NEW YORK –
The Greek financial crisis has put the very survival of the euro at
stake. At the euro’s creation, many worried about its
long-run viability. When everything went well, these worries were
forgotten. But the question of how adjustments would be made if
part of the eurozone were hit by a strong adverse shock lingered.
Fixing the exchange rate and delegating monetary policy to the
European Central Bank eliminated two primary means by which
national governments stimulate their economies to avoid recession.
What could replace them?
The Nobel
Laureate Robert Mundell laid out the conditions under which a
single currency could work. Europe didn’t meet those conditions at
the time; it still doesn’t. The removal of legal barriers to the
movement of workers created a single labor market, but linguistic
and cultural differences make American-style labor mobility
unachievable.
Moreover,
Europe has no way of helping those countries facing severe
problems. Consider Spain, which has an unemployment rate of 20% –
and more than 40% among young people. It had a fiscal surplus
before the crisis; after the crisis, its deficit increased to more
than 11% of GDP. But, under European Union rules, Spain must now
cut its spending, which will likely exacerbate unemployment. As its
economy slows, the improvement in its fiscal position may be
minimal.
Some hoped
that the Greek tragedy would convince policymakers that the euro
cannot succeed without greater cooperation (including fiscal
assistance). But Germany (and its Constitutional Court), partly
following popular opinion, has opposed giving Greece the help that
it needs.
To many,
both in and outside of Greece, this stance was peculiar: billions
had been spent saving big banks, but evidently saving a country of
eleven million people was taboo! It was not even clear that the
help Greece needed should be labeled a bailout: while the funds
given to financial institutions like AIG were unlikely to be
recouped, a loan to Greece at a reasonable interest rate would
likely be repaid.
A series of
half-offers and vague promises, intended to calm the market,
failed. Just as the United States had cobbled together assistance
for Mexico 15 years ago by combining help from the International
Monetary Fund and the G-7, so, too, the EU put together an
assistance program with the IMF. The question was, what conditions
would be imposed on Greece? How big would be the adverse
impact?
For the
EU’s smaller countries, the lesson is clear: if they do not reduce
their budget deficits, there is a high risk of a speculative
attack, with little hope for adequate assistance from their
neighbors, at least not without painful and counterproductive
pro-cyclical budgetary restraints. As European countries take these
measures, their economies are likely to weaken – with unhappy
consequences for the global recovery.
It may be
useful to see the euro’s problems from a global perspective. The US
has complained about China’s current-account (trade) surpluses;
but, as a percentage of GDP, Germany’s surplus is even greater.
Assume that the euro was set so that trade in the eurozone as a
whole was roughly in balance. In that case, Germany’s surplus means
that the rest of Europe is in deficit. And the fact that these
countries are importing more than they are exporting contributes to
their weak economies.
The US has
been complaining about China’s refusal to allow its exchange rate
to appreciate relative to the dollar. But the euro system means
that Germany’s exchange rate cannot increase relative to other
eurozone members. If the exchange rate did increase, Germany would
find it more difficult to export, and its economic model, based on
strong exports, would face a challenge. At the same time, the rest
of Europe would export more, GDP would increase, and unemployment
would decrease.
Germany
(like China) views its high savings and export prowess as virtues,
not vices. But John Maynard Keynes pointed out that surpluses lead
to weak global aggregate demand – countries running surpluses exert
a “negative externality” on their trading partners. Indeed, Keynes
believed that it was surplus countries, far more than deficit
countries, that posed a threat to global prosperity; he went so far
as to recommend a tax on surplus countries.
The social
and economic consequences of the current arrangements should be
unacceptable. Those countries whose deficits have soared as a
result of the global recession should not be forced into a death
spiral – as Argentina was a decade ago.
One
proposed solution is for these countries to engineer the equivalent
of a devaluation – a uniform decrease in wages. This, I believe, is
unachievable, and its distributive consequences are unacceptable.
The social tensions would be enormous. It is a fantasy.
There is a
second solution: the exit of Germany from the eurozone or the
division of the eurozone into two sub-regions. The euro was an
interesting experiment, but, like the almost-forgotten
exchange-rate mechanism (ERM) that preceded it and fell apart when
speculators attacked the British pound in 1992, it lacks the
institutional support required to make it work.
There is a
third solution, which Europe may come to realize is the most
promising for all: implement the institutional reforms, including
the necessary fiscal framework, that should have been made when the
euro was launched.
It is not
too late for Europe to implement these reforms and thus live up to
the ideals, based on solidarity, that underlay the euro’s creation.
But if Europe cannot do so, then perhaps it is better to admit
failure and move on than to extract a high price in unemployment
and human suffering in the name of a flawed economic
model.
Joseph
E. Stiglitz is University Professor at Columbia University. Among
many books, he is the author of
Globalization and Its
Discontents. He received the Nobel Prize in
Economics in 2001 for research on the economics of information. He
is the co-author, with Linda Bilmes, of
The Three Trillion Dollar War: The
True Costs of the Iraq Conflict. His most
recent book is
Free Fall: America, Free Markets, and
the Sinking of the World Economy.