Joseph Stiglitz, one of the world’s most respected economists, believes that Europe has already suffered one lost decade due to mismanagement and risks facing another lost decade if the continent’s leaders fail to come together. And Germany may be part of the problem, not the solution.
In an interview with Handelsblatt, the U.S. Nobel Prize-winning economist argued while central banks can buy time through easy-money policies, governments have to use that time to formulate long term policies to keep the euro alive. He called on Germany to help create a solidarity fund to bail out struggling members, and a euro bond to share out debts among all the European Union
The 71-year-old Columbia University professor offered an extremely downbeat view of the state of the euro zone and the global economy as a whole. But he delivered his barbs with a disarming smile and with a fair amount of humor.
Mr. Stiglitz, has been a long-time critic of the euro zone, but he considers the euro an important project. Ever since its inception in 1999, Mr. Stiglitz has argued that Europe’s experiment with a common currency is being watched closely around the world. That is all the more reason to get it right.
On that count, Mr. Stiglitz argued Europe’s policymakers have failed on a massive scale. He criticizes German Chancellor Angela Merkel, who at the helm of Europe’s largest economy has been the de-facto leader of the response to a crisis that has faced the 18-nation currency bloc ever since the 2008 financial crisis.
Mr. Stiglitz has argued that Europe’s experiment with a common currency is being watched closely around the world. That is all the more reason to get it right.
The euro zone economy stagnated in the second quarter and can expect to grow less than 1 percent overall this year. Unemployment remains near 12 percent, and as high as 25 percent in countries like Spain and Greece that have been especially hard-hit by the crisis.
Germany’s own economic situation is also overrated, Mr. Stiglitz said. Germany, which has seen average growth of just 0.63 percent over the past five years, is only standing tall in comparison with the dire situation in many other euro zone countries. Under normal circumstances, its growth rate would be seen as a failure, he argued.
Mr. Stiglitz said the policy of austerity prescribed for the bloc by Germany and Ms. Merkel has “failed.” Instead of returning Europe to growth, the broad push for spending cuts and the singular focus on bringing budget deficits under control has ushered in a period of low wages, low profits and weakened social safety nets.
The euro was created at a time when neo-liberal economic thought reigned supreme, according to Mr. Stiglitz. Markets were left largely to their own devices. To return to growth, the European Union needs a banking union, together with a common deposit guarantee, that binds its financial institutions. But it also needs a fiscal union to bind governments. That doesn’t just mean having more control over other countries’ budgets, as Germany has sought, but it means “more solidarity.”
For Mr. Stiglitz, this includes a common “solidarity fund” that can be spent on member countries in trouble, as well issuing common debt, or euro bonds, that would make euro zone countries liable for each other’s debts.
While some sort of solidarity fund could become a possibility on the European stage – the incoming European Commission is contemplating a euro zone budget – euro bonds are a vehicle that has long been shunned in Germany, despite some recent efforts to revive the debate.
Germany has long argued that its taxpayers would refuse to pay for the profligacy of other European nations without gaining control over their budgetary policies. France and other countries by contrast have refused to put their budgets under the kind of scrutiny that Germany demands in exchange for solidarity. The debate is at a standstill.
Yet not moving forward on this is a mistake, according to Mr. Stiglitz. As the largest economy in Europe, Germany has to pay for problems in the euro zone “one way or another,” and the bill is likely to only get larger without fundamental reforms. As an example, he cited Greece. Instead of bailing out the country when its budget deficit ran wild, Mr. Stiglitz argued it would have been cheaper for Germany if Greece had already been folded into Europe through commonly-issued bonds.
The only person who wins real praise from Mr. Stiglitz is the president of the European Central Bank, Mario Draghi, whom he credits with making a real contribution to keeping the euro zone together. Indeed Mr. Draghi’s now famous promise in July 2012 to do “whatever it takes” within the ECB’s mandate to rescue the euro is largely credited with calming financial markets.
Mr. Stiglitz argued the ECB still needs to do more and suggests it quickly launches a “quantitative easing” program along the lines of what the U.S. Federal Reserve adopted soon after the 2008 financial crisis. The plan, which would involve the ECB buying up government bonds of euro zone countries on a massive scale, has long been rejected by most German economists as a measure that is outside the central bank’s scope, and would let governments in Europe off the hook.
To return to growth, the European Union needs a banking union, together with a common deposit guarantee, that binds its financial institutions.
Mr. Stiglitz acknowledged there were risks involved in the ECB easing monetary policy but warned that political inaction has so far left the central bank with no other option.
Better would be for European governments to act so that central bankers don’t have to. Mr. Stiglitz said fiscal policy is a better tool to deal with Europe’s economic decline than monetary policy, which works in broader brush strokes by buying up assets indiscriminately to revive an economy.
Mr. Stiglitz pleaded for governments to make a decisive contribution to overcome the euro zone’s crisis once and for all.
The irony of Europe’s ongoing debt crisis, Mr. Stiglitz pointed out, is that the euro zone as a whole actually has borrowed less money than the United States. While individual euro zone countries may have high debts, the euro zone’s overall debt-to-GDP ratio is lower than across the Atlantic.
Europe’s problem therefore lies in the original diagnosis of the disease. Mr. Stiglitz rejects the commonly-held notion that high government debt is what got Europe into trouble in the first place, noting cases like Spain and Ireland which had low levels of government debt ahead of the crisis but were forced to take on the burden of saving their banking sectors. For Mr. Stiglitz, high government debt didn’t lead to the crisis – it is the crisis that led to high government debt and Germany, of all countries, should learn lessons from this.
Jens Münchrath leads economic and monetary policy coverage for Handelsblatt. Christopher Cermak is an editor who specializes in finance and economic issues for the Handelsblatt Global Edition. To contact the authors: firstname.lastname@example.org, email@example.com