has raised valid concerns, the only way out is to go back tothe scratch board.
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- Mathieu Van Vyve Aug 24, 2016
  
  @Peter Schneider
  I understand your point of view. But put yourself 5 minutes in the shoes of a spaniard or an italian. I just see no solution for them in the current institutional arrangement.
  Basically the point of Stiglitz is just that any currency union must come with common bonds, common deposit insurance, common fiscal room in case of adverse shocks, etc...otherwise it cannot work for ALL members of the union.
  If you accept this, there are just two options: to implement the seven changes proposed (i.e. much deeper integration), or to dismantle the eurozone.
  If there was such a referendum in Germany, what would be the result? In Belgium, my impression is that people would vote for the Stiglitz plan over the dismantling of the eurozone.
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- Jose araujo Aug 23, 2016
  
  Complete non-sense, and the utter inability to understand how economy works, specially a currency zone. Small minds think alike, definitely Germany is the Midwest of Europe, its not going to take long before we watch a German Trump take power.
  
  By the way, the mechanism used to intervene in Europe hasn’t resorted to tax payer money, so please stop the entire BS about Germany paying, Germany hasn’t paid anything. I also want to see when the Deutsch Bank goes bally up, if the Germans have reservations on taking the others money, like they did so many times before..
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- Steve Hurst Aug 23, 2016
  
  @Peter
  
  'they all remove the budgetary right from ... parliament and allow foreign institutions to transfer wealth out of ... without democratic legitimation by the ... people'
  
  Ironically that is also exactly the case for most of the EZ. Germany by having a cheaper currency - the euro - than it would with an independent DMark is de facto transferring wealth from elsewhere within the EZ to Germany.
  
  Because the Euro is cheaper for Germany than having its own currency the Euro is more expensive for most of the EZ than their having their own national independent currencies. The only outcome is the relentless stealthy accumulation of localised debt imbalances or localised economic decline coupled with localised depopulation within the EZ which will be its destruction. It is obvious Germany is intent on fighting to the bitter end with a bunker mentality to maintain the benefit it obtains from the Euro, this was clearly shown by the German led treatment of GR. Germany has failed economically with Reunification, E Germany remains a basket case. There is no reason to expect German strategy to unify the EZ. A further impediment to Germany addressing the EZ problems is the monumental liabilities with TARGET2 and the, at present private, bank DB with its eyewatering liabilities
  
  It took a decade for the imbalance stresses to build up for the EZ Med Club, those stresses will obviously return again on a similar interval, if they are massaged to gain further time then the outcome will just be worse
  
  A rigid structure based on robbing your neighbours into perpetuity cannot survive. Even if a Greater Germany federal state could evolve encompassing the EZ the outcome would have to be structured subsidy from wealthy to poorer regions as happen in all common currency areas. A Greater Germany or 19th century Mitteleuropa+ is indicated by the German diktat response to the EZ crisis and it is probably is required for the EZ to survive but will never occur because voters everywhere do not want it. Germans do not want to own the GR and similar problems, and nobody can trust the German mentality after GR and Merkels open house migrant invite now so clearly withdrawn despite the lip service it remains. If you want a union you cannot make arbitrary unilateral decisions
  
  In short there is a total lack of reality in the EZ so the problems will not be addressed. This EU detachment from reality was strikingly reinforced by the very recent statement by Junckers that borders are a bad idea, the worst invention ever in his opinion. This is because for the EZ to make any sense Schengen has to function and Schengen is dead
  
  So Peter one way or the other a slow train wreck is heading your way
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- jagjeet sinha Aug 23, 2016
  
  + 1
  
  @ Peter
  
  Agree with the logic you consistently espouse.
  Germany worked hard to produce the miracle - from the ashes of 1945.
  In process it's success is so successful, that Europe has been trying to contain it.
  No one in Europe - least of all, Germany - wants a "German" commonwealth.
  An orderly dissolution - with Germany extricating itself - perhaps most appropriate.
  Because the give and take that is needed - seemingly impossible, the brilliance of Doctor Stiglitz notwithstanding.
  Fortunately the process needs Voters and Democracy - and German Parliament is chosen by German Voters, not European.
  Brexit allowed British Voters the choice - and Germany eventually perhaps will emulate.
  Disorderly dissolution in democracies must be disallowed.
  History contains all the lessons of Statecraft needed.
  But - if the German electorate chooses Europe over Germany - back to Square One.
  NATO had its Economic equivalent - EEC, the precursor of European Union.
  Should EEC be back, Britain perhaps the first to Bremain.
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Steve Hurst Aug 22, 2016

There will be no effective reform in the EZ simply because of the veto option on new policy. There will always be some veto holder who wants to defer grasping the nettle or is a beneficiary, naming no names. It doesnt matter what the math says, its about vested interests and buying time.

That was GR. As 3% is referred to as not being that critical perhaps it is worth noting GR is only 3% of EZ GDP, so quite clearly 3% is seen as being hugely important to some people.

Although it is a national domestic issue, not an EZ wide issue, vested interest in defiance of logic is well displayed by the German political reaction to the Bundesbank again raising the proposal to extend German retirement age by a couple of years as the math says funding pensions will become a problem. Raising the retirement age is rejected out of hand by the German politicians because it will not be popular with the German voters

So there will be no logic or math applied to the solution only political bending and miss-speaking
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dan baur Aug 22, 2016

Finally proposing some "solutions". Let's have some fun with them:
eliminate "3% of GDP" requirement - take it to its logical conclusion given that debt has exceeded GDP growth like forever. Debt/GDP continues to grow a la Japan. And then what? How do you plan to ever resolve this?
"growth strategy" - like what? Japan has been looking for 25 yrs. for one without luck.
"a solidarity fund for stabilization" - will see this when pigs fly. What does it even mean other than permanent transfers from one country to another?
"Rely instead on Eurobonds" - backed by who? Germany or Greece? There's a yuuuge difference.
"better burden-sharing" - Germany said 'Nein'. Now what? In this world, there's savers and there's spenders - two different animals like ant and grasshopper. A 2,500 years (at least) old problem never solved.
"changing the mandate of ECB" - does that make any difference? For instance, if Italian law is such that companies prefer to stay at 49 employees instead of growing, what can ECB do?
"prevent money from fleeing poorly performing..." - money always flees poorly performing everything - it's a law of nature. Communism tried to abolish this law too. Guess who won?
"encouraging, ... industrial policies ...laggards catch up..." - such as? Laggards like Greece make their own policies. That's why they are laggards. The crisis is finally forcing them to follow German policies (such as retirement at 65).
- Jason H Aug 29, 2016
  
  Japan is selling 10 and 20 year bonds at negative interest rates so what's your point? Fiat money doesn't require debt it's a policy choice and legacy of the gold standard.
  
  http://bilbo.economicoutlook.net/blog/?p=33094
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- dan baur Aug 22, 2016
  
  To be fair, Greeks, Italians, and others are not really "grasshoppers" when it comes to their private accounts. They do let their state be a "grasshopper" most likely because they dissociate themselves from their government.
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John Brian Shannon Aug 22, 2016

Hi Joseph,

Brilliant! And I agree with all of it.

I like your seven conditions. But I do have some additional points:

1) "abandoning the convergence criteria, which require deficits to be less than 3% of GDP;" -- Joe Stiglitz

'Always find the best model and duplicate it' said every engineer in history -- and the same with economists.

Norway is easily the best economy in Europe and they legislated that no deficit shall exceed 4% of GDP.

Just do what Norway does?

Yes, I understand that each economy is unique, but on the things that *can be* harmonized, do that. Moving from a maximum deficit rule of 3% to 4% of GDP isn't difficult and it would give a little more room for marginal economies to maneuover.

If it's good enough for Norway to impose a legislated spending cap with all of that petroleum resource revenue coming in, then it's good enough for every other European nation.

2) And to pay for things you've suggested in your essay -- and to support other generous spending programmes -- the EuroZone should institute a 1% Tobin Tax.

Norway has it's petroleum revenues to finance its huge commitment to its citizens, and has amassed $1.3 trillion dollars in sovereign pension fund. The EuroZone could easily attain the same on a per member country basis, via a 1% Tobin Tax, which is simply a 1% tax on each transaction made in the country.

The Tobin Tax could also raise the threshold for low income earners. In that way, low income earners would be able to keep more of their earnings/pay less tax/receive less government assistance. (Win-Win-Win)

And then, like Norway, when you provide free university education to all citizens and residents, productivity rises, per capita income rises, the SPI and UN Happiness Index rankings rise, the crime rate falls dramatically -- and every other part of the socio-economic contract gets better.

https://johnbrianshannon.com/2015/12/15/secret-of-norways-success/

As always, very best regards, JBS
- John Brian Shannon Aug 29, 2016
  
  Hi Jason H,
  
  I agree that Norway runs budget surpluses and that nations using deficit financing are a different kettle of fish altogether, and I agree that macro economics is counter-intuitive.
  
  In my original comment I never said otherwise.
  
  The link you supplied, is written by a blogger whose opinion differs on an article written by a New York Times' reporter in 2009.
  
  I'm not sure what point you're trying to make.
  
  Best regards, JBS
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- Jason H Aug 29, 2016
  
  Norway runs a huge external surplus. Deficit nations are totally different. One persons surplus is another's deficit by simple accounting. You should learn more about macroeconomics as its counterintuitive.
  
  Here's some economics of Norway: http://bilbo.economicoutlook.net/blog/?p=2418
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- dan baur Aug 22, 2016
  
  Why limit yourself to Norway? Let's all be like Bill Gates and Carlos Slim. That way we can all be multi billionaires. Wouldn't that be better?
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Manu Oquendo Aug 22, 2016

Neither reform nor divorce.
Reform is as impossible as divorce.
The whole concept was wrong from the start. Nothing to do with economics. It is much simpler:
1. Postwar Europe is a sort of Colony suffering from cognitive dissonance
2. It is fragmented by design to fit the imperial requirement of "keeping vassal states dependent an unable to collude" sic. Europe does not even have a Demos able to communicate at the people level.
Where do we expect to go from there?
Nowhere.
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Tomas Kurian Aug 22, 2016

Free trade without limits should not be the untouchable mantra:

Limits needed in international trade
http://www.genomofcapitalism.com/index.php/8-limits-needed-in-international-trade
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Jose araujo Aug 22, 2016

The Euro was build on supply side economics and reagomics Architects, it has 3 pillars/dogmas: Free trade, low government Spending (no deficits) and wages flexibility has the way to balance the model.

Supply side economics has no theoretical groundings, but it appeals to a vast majority of “economists”, and the European derivation has a profound entrenchment in the Imperial/Colonialism/mercantilism traditions, so it is being taken to the its limits, that’s why supply side European economists have no problems in letting the Spending pillar fall, has long has you continue to cater to the export sector and financial oligarchies.

Supply side European economics has failed spectacularly, not only it didn’t prevent governments to grow, but actually made the intervened economies (Greece, Portugal, Ireland) almost 100% dependent on gov spending by annihilating all private initiative.

IMHO, either the Euro will spectacularly fail, or some measures will have to be taken. The start of the future of the Euro has to begin with abandoning the Free Trade Dogma, recognizing all economies have their own peculiarities and that less competitive economies suffer with integration. With a common currency the only way to mitigate the effects is to allow for differentiated taxes, import barriers and export subsidies for the less competitive countries.
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Margaret Bowker Aug 22, 2016

Since former EC head Jacques Delors has said that new architecture for the Euro should be created, perhaps 'fire-fighting' should be flexible and there are signs that it is to some degree, for example an emerging practical attitude towards the 3%, the writer's first condition. Professor Stiglitz also rightly says the Eurozone was a political arrangement. It will take politicians to transform it, and the executive to stand back whilst they are doing so. It would make 'fire-fighting' more likely to be successful.
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Frans Verhagen Aug 22, 2016

Observers of the present EMU situation may be categorized in four categories such as eurocrats, those who blame labor laws, welfare laws or the initial optimism that would political convergence would take place after a monetary union’s establishment. One could also blame the lack of a global integrated vision of observers such as Stiglitz and Krugman in respect to the need of global monetary, financial, economic and commercial systems. Such failing vision would prevent the view that the euro approach was a good or even a bold one in the face of globalization and the need for ever more global cooperation. If those observers had assessed the ups and downs of the euro in that global vision it would have strengthened the euro unification approach.

In last instance such global integrated vision would entail a realistic and bold approach to the looming climate catastrophe. One such approach is proposed in the Verhagen 2012 "The Tierra Solution: Resolving the climate crisis through monetary transformation" where the conceptual, institutional, ethical and strategic dimensions of a carbon-based international monetary system with its standard of a specific tonnage of CO2e per person are presented (www.timun.net.). Having a carbon monetary standard compels nations to stay near the standard and introduces some rigidity or discipline which is needed to deal with the looming climate catastrophe
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Petko Miran Aug 22, 2016

The EURO should have been the final step of integration. Two countries at different economic and social levels require different policies, including a monetary one, to cope with the facing challenges. Thus the convergence might have been much faster and easier, especially during the shifts of the economic cycles. A super state can provide the changes proposed in the article; whether this super state can indeed be achieved is another topic.
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S Sam Aug 22, 2016

Thanks for the eurozone analysis.
From past record, EU and eurozone is unable to reform. Divorce like Brexit seems inevitable.
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Walter Gingery Aug 22, 2016

Well, if Steve can bring in Johnny Cash, I guess I can use J.R.R. Tolkien's "The Lord of the Rings."

Midway in the work, in the Council of Elrond, all the races of Middle Earth gather to discuss how to rid themselves of the Great Evil, Sauron. After exhaustive rehearsal of the history of the Ring, they conclude that something must be done -- but what?

That, or so it seems to me, is where Europeans are now. The Eurozone finds itself at an impasse. The Euro, it is clear, has become a source of discord, but no one can agree on a course of action to mend it.

In Tolkien's work, the hobbit Frodo steps forward to take on the burden. With the acquiescence of the rest, he goes on to resolve the situation. But, in the case of Europe, so far, no one has come forward to take on a similar leadership role -- possibly because of the personal sacrifices required.

In short, the Eurozone is "Waiting for Frodot," playing all the usual games to pass the time, hoping that something will turn up. . . .
- Jason H Aug 29, 2016
  
  8 years and counting Tolien's world would already be long gone with inaction and incompetence and lack of bravery of that level. Fact stranger than fiction sadly.
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- P. Foofootos Aug 23, 2016
  
  One Euro to rule them all,
  One Euro to find them,
  One Euro to bring them all,
  And in the Darkness bind them
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- Steve Hurst Aug 22, 2016
  
  @Walt
  
  The EU search for euro solution will likely start by sending for the Chairperson of the Regulatory Committee on Grass Verges
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Michael Vielhaber Aug 22, 2016

We need only one single change: The return to national currencies. Period. Nobody outside France ever wanted the ECU/Euro and now even the French see what (ineviitably) happened. Get back to EC (not EU) and to smooth bands of exchange rates.
- Egidio Bernini Sep 3, 2016
  
  Well said. Stiglitz explained very clearly why the eurozone has not worked. He's also explained that the seven changes needed are not possible due to lack of political will. I do not understand why he doesn't draw the only possible conclusion. There is only one option left: divorce. It will be costly ? yes, but less than muddling through. Amicable (better) or not but divorce anyway.
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- Jason H Aug 29, 2016
  
  Exactly. But it was never designed to be unraveled so someone needs to start by leaving. Ideally Germany would or hopefully France or Italy or Spain.
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- Peter Schaeffer Aug 22, 2016
  
  +1
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Steve Hurst Aug 22, 2016

A song suitable for the Euro, well part of a song -

'I fell into a burning ring of fire,
I went down, down, down as the flames went higher
And it burns, burns, burns,
The ring of fire, the ring of fire.

And it burns, burns, burns,
The ring of fire, the ring of fire,
The ring of fire, the ring of fire.'

Johnny Cash, sadly missed
- Jason H Aug 29, 2016
  
  Nice so apt and great song :)
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