Joseph Stiglitz – The Euro: How a Common Currency Threatens the Future of Europe


I'm Peter Goodman and I'm the European economic correspondent for the New York Times soon to be based in London, but now in New York and I have the pleasure of speaking with a professor Joseph Stiglitz who is a Nobel laureate economist.

Who probably needs no introduction A best-selling author and most recently the author of this terrific and clarifying new book on the Euro It's called "The Euro: How a Common Currency Threatens the Future of Europe" and we're here to talk about the book and eventually take some questions from the Facebook community.

So, with that thanks a lot for being here and it is difficult to overstate how much trauma Europe has gone through in recent years.

Greece has experienced essentially a depression Spain has seen massive youth unemployment even in countries that have done relatively well like Germany as you note in the book we've seen very slow growth a loss of wealth and opportunity.

You've written this book in which you put a lot of the blame on the Euro Tell us about that.

What happened?-When the Euro was an attempt to advance the economic integration of Europe by having the countries of the Eurozone share a common currency and they certainly looked across the Atlantic they said the United States big economy, very successful single currency We should imitate, but the problem was they didn't have the political integration they didn't have the conditions that would make a single currency work and that's the problem The economic integration outpaced the political integration The creation of the Euro I've argued is the single most important explanation for the extraordinary poor performance of the Eurozone economies since the crisis in 2008.

You know, the crisis originated here in the United States.

It was our banks You would have thought we would have been the country that would have suffered the most and you look at the data and it's so clear that while the crisis originated in the United States we've recovered I mean, we're not perfectly recovered You know, but the problems in Europe are far, far greater and the divergence between where they would have been and where they are is actually increasing I mean, one of the arguments you make in the book that's so intriguing So, you actually put the blame forgrowing inequality on the Euro and you argue that the crisis in bothIreland and Spain was essentially caused by the Euro.

Tell us about that.

How did that work? Well, you know, that the idea was that for the Euro to work the countries had to converge together and they formulated these ideas called the convergence criteria Put enormous amount of pressure on the countries to keep their deficits and debts relative to GDP down.

Three percent deficit to GDP, sixty percent debt-to-GDP That was viewed as the necessary and almost sufficient conditions for making the Euro work Well, one of the things I point out is that several of the countries that went to crisis, Spain and Ireland among them, actually had a surplus before the crisis and a very little debt to GDP ratio, but they still had a crisis and that tells us an important lesson that what they thought The people who were behind the creation of the Euro What they thought was going to be the critical condition was not But, the disappointing thing was that after the crisis they didn't learn the lesson You know, they've never been an attempt at this kind of bringing countries together.

So, you might say, well, you know there've been no experiments and they were making guesses, but after the crisis it was so clear that those convergence criteria were not necessary Were not the critical things and yet what they did is double down on that same recipe, austerity, and that led to one of the real points I emphasized in the book is the structure of the Euro with the Eurozone was at fault and the policies that they enacted amplified the structural deficiencies and the result was the countries diverged So, rather than bringing the countries closer and closer together they move them further and further apart.

As you mentioned, Greece is in depression effectively Spain and Portugal are in depression.

Deep recession in Ireland and the countries have moved further and further apart One of the things that's most interesting in the book to me is this discussion of the origin of these ideas that had driving force both in the creation of the Euro and in the policy response to the crisis.

You're very tough on the Germans I mean, you essentially argue that Germany is marinated in this idea that if you just keep a lid on deficits No, no deficit spending by the government and you look out like a hawk for inflation then, you know, the magic of the market the confidence fairy as Paul Krugman's put it You know, we'll just take care of everything and everything will be wonderful Well, a lot of this book is devoted to demolishing that idea Where does that idea come from? And is it really believed or is it a sort of official excuse for doing stuff that the Germans would like us to do? I think, it's actually really believed by the Germans and this is what quite a large fraction, not all, but let me say a large faction and this is the striking thing.

Whereas, in the United States even many conservatives have rejected that extreme version.

They say when you have an economic downturn you need some stimulus President Bush said as we went into the 2008 recession we need a stimulus.

There might be a disagreement about the best form of stimulus but even the Republicans even the conservatives said you need a stimulus and yet in Germany that view seems to be an outlier In that sense, Germany itself has become an outlier in the global community But, the problem is that within the Eurozone itself since Germany is the deep pocket Right They seem to be, you know, calling the tune and the tune they're calling has not been working -Part of the tune I mean, as you lay out in the book particularly in terms of the conditions that they imposed with the rest of the so-called Troika I mean, the Germans are sort of behind the scenes as the dominant player in the European Union the IMF is involved the European Central bank is involved These are the three players known as the Troika.

They impose these conditions on recipients of bailouts especially Greece, but also Portugal and one of the things that you argue in the book is what was really going on is let's have Greek savers, Greek retirees, pensioners, whose pensions are now being cut as part of these German conditions deliver the funds that will be used to basically pay back debts that the German banks are on the receiving end of When we absorb this story is it ideology? Is it protectionism for favorite industries that are well connected to the powers that be? Is it both? Help us understand that It's both.

It's a mixture.

So, the ideological belief that austerity will work is very strong and, you know, I visited Germany often and I'm shocked about how strong the belief is in this view that has been totally discredited elsewhere and has not been working anywhere in Europe So, that is a strong belief, but it's clearly the policies are mixed together with interest So, for instance, when the Greek crisisbroke out in 2010 what was really at risk were German and to some extent French banks and there was massive bailout called a bailout of Greece, but it's really a bailout of the German and French banks Most of the money went to Greece and thenright away went back to Germany and France and you know I saw this when I was chief economist at the World Bank You know, you have something called a Mexican bailout, or a Korean bailout or a Greecean bailout.

They are always a bailout of Western banks and this was exactly the same thing.

In this case, it was particularly iniquitous.

Because, in order to do the bailout the IMF had to break its own rules and that's actually recently gotten a lot of attention You mean, to structure a bailout such that even the IMF doesn't believe that under those terms Greece is going to have the economic growth to pay it back Exactly.

It's too much austerity -And too much debt and their own rules were you can only lend if it's a shortterm problem.

You know, if it's a real solvency problem it's a problem where they're never going to be able to repay it back then you have to restructure the debt first and the IMF had to break its own rules in order to participate in that You know, that there will be a footnote about if there is systemic risk and the judgment most people was the Greece is sosmall that the likelihood to systemic risk was not significant but that was theway they were able to make the loan But, that issue has just recently, in the last couple of weeks, been revived by you know, one of these reviews and said it was really a breaking of the rules, but when you look at other aspects of the program you see that it really is also helping special interest within Europe How so?-So, there are two parts of theprograms.

One is the austerity the balancing of the budget The other part is what I calledstructural reforms, changes in policies of the country, changesin the their rules governing collective bargaining a whole variety of particular industries that are supposed to stimulate the economy and restore it to health Now, when you think about particular countries there are a list of things that make a big difference and some things that are really not very important You know, no country is perfect and I was chief economist at World Bank.

We always emphasized the importance ofprioritization.

You know, what are really the important things to do If you look at what the Troika did There was no prioritization and you ask Was there a hidden agenda there? So, let me give you an example of one of the absolutely absurd things There was a loaf of bread.

They were debating a regulation in Greece that loaves of bread should be sold either as a kilo or a half kilo bread You know, consumers like to know the size of loaves of the bread.

They don't want to know whether it's 65 grams or, you know, they want to know is this a half kilo or a full kilo? Economists argued that that's actually good for competition But, for some reason, they decided to criticize this regulation that many of us think was a good regulation, but there was one that was even worse than that and that was milk The question is what is fresh milk? and there was a rule that fresh milk is 4 day old milk You're older than four days you need to be labeled.

Consumers ought to know that this is not a four-day-old fresh, but maybe 10 day So, now why was that important.

You know, of all the things that were going on why would you have a debate about that.

Well, it was important, we think because-German dairy industryand Dutch dairy industry wanna ship their factory farm milk across Europe and sell it to the Greek consumers now that would devastate it.

The small Greek producers.

That would weaken the Greek economy that would increase the balance of payments deficits So, it was going in exactly the wrong direction from a policy that would have strengthened the Greek economy So, here is something that could only be seen as benefiting special interest in The Eurozone and actually weakening the Greek economy I wrote that in a op-ed at that Iwrote for The New York Times and I expected to get a furious letter from somebody in the Troika saying You know, you got it absolutely wrong.

Here's the true story And what happened? Silence.

-That is so interesting That nobody said anything You know, maybe I got it right,but it's certainly very disturbing So, would Greece have been better off in your view just saying, you know what We're done talking to the Troika We're going to start putting our own currency again or Grexit.

We're out of the Euro You know, that's one of the hardest decisions that the Greece had to face in the summer of 2015 To the greek people and I was there actually during the summer of 2015 They wanted two things.

They want to stay part of Europe but the Eurozone and they wanted to end to austerity and these crazy structural reform policies They want to return to growth.

Actually, back in the summer of 2011 the Eurozone realized that the policies that they were imposing were causing a recession, depression and they promised that they were going to do something about growth.

Never did it So, four years later they were still in depression Actually, five years later they're still in depression They didn't realize they couldn't have both Their finance minister had actually made contingency plans for how can we make a smooth transition out of the.

-This is Yanis VaroufakisExactly.

Out of the Eurozone I have one chapter in the book, which I call an amicable divorce In which, I tried, basically very consistent with some of the perspectives that he has That, in fact, I think there could have been an amicable divorce and would that have been better ultimately? I mean, if you look at what Greece has experienced Yes.

I mean, let me put it like this.

Best would be for the Eurozone to change its policies Reform the structure of the Eurozone There are some really deep structural issues.

Not in individual countries Not in Greece, but in this structure of the Eurozone.

So, it needs to reform the structure of the Eurozone and needs to change the policies So, I mean, first the European Central Bank mandate as you point out in the book voluminously It's only about inflation.

It's not about employment It's not about economic growth Exactly.

In United States, we recognize that.

We had three targets We said inflation, but also growth and employment.

Now, we've added financial stability Because, we didn't have that before and look at the mess we got into and they have this single-minded focus on inflation and you see the consequences not only in the countries at crisis but Italy's banking system is now on the verge of a crisis and they're refusing to do anything about it Well, Italy is an interesting test case.

I mean, your book teases up this issue.

I mean, here you have Matteo Renzi the Italian prime minister essentially arguing We need some relief from these.

We don't have to get into the technical details but some relief from the structures of the Eurozone rules on what we've got to do We just want to put some money in the banks and try to get past this and the European Union, so far, is holding firm.

Is there any evidence post Brexit I mean, let's remember we're having this conversation about a month after voters in the UK have shocked the world with this vote on a referendum to leave the European Union That's about a lot of things.

It's backlash to immigration But, in part it's a backlash to the perception that the European Union and let's remember the UK isn't even in the Euro, but the European Union is a place of slow growth and bad ideas that aren't working out and You know, that's not the sort of fire department you want in charge of your economy Is there any evidence both in this Italian context and more broadly that these experiences now are leading to some change of heart in Brussels? In Berlin? Some feeling that you know, maybe we need more flexibility? Maybe we need some structural change? I wish that were happening.

Unfortunately, what I've seen is almost the reverse It's doubling down on a failed experiment.

It is a hard line approach Their European leaders and response to the Brexit.

People like Juncker Who is the head of the European Commission which is the administrative body for the EU as a whole He said were going to be very, very tough on the UK because we want to make sure that no other country leaves and to me that was shocking.

It was shocking for the following reason You know, you hope that people want to stay in the EU because it's delivering benefits Because, there's a belief in European solidarity to believe in the European project, which is bringing European integration That it's bringing prosperity No.

It's not the way he's thinking.

He's saying the only way were going to keep the EU together is by the threat of what happens if you think about leaving That's not a healthy way -It's like Soviet Union its really a fear and threatsand then just days afterwards.

After the brexit vote You know, Spain and Portugal have done wonders in terms of reducing their deficits You know, economy is not doing very well They celebrate in Spain when the unemployment rate goes from 25% to 21% Europe says that's a victory, but in spite of all the sacrifices that they've had in the last six years with European Commission is now saying your deficits are too large You have to have another, another dose of austerity and Spain and Portugal are pleading no please don't do this again I mean, you know, were having in Portugal 62% of the people voted against austerity In Spain, they can't put together a government and there's a whole group of people in Catalonia who wanna leave Spain I say, look at, you know, what your policies are doing is just destroying the fabric of our society and the bureaucrats in the European Comission saying no we have to follow the rules Your deficits are two large and we for the first time are going to impose fines on you for your deficit -So, it's truly the the opposite Really the opposite.

They didn't improse fines, by the way, on Germany and France when they had deficits and that gives rise to a sense that maybe there's some inequities on the system-Italy is a particularly interesting example Because, there you have this five star political movement.

That unlike in the UK You know, Italy is in the Euro and this movement is very much about getting out from under the Euro and surely they are taking heed of what's happening in terms of punitive retaliation on deficits and Portugal and Spain So, I mean, are we likely to be here again post, you know, Greek crisis, were a sizable European economy is on the doorstep of leaving the Europe I think, there's a significant chance, you know, they're going to have an election October on a constitutional referendum on a constitutional reform and many of the pundits say that if the problems in Italy continue that it will feed into anti-Renzi sentiment anti the constitutional reforms and that will really give a lot of impetus to the five star movement So, I mean, to the extent to which you carry around a crystal ball I mean, if you're looking ahead you've laid out a bunch of scenarios you essentially see the best case scenario reform the Euro Let's have more flexibility.

So, there's some more flexibility both in exchange rates from ability to tailor your monetary policy You want a comprehensive banking union with deposit insurance You lay out in the book ways to actually make the Euro work, but then you say if we can't do these things then better to blow up the 17 year experiment and move on What do you think is actually going to happen?-I think most likely there's going to be a period of muddling through like we've had since 2008-2010, stagnation, malaise You know, even the best performing economy Germany It's growth is so low that you would have given it under normal circumstances a "D" but because it's doing better than its neighbors everybody looks about it as a great success I think that it is hard to believe that kind of muddling through can continue for another five years that the political forces are just too strong no Greece is still in depression no better than it was a year ago The policies to which they agreed a year ago I forcasted would not work they have not worked.

Not because Greece didn't comply but because Greece did comply and they were badly designed policies that could not work.

So Greece is small, as you said Italy is big, Spain is big and the likelihood in one country or another that there will be enough support for a referendum that another referendum will be held and another Brexit will occur and that will begin the process of a real unraveling of the Eurozone Gotcha.

So, again, we're talking with Professor Joseph Stiglitz Nobel laureate economist who has written this terrific book "The Euro: How a Common Currency Threatens the Future of Europe" Why don't we take some questions from the Facebook audience so Normandy has person What is your opinion of Bitcoin and other virtual currencies Bitcoins are for the most part and attempt to circumvent our monitoring and regulatory system to go into that dark pool and it's major motivation is avoiding taxes and avoiding regulations So, I am not a big fan of Bitcoin we have a monetary system in the United States that works, maybe not perfectly, but as well as one could expect the problems in Europe, they are not that they couldn't create a good monetary system economist warned them that there are certain things you need to do -at inception to make a common currency work.

In fact, my colleague here at Columbia Robert Mundell wrote a very famous paper about what are the conditions necessary to make a group of countries share a common currency Bitcoin is not the solution-I'm going to violate my prerogative as moderator though and ask you a follow-up question If we can play let's pretend for a second The Euro is created in '92 you have the exact same structure you have one central bank The one difference is that the Germans instead of fearing the inflation that they remember from the war era are terrified of deflation they're terrified of a repeat of the great depression they they're terrified of a Japanese-style credit trap they're Keynesians to the core with the same structure that you're saying is flawed but we have a very different philosophy how does this whole project work in that scenario it works much better than the way it is working today but there is still some fundamental structural problems of the Eurozone the lack of a banking union means that when Italy's banks are in problem it has to be about know this transfer that to the United States context assume the Washington Mutual was in problem.

It was bailed out Not by the state of Washington It didn't have the resources really to bail it.

It was bailed out by the federal government by the FDIC so that illustrates we have a common currency but we have a common banking system for the country and, it would, our system would never have worked if we had required each state to have to bail out its own banks So, that's an example of something that needed to have been done before or at least contemporaneously with the creation of of the Euro a second example they have most the debt most of the spending resides within the national borders We call that place based debt.

The problem in a Union where there is free mobility of labor is individuals can escape paying back the debt of their parents A young Greek person who doesn't want to pay back the huge Greek debt just moves to another country within the EU and that debt is no longer on his shoulders And what does it mean if he moves? That means those remaining have a per capita debt that has gone up and the ability of the country to service that debt has gone down -So, you flee trouble and you never actually get a real rescue Exactly.

So, if this is an example of the diverging structure which they didn't think about They thought free mobility would make for greater efficiency But, they bought, it was a little too naive they didn't take into account the distortions associated with this place based debt that if you are going to have debt, which you're going to have and you're going to have the Euro to have countries borrow in a currency not under their control Greece is borrowing in Euros, was creating the same kind of problems that exist in emerging markets.

They never had a sovereign debt crisis like the kind of sovereign debt crisis they have since the creation of the Euro The Euro created the sovereign debt crisis that they are now confronting So, that's another example of reforming the structure that even if they had a Keynesian mentality these problems would still be there Fair enough Sean Madison is asking is it possible to maintain a cohesive political union with up the Euro or will we see a return to extreme nationalism in Europe Well, I actually think that the Euro is causing divisiveness within Europe and the reason for that is is actually very simple remember I said the Euro is creating divergence across countries and when you're having divergent economic circumstances you're going to have divergence in political perspectives most important divergence is between creditor, Germany, and debtor, the rest and so what you are seeing, you know, the intent of the Euro way back when it was created was to bring the countries closer together and further the objective of political integration in fact things have never been worse it is actually increased divisiveness within Europe and you see it so forcefully I mean, that the criticisms that you hear in Greece of the Germans you they are reliving the horrors of World War two.

Criticism in Germany of the Greeks saying that they're lazy even though the number of hours they worked per week is higher than the Germans.

I mean, flinging of accusations whether true or not has been enormous the divisive – and has been enormous and the result of it is they can't even address some of the key issues like that presented by the migration crisis showcase today I mean, there's there's new meaningful issues to argue about and disagree I mean, it's like a feedback loop and then the experience of those issues 42000:34:55,690 –> 00:34:55,690 you don't have a permit me to quote you back to you but there's a great passage in your book that speaks to this.

As soon as some of the countries in the Eurozone owed money to other member countries, the currency union had changed Rather than a partnership of equals striving to adopt policies that benefit each other The European Central Bank and Eurozone authorities have become credit collection agencies for the lender nations with Germany particularly Influential the Germany had the money The German parliament had to approve any significant new program.

It became clear that their Parliament would only approve these new programs that there were sufficient conditions imposed on the crisis countries and finally the power to withhold credit becomes the power to force a country to effectively see its economic sovereignty and that is precisely what the Troika including the ECB have done most visibly to Greece and its banks but to a lesser extent to the other countries.

They have imposed policies not designed to promote full employment growth but to create surpluses that in principle might enable debtor countries to repay what is owed.

I mean, really, that's an experience that the debtor countries are not going to forget any action and it's going to have political consequences Absolutely.

-Maybe last question from Trudy Muller, which is ostensibly someone from Europe is asking what's the difference between the common currency in the US and all the different states in the US and the way the Euro functions in Europe It's a good question.

I actually have a part of one of my chapters devoted exactly to that question The difference is.

There are many differences.

One of them I already referred to is the fact that we have acommon banking system common regulator and when Washington Mutual has a problem the federal government bails it out not Washington state.

So, that's oneexample Secondly, we have really very strong free migration across the states now of course in Europe they have free migration in principle, but there are linguistic barriers.

There are cultural barriers.

There are licensing barriers and so the degree of mobility is an order of magnitude different and that is important Because when there is a state with a high level of unemployment the people leave and go elsewhere Thirdly, we have a national government that is very sensitive to the issues of differential unemployment rates You know, when and I was in the Clinton administration California had a very high unemployment rate and one of the implications of that was that the federal government use some of the discretionary powers to spend more money in California to strengthen the California economy About two-thirds of all public spending occurs at the federal level In Europe, the amount of money spent by Europe as awhole is minuscule It's under, what, two percent of European GDB So, it's not enough to engage in this kind of support Finally, something is really important for the long run by ability of I think of the Eurozone is that the way the Eurozone is structured it actually increases inequality really big concern all over the world when you want a country raises taxes like France try to do on the very wealthy Very easy for people to move out Conduct their business from another country and avoid the tax Not the way you have to deal with progressive taxation then is they have that kind of progressive taxation at the national, at the European, level In the United States, the burden of progressive taxation lies with the federal government.

In Europe, there is no European progressive taxation.

That's one of the reforms that I talk about in the book that has to be done -So, its begger thy neighbor tax policy which is actually existed before the war through other means before we have the European project Exactly.

So, Ireland and Luxembourg the are real examples of begger the neighbor policy and to have as the head of the European commission the guy who was responsible for creating Luxembourg as a tax avoider as a tax haven is obviously not sending a good message around Europe I think were at the end professor Stiglitz.

Thank you so much the book is "the Euro" It's a terrific description of how we got into the crisis and suggestions on how we might get our way out of it Thank you very much for joining us!-Thank you! Great pleasure!.

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Joseph Stiglitz - The Euro: How a Common Currency Threatens the Future of Europe