Stiglitz: Euro area should split up if it can’t reform

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Bloomberg — Nobel laureate Joseph Stiglitz said rather than continuing on its present “dismal” path the euro area should split up if it can’t undertake reforms Stiglitz, an economist and professor at Columbia University, said in a Bloomberg Television interview last week.

Until European Central Bank President Mario Draghi’s 2012 pledge to do “whatever it takes” to save the euro, anxiety among investors about potentially unsustainable government indebtedness in a number of euro-area countries — notably at the periphery of the bloc — fuelled speculation the 19-country currency union might break apart.

Those concerns resurfaced last year when Greece was thrown into turmoil following the election of a new government.

More Integration

Draghi and the European Union’s top bureaucrats have said they want to overcome the contradictions of 19 sovereign countries using one currency and rejig the bloc to rule out recurring debt crises. The ECB president and his co-authors last year laid out a potential map for stronger European integration in the so-called “Five-Presidents” report.

The document cited the possibility of a shared treasury for the region within 10 years. That meshes with the opening lines of the 1957 Treaty of Rome, which envisaged an “an ever closer union” which would “eliminate the barriers which divide Europe.”

Presently, Draghi faces the risk of a renewed economic slowdown in the aftermath of the U.K.’s decision to leave the European Union, as well as fresh downward pressure on headline inflation from falling oil prices. Inflation in the euro area rose to a mere 0.2 percent in July. More stimulus, in the shape of extended asset purchases, could be in the cards for the Sept. 8 policy meeting.

“Of course a divorce is not going to be easy — it could be done in a way that is better than the current system,” Stiglitz said. “It would still be better if they put in place institutions that would make it work. The question is will they do that?”

In his new book “The Euro: How a Common Currency Threatens the Future of Europe”, Stiglitz argues  that persistent trade surpluses of Germany and the vast deficits of boom-time Spain, Portugal and Greece are two sides of the same coin.

Stiglitz argues that on its current course, the euro is certain to fail — and indeed, that it was fatally flawed from birth.

Mr Stiglitz pointed out the Euro’s fixed exchange rate and a single interest rate for its members, which means countries must forgo the option to devalue in times of economic weakness.

He suggested the euro’s architects should have created institutions, such as jointly issued bonds, mutual backing of bank deposits and a common fund for unemployment insurance, so the costs of righting each economy are shared.

Current austerity policies mean the burden falls on individual countries, who respond with tax rises and wage cuts.

This is a picture Greece knows only too well.

National income has shrunk by a quarter since 2007 and the unemployment rate is 24 per cent.

Mr Stiglitz believes a Greek exit of the euro on amicable terms is the bets solution to solving the nation’s woes.

Mr Stiglitz favours the remedy, first proposed by John Maynard Keynes, of forcing creditor countries to adjust by taxing their trade surpluses.

The author suggests if every European country had retained its own currency, they would have adapted to the rapid changes imposed by globalisation.

In the book, Mr Stiglitz offers three alternatives, including abandoning the currency or regression to a limited flexibility of exchange rates. 

He suggests Germany could leave the euro on its own or with other Nordic countries to split the currency in two.

On the Euro, he writes: “It was created with the best of intentions by visionary leaders whose visions were clouded by an imperfect understanding of what a monetary union entailed.