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

05.09.2019 20:00

In his lecture on the occasion of being awarded the Nobel Prize for Economics for year 2001 Joseph Stiglitz spoke out vigorously against the classical economics based on a limited impact of government and markets functioning without government interventions. We do not see the invisible hand of the market, he remarked, either because it “simply doesn't exist”, or “at least [...] it is palsied” (Stiglitz 2001). In the basic dichotomy between free market and state interventions Stiglitz stands as a strong critic of neoliberalism, and is entirely on the side of state interventions.

This view also forms the essential character of his (so far) latest book Euro - How a Common Currency Threatens the Future of Europe. The monograph thus does not discuss the origin and development of euro, establishing the monetary union or monetary integration during the Great Recession, but is primarily “about economics and economic ideologies and their interactions with politics” (p. 42). For Stiglitz the ideology against which he speaks out is the “unwavering faith in markets” (p. 47), i.e. neoliberalism or market fundamentalism (both terms are virtually used as synonyms). For Stiglitz, as an American economist, the common European currency is only an academic opportunity to speak out against the individual aspects of neoliberalism, based on a specific, and rather dramatic, European case.

The book is divided into four parts. The first part (Europe in Crisis) describes the theoretical expectations for the common currency and essential arguments in favour of its adoption, in the third chapter he provides a concise overview of development of the eurozone’s basic economic markers in comparison to the development of (predominantly) the American economy. In the second part (Flawed from the Start) he explains the conditions under which euro could work. He emphasizes that despite the expectations, or rather wishes, of the founders of the monetary union, euro did not lead to higher and more profound integration, but on the contrary it contributed to numerous divergences. The last chapter of the second part is devoted to the criticism of European Central Bank’s currency policy. The third part (Misconceived Policies) criticizes the crisis programs proposed by the “Troika” (European Central Bank, European Commission, International Monetary Fund) during the Greek economic crisis. In the final, fourth section (A Way Forward?) he outlines three possible ways of solving the problems of the eurozone. The first (and in Stiglitz’s opinion the most suitable) way is implementing his proposal of the seven structural reforms of the eurozone. The second option is an “amicable divorce”, illustrated by Greece or Germany leaving the monetary union. Finally, the third option is his concept of a so-called “flexible euro”.

Throughout the monograph Stiglitz keeps emphasizing that euro is not an economical project. He reminds that euro “was a political project, and in the case of any political project, politics matters.” (p. 41) and consequently it “was not an end in itself but a means to broader ends.” (p. 576). Allegedly, euro is like a bad marriage where it is not clear whether it should be saved (p. 88). Therefore the European politicians must choose whether they want “more Europe” or “less” (p.  50).

Stiglitz gradually uproots the three fundamental arguments which are in favour of euro, despite its flaws. In his view the “influence of the united Europe on the world stage” is not to be accomplished by a deeper monetary integration, but through consensus of the European Union member states. Contrary to the persisting beliefs, Stiglitz is convinced that there is not any proof that the use of common currency would reduce probability of conflicts. Therefore he does not see any link between a deeper monetary integration and achieving peace. Eventually, he also disclaims the argument that euro will help to create European integrity. He does not find the economical argumentation in favour of the single currency compelling, because the savings in transaction costs are not significant enough to prevail over the costs of the crises (p. 131-132).

In Stiglitz’s opinion the Great Recession after 2008 started a “lost quarter-century”, i.e. the stagnation of the European economies. The Eurozone will stay weaker than it would be if the crisis did not occur or was better managed (p. 159). The external observable reason is the weak economic growth of the Eurozone (compared, for example, to the US). Stiglitz reminds that since the creation of Eurozone in 1999 its overall growth is not increasing, it is still below the growth trend of the gross domestic product before the creation of euro and that this contrast is getting even greater. However, there is nothing about the structure of economies of the Eurozone’s member states that would prevent growth.

In the spirit of Mundell’s theory of Optimum Currency Area Stiglitz explains which adjustment mechanisms enable the currency area in the United States to work. Unlike the US, the Eurozone does not meet the migration requirement, because it does not have one common language, one common social security system, one common health insurance. While the exodus of the inhabitants of one American state into another does not cause serious problems, the depopulation of Greece after the unemployed Greeks left for work to the northern and western European states is already a problem. Also, unlike the US, the Eurozone does not have a common budget therefore the states affected by the crisis cannot expect financial support from the centre. Another advantage of dollar over euro is the existence of Federal Deposit Insurance Corporation, and also the American banking system itself. Allegedly, a free movement of workforce or capital cannot function without a common deposit insurance and sharing the debts. Thus Stiglitz paradoxically suggests bringing the Eurozone closer to the US system, i.e. the system in which the last economical crisis emerged. Actually, according to some studies, The United States are not an optimum currency area either (for example Kouparitsas 2001).

In accordance with Stiglitz’s Neo-Keynesian beliefs the main culprit of the Eurozone’s failure is neoliberalism. In his opinion the market fundamentalists believe that “if only the government would ensure that inflation was low and stable, markets would ensure growth and prosperity for all” (p. 48). Stiglitz believes that this idea had became obsolete long ago, but in Germany, the leading economy of the European integration, it survived until the crisis. Moreover, neoliberalism is allegedly strongest in finance ministries and central banks and weakest in labour and education ministries (p. 82), so it “let [the founders of the euro] astray” (p. 207). He only regards it as a sort of modern religion, because the markets by themselves “can’t do the adjustments necessary to ensure full employment and external balance” (p. 252). When creating a single currency area, he adds, full employment in all the member countries, macroeconomical stability and trade equilibrium are crucial.

Stiglitz’s criticism of neoliberalism is famous, yet it does not change the fact that neoliberalism does not exist as a single economic direction, school, or way of thinking. Neoliberalism is a mere label used by the left-wing for Thatcher’s or Reagan’s policies (for example Auerbach 2006). Similar to the other critics of free market and laissez-faire, Stiglitz blames the market (“neoliberalism”, in his vocabulary) for the failures which are actually the failures of governments and consequences to state interventions. However, it is the governments who should have wider role in the economy (p. 78).  

The statement “blame the victim”, which is repeated several times, suggests that apart from the “market – state intervention” line the monograph also follows the “Germany – Greece” line. While the author praises Janis Varoufakis, the Greece minister of finance, as an excellent economist, he strongly criticizes the conception of the “Swabian housewife” by Angela Merkel. In fact, he considers a relative success of Germany within the Eurozone as a failure: the average annual rate of 0.8 % p. a. would have been “under normal conditions [...] described as near-stagnation” (p. 165), and should the German economy be evaluated based on its absolute results, the grade would be “perhaps D-” (p. 189). The German growth is based on trade surplus, which other states cannot achieve: if the trade equilibrium of the Eurozone as a whole is balanced, Germany’s surplus must mean trade deficits of the other economies. In the spirit of the Keynesian thinking he sees surpluses as a more serious problem than deficits because they contribute to the deficit of the global demand. Therefore he blames German surplus with Spain or Ireland, which resulted in more divergence of the European states, for the global secular stagnation after the Great Recession. After the creation of the Eurozone  (and eliminating the exchange-rate risk) the markets (which are failing in Stiglitz’s opinion) underestimated the risk associated with the national debt. The low interest rates thus helped to blow up the real estate bubble – for example more homes were constructed in Spain than
in France, Germany, and Ireland combined (p. 262).

If euro did not exist Greece could easily devaluate its drachma, thus supporting exports and limiting imports, and consequently increase the economical growth. In the monetary union Greece could only follow the way of internal devaluation, i.e. lowering wages and salaries. However, Stiglitz remarks, the competitiveness of the southern part of the Eurozone could be secured by weakening euro due to rise in German wages and prices (p. 67). However, Germany not only did not increase the wages, but even “enact[ed] policies that lowered wages” (p. 116). However, Stiglitz does not provide any supporting evidence for this strong statement – and we are not aware of any concrete legislative norm enacting lowering the wages. In Stiglitz’s opinion the alleged competitive devaluation in a form of lowering the wages is just another form of “beggar-thy-neighbour” policies (p. 115).

Stiglitz is characteristic for his criticism of the Troika. As the chief economist of the World Bank he became a famous critic of the Bretton-Wood institutions. He criticized and still criticizes the anti-crisis packages of the International Monetary Fund during the East Asian crisis as well as the new anti-crisis packages for Greece. He emphasizes that IMF “masquerades its “demands” as
simply “proposals,”” even though Greece actually does not have any other choice but to accede to them (p. 394). In his opinion the Troika’s packages do not help Greece, but are only mechanisms to ensure that debtors pay and the creditors get their money back (p.  403). He finds another parallel between the Greek and East Asian crises in the fact that Greece does not have control over the rotary presses “printing” the currency in which it is indebted. Just as the developing countries were indebted in dollars in 1997, Greece is now indebted in euros. The moment Greece ceased to be able to meet its obligations the eurozone authorities have become “credit collection agencies” and Greece began to lose its sovereignty (p. 268).

Using many examples he demonstrates that during recession Troika preferred particular interests of the western economies (and their selected businesses) over the interests of Greece. Thus the focus was for example on the definition of “fresh milk”, right size of a loaf of bread, parameters of running a pharmacy and other items of a seemingly irrelevant agenda, which, however, made it easier for certain groups to enter the Greek market. Primarily the reforms helped the foreign countries by increasing the income of the multinational corporations (p. 482). Likewise, the ordered privatization was in Stiglitz’s opinion convenient to the regional German governments (p. 427).

Apart from the Troika, the European Central Bank and monetary policies in general are also subject to Stiglitz’s criticism. He criticizes the structural flaws of ECB, its mandate (fighting inflation) and inefficient allocation of resources in the market economy. In a quite innovative fashion he identifies the reason of the problems not as not enough independence of the central banks on the government, but on the contrary the fact that “Europe has taken this [independence] to an extreme,” (p. 351) and that the central bankers are captured by the financial sector, to which they continue to return (p. 352). In accordance with his criticism of neoliberalism he does not agree with
a traditional argument that independence is necessary for the fight against inflation. The anti-inflation monetary policy is allegedly a manifestation of a distrust of democracy, because fighting inflation by monetary policy is not a purely technocratic matter (p. 362). According to Stiglitz's teachings inflation is not a major economic issue (in particular due to the cheap imports from China): the only issues are growth and employment. Thus he suggests that ECB adopts a dual mandate (similar to the Federal Reserve) and starts using a different portfolio of instruments. As a traditional critic of Milton Friedman, Stiglitz unsurprisingly continues by criticizing monetarism, which, in his view, never was a real theory (p. 373), but he also criticizes inflation targeting, and even quantitative

During the crisis the monetary policy was also associated with unconventional fiscal policies. For the governments saving the banks was primarily a bootstrap operation (p. 435): banks lent the government money by buying government bonds, the government guaranteed the banks, allowing them to get access to money from markets at lower rates – and to be able to lend some of that money to the governments. Given the Greek government’s indebtedness to the German and French banks the rescue packages were adopted primarily in order to rescue these banks, but with a motto of “helping Greece”. On the contrary Stiglitz’s statement “One shouldn’t feel too sorry for the private sector creditors: typically they have been well compensated for their risk” (p. 446) is nonsensical. As the creditors the banks also function as financial intermediaries and their punishing will thus primarily affect the ordinary small savers. Thus Stiglitz, as an enemy of commercial banks and bankers, completely disregards the interests of households.   

He also sees the problem in three types of divergence. He identifies the first divergence in relation to the movement of workforce. He correctly points out that a rational individual decides based on the taxed salary, which, however, does not depend only on the marginal productivity, but also on the tax system. With a homogeneous marginal productivity we should observe migration (of qualified workers in particular) from the highly indebted countries to the less indebted countries. The consequence to such migration is the increased tax burden on those who stayed in the country (p. 304). In Stiglitz’s view the solution is introduction of a very controversial instrument: Eurobonds, a common obligation, which would allow the countries affected by the crisis to reduce the cost of debt servicing and thus reduce taxes. Expansive fiscal policy would at the same time increase their income and restore growth. This concept is purely Keynesian (in the spirit of balanced budget multiplier), but also very controversial because of the risks of moral hazard and information asymmetry associated with the potential Eurobonds.  According to Stiglitz another divergence is the divergence of public investments, where the wealthy countries can invest (for example in the infrastructure) more than the poor countries. He sees the solution in more support to the development banks. The third divergence is the technological divergence, which has its roots in failure of the markets. He intends to prevent this via industrial policies (and thus an increasing level of state intervention in the economy).

As a part of his fiscal measures Stiglitz also suggests imposing a carbon tax, because the climate change is in his opinion the most serious market failure of these days, and also a luxury tax, which would allegedly affect imports in particular (p. 422). This tax is thus a hidden equivalent of the customs (which Stiglitz does not admit), and therefore a continuation of the trade war (which he criticizes in the book), only by different means.

The focus of Stiglitz’s monograph can be summarized in the seven points of his structural reform. Under the “more Europe” motto he prescribes to the sick Eurozone a bank union, Eurobonds and a common framework for stability (that is, automatic stabilizers on a pan-European level, new budget rules or solidarity fund for stabilization). He also asks for a convergence policies, by which he means “fighting the current account deficits” and expansive wage and fiscal policies in the surplus countries (these should increase wages and strengthen the rights of the employees in the collective negotiations). Macroeconomic support of the full employment and growth is to be achieved primarily by changing the ECB's mandate and by promoting environmental investments to ensure environmentally sustainable growth. The last point of his programme is the commitment to shared prosperity by which he means fighting against “the race to the bottom” or the political integration through the tax system (p. 561).

It is clear that from the three alternatives outlined in the final part of the book (structural reform, amicable “divorce” and flexible euro) Stiglitz considers the structural reform the only right path. He describes the other two strategies only superficially and to a large extent one-sidedly.

Stiglitz’s monograph is a remarkable mixture of quality economical and political-economical observations reflecting the author’s experience and, above all, his thorough personal knowledge of the background of the crisis games and players, and his considerably one-sided criticism of the free market and the set of economical principles which he labels with a pejorative name “neoliberalism”. This imbalance and ideological bias harm the otherwise good monograph. We can unanimously agree with his strong conclusion: that euro is only a 17-year-old, poorly designed experiment, which is
a threat to the future of Europe. However, we can hardly identify with his hostile attacks on the market and market economy.


AUERBACH, Nancy, N. 2006. The meanings of neoliberalism. In ROY, Ravi, K., DENZAU, Arthur, T.
and WILLETT, Thomas, D. Neoliberalism: National and Regional Experiments with Global Ideas. Routledge. 

KOUPARITSAS, Michael, A. 2001. Is the Untied States an optimum currency area? An empirical analysis of regional business cycles. Federal Reserve Bank of Chicago, Working paper No. 2001-22. 


LIPOVSKÁ, Hana. Joseph E. Stiglitz: Euro – How a Common Currency Threatens the Future of Europe. Central European Journal of Public Policy, Praha: CESES UK, 2018, roč. 12, č. 2, s. 1-4. ISSN 1802-4866. doi:10.2478/cejpp-2018-0007.