In The Euro, Stiglitz is highly critical of the euro as a currency for all of Europe because it goes too far in some areas while not going far enough in others. The fundamental issue is that the euro pegs the entire eurozone together at one rate of exchange, taking away a major tool for countries to regulate their trade. If countries control their own currency, they can increase the supply to pay off debt or make their exports cheaper, or increase the supply to buy more foreign goods more cheaply. But with the euro, only the European Central Bank has that power. Meanwhile, only national governments deal with employment, creating a problematic system where national governments focus on both inflation and unemployment because they are responsible to their voters while the ECB focuses only on inflation.
A major problem for the 1992 Maastricht treaty, which formed the eurozone, is that it created several automatic destabilizers in the event of economic crash. The first were the "convergence criteria," which were requirements that to join the euro, governments needed to reduce their deficits to less than 3% of GDP and debts to less than 60% of GDP. This was to make sure no countries that were borrowing excessively could join. But for the future, this would be a problem. In good times, it was not too difficult to meet these requirements, but in the Great Recession, many countries were short on tax revenue, creating deficits that needed to be closed. And at the same time, the economies needed money from the government to function. This created the austerity crisis in the wake of the recession, in which European countries implemented austerity measures to cut their own spending to meet euro requirements, which was the exact opposite of what their economies needed to rebound. Meanwhile, in the United States, the response was much swifter and stronger to just deficit-spend to get out of the recession quicker.
There are some important factors that make the single-currency system work in the United States where it doesn't in the eurozone. The first is that people can move more freely in the USA from one state to another than individuals can move between countries in the eurozone, including both the legal boundaries but also the cultural boundaries that make it more difficult to move from Greece to France than from California to Ohio. Americans don't worry about states becoming depopulated, whereas Europeans do worry about those immigration patterns so that countries in Europe can preserve their economies, cultures, and identities. Kentuckians and Americans from other states usually think of themselves as Americans first, whereas Europeans more frequently identify by their country, making them less sympathetic to the others. Second, it is critical that the US government has far more capacity than European government to respond to crisis and administer services. In fact, while the budget of the European Union is 1% of GDP, the US federal government's budget is 20% of GDP. In America, you can move from state to state and still get social security checks or other financial support. In Europe, welfare and most policy is set by countries, making it far more decentralized than the United States. And finally, in the USA, we have one banking system that is national and when a bank runs into a problem, the federal government can bail it out. In Europe, the EU has not been responsible for bailing out banks and lacks the funds to do so. If Europe were more centralized, individual banks could have been bailed out by Europe as a whole. But instead, individual countries had to bail out their banks, which then bankrupted their governments. Ireland's debt to GDP ratio went from the 20% range to the 90% range as a result of bailouts. Stiglitz writes that if Washington had been forced to bail out Washington Mutual, the biggest American bank to fail in the financial crisis, it would have been similar to Iceland trying to bail out banks ten times bigger than their GDP.
By joining a common currency, eurozone countries eliminated their ability to lower their interest rates and exchange rates. This left them with only the ability to stimulate exports by fiscal policy, which is difficult to do under the convergence criteria because countries have little room to spend to subsidize their own industries. Instead, they can join a race to the bottom to lower wages and other costs to make their industries competitive. The European Central Bank is not a good replacement for each country's individual central bank. The ECB is mandated to focus on inflation, but that leaves out effects on unemployment and economies overall. This becomes especially problematic because Germany is such a massive exporter of over a trillion dollars of goods every year. Because Germany exports so much and the ECB keeps prices level, that means that other countries in the EU must become importers, as the ECB only pays attention to the average. More simply, when one country runs a trade surplus the other countries must combine to form a complementary deficit. And Germany runs a huge trade surplus. So those other countries would probably like to devalue the euro to stimulate exports, but that can't happen as long as Germany is in the mix. Stiglitz proposes that a Keynesian surplus tax would help to right the system.
Stiglitz proposes that many of the problems of the eurozone could be fixed by forming a "banking union," which would guarantee deposit insurance, common regulations, and a resolution procedure across the EU. He writes that moves were made as of 2014 to move in that direction, but I don't know what has happened since. Additionally, Stiglitz proposes that Europe use the European Investment Bank to get more resources to loan in Europe or for the countries of Europe to form national investment banks to help them deal with crises.
But in addition to being about the euro, this book is about Greece, and how Stiglitz believes that the country has been treated very unfairly by the EU and Germany. The trap that the EU made for Greece was the austerity that it imposed on the country, loaning Greece money that could only be used to pay off creditors and not to help the economy rebound. Only 10% of the Greek bailout made it to the people of Greece. What did make it to the Greek populace were new onerous regulation changes, like that Greece had to drop the "fresh" label on local milk so that international milk producers could better compete. The EU demanded that Greece end its regulations on bread loaves, which standardized sizes to increase competition within the sizes. So it feels kind of ridiculous the extent to which Europe feels entitled to enter Greek politics through a loan that doesn't even really reach the Greek people. And all of this is to keep Greece in the EU and the Eurozone but it is not clear that is good for Greece. Greece's largest economic downturns before joining the euro were in 1981-83, 1987, and 1993, when the economy shrank by 4%, 2.3%, and 1.6%. But in the recent crisis, Greece's economy shrank by 9% in 2011. While Greek unemployment had previously peaked at 12.1% in 1999, it shot up to 27% by 2013. So Greece is really doing worse in the eurozone than when it wasn't inside.
Miscellaneous Facts:
- Argentina pegged its exchange rate to the dollar in 1990, but it became intolerable by 2001, when it had to abandon the peg in the face of currency, financial and debt crises, allowing their exchange rate to fall by 75%. After the end of the peg, the economy grew quickly.
- As of 2014, Greeks worked 50% more hours on average than Germans.
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