As the Eurozone struggles to stave off a lingering economic crisis, four economists debate the measures necessary to ensure its survival and what’s preventing them from being implemented.
Should the euro be regarded as an utter failure? As the Eurozone struggles to stave off a lingering economic crisis, with countries like Spain and Greece mired in enormous debt and high unemployment, and Italy on the brink of meltdown, several economists have recently contended that the single currency has been nothing short of a disaster for Europe. As Europe wrestles with the threat of deflation, an escalating immigration crisis, and a looming bank crisis, the European currency’s chances for survival are shrouded in doubt.
Last week, a panel of four economists, held by The European Institute at the School of International and Public Affairs at Columbia University, raised questions regarding the viability of the euro and the ability of European leaders to implement the drastic reforms necessary to ensure its survival.
The panelists were all authors of recent books on the European currency: Markus K. Brunnermeier and Harold James, authors of The Euro and the Battle of Ideas (Princeton University Press, 2016); Joseph E. Stiglitz, Nobel laureate and author of The Euro: How a Common Currency Threatens the Future of Europe (W. W. Norton, 2016); and Luigi Zingales, author of Europa o No (Rizzoli, 2014 – in Italian) and a professor at the University of Chicago Booth School of Business (also, one of the editors of this blog). The panel was moderated by Alessandra Casella, a professor at Columbia, and Moreno Bertoldi, principal advisor to the EU delegation to the U.S.
On the question of whether the euro is indeed a failure, the panelists were split evenly between critics and believers: Brunnermeier and James, whose new book argues that the euro crisis is largely driven by a clash between the opposing economic philosophies of Germany and France, maintained that the immense political capital invested in the single currency project over the past few decades was not spent in vain.
“The euro has not been a disaster,” claimed James, who defined the euro as “an answer to a coordination problem” and argued that Europe’s current “existential crisis” of democracy will eventually lead to inevitable reforms. Brunnermeier contended that the euro has not been the failure many say it is, since Europe has been “extremely helpful” in “bringing sound institutions” to peripheral countries like Greece. He added: “If you talk to Greek people, many say ‘don’t take the euro, we need the sound institutions caused by the euro, otherwise the corruption of our politicians will eat us up.”
Zingales and Stiglitz, however, argued that the euro’s faults outweigh its benefits, particularly when it comes to countries like Italy. Both took aim at the structure of the euro, which favors northern countries like Germany, and the lack of a European banking union. “The fundamental problem is the structure of the Eurozone itself, not the structure of individual countries,” said Stiglitz.
Reviewing economic developments in Italy during the period in which Italy’s economic miracle of the 1950s and 60s had turned into what he called “a curse,” Zingales said that instead of helping Italy form better institutions, the euro in fact exacerbated many of Italy’s bad habits.
“Part of the Italian system thought that if we join the euro, we will be forced to get into shape. That didn’t happen. In fact, paradoxically, the euro is what permitted Berlusconi to stay in power for twenty years. If we had an exchange rate, there would be a run on the lira the moment Berlusconi was elected Prime Minister.”
Italy, Zingales said, was unable to take full advantage of the euro, partly due to its own internal politics and partly due to the structure of the Eurozone itself. “Per capita income today is as low as it was twenty years ago, and there has been no productivity growth for twenty years. The Great Depression was light compared to what we have today. We are much worse than the Great Depression, and this is also true for Greece and many other countries. Saying this is not a disaster is not really compassionate, in my view.”
Stiglitz also called the euro a disaster. “In terms of economics it has been a disaster. All the peripheral countries, half the Eurozone, are in a depression that is greater than the Great Depression. And what is so clear is that these countries are not going to recover quickly.”
Despite their differences, all four panelists agreed that the euro cannot survive without radical changes, such as a banking union and unemployment insurance. However, Zingales and Stiglitz were less than optimistic about the probability of these changes being implemented, in part due to the influence of special interests on European politics, which has led to ineffective or harmful structural reforms in the past. “The euro has exacerbated [Italy’s] problems,” said Zingales. “For one, all the reforms that Europe has pushed have avoided most of Italy’s real problems, like corruption and lack of meritocracy. There was a big emphasis on labor flexibility, but once this reform was done, we have not seen much impact.“
When discussing the failure of the EU to fix its structural imbalances, Stiglitz pointed to the influence of special interests. “The problems in the structure of the euro were compounded by the policies. Austerity is one example. The structural reforms were not designed to promote economic growth. One of the structural reforms in Greece was a demand that Greece change the definition of fresh milk. The fire’s burning, Greece is going into a deep depression, and the European leaders are discussing should fresh milk be defined as four days old or ten days old. What is this about ten days or four days? It’s about special interests. Politics in Europe is about individual countries’ interests and special interests. Milk from northern Europe wants to be able to ship down to Greece, worsening Greece’s balance of payments, worsening the economy of Greece, and that’s called structural reforms. And that’s the kind of demand that was imposed.”
Zingales, too, struck a note of pessimism regarding the future viability of the current European framework. “We are seventeen years into a marriage that we started out of love, and after seventeen years you start to say, ‘There should be something else other than love.’ This idea we’re going to do things in the long term, in the long term we might not be there. Either we have a push [toward common fiscal policy] now, or we fall apart. I was hoping that the Brexit shock would be a terrible shock, and that afterwards people would realize this is not working. But nothing has changed.”
Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.