It was started in the name of forging a greater sense of union among the disparate nations of Europe. It was supposed to enhance commercial ties, erode borders and foster a spirit of collective interest, furthering the evolution of former wartime combatants into fellow nations of a united Europe.
But the euro, in the 17 years since the common currency came into existence, has instead reinvigorated conflicts, yielding new crises, fresh grievances and a spirit of distrust. So argues the Nobel laureate economist Joseph E. Stiglitz in a timely new book, “The Euro: How a Common Currency Threatens the Future of Europe.”
Italy’s banks teeter on the brink of crisis while the euro has become the subject of ceaseless bickering over economic policy. By Mr. Stiglitz’s reckoning, the common currency has made economic inequality worse while dividing Europe into two adversarial camps — debtor and creditor.
In his first interview about the book, Mr. Stiglitz described the euro as a tragic mistake, a currency begun without the necessary political integration or clear thinking about its fundamental flaws. The euro was compromised from inception by an ill-conceived structure, and its troubles have been amplified by wrongheaded economic policies imposed by the most powerful countries as conditions for bailing out those worst ensnared by crisis.
What follows is an edited and condensed version of our conversation.
It is difficult to overstate the economic trauma Europe has suffered in recent years — veritable depressions in Greece and Spain, alarming levels of unemployment across much of the continent. You place much of the blame on the euro. What happened?
The euro was an attempt to advance the economic integration of Europe by having the countries of the eurozone share a common currency. They looked across the Atlantic and they said: “The United States, big economy, very successful, single currency. We should imitate.”
But they didn’t have the political integration. They didn’t have the conditions that would make a single currency work. The creation of the euro is the single most important explanation for the extraordinarily poor performance of the eurozone economies since the crisis of 2008.
Were there warnings when the euro was begun that maybe it wasn’t such a wonderful idea?
Yes, but it was mostly Americans, and that may have colored the reaction to it: “Oh, you don’t understand the value of the European project.” But the criticism was not that we don’t agree with the European project, but that you were undertaking something that will undermine the European project, because it’s not going to work. Their answer was, “We will create institutions as we go along.” A lot of people pushing for this were not economists.
You blame the euro for widening economic inequality. How has this played out?
The idea was that for the euro to work, the countries had to converge, and they formulated these ideas called the convergence criteria. They put enormous pressure on the countries to keep their deficits and debts relative to G.D.P. down. That was viewed as the necessary and almost sufficient conditions for making the euro work.
Several of the countries that went into crisis, Spain and Ireland among them, actually had a surplus before the crisis, and a very low debt-to-G.D.P. ratio. But they still had a crisis. That tells us an important lesson: What the people who were behind the creation of the euro thought was going to be a critical condition was not.
The disappointing thing was that after the crisis, they didn’t learn a lesson. What they did was double down on that same recipe — austerity. The structure of the euro was at fault, and the policies they enacted amplified the structural deficiencies. The result was that the countries diverged.
In your telling, Germany has imposed austerity across Europe out of faith in a discredited economic idea, the notion that if policy makers concentrate solely on preventing budget deficits and inflation, the markets can be counted on to deliver prosperity. A lot of your book is devoted to demolishing this idea. Does the German elite still really believe in this philosophy, or is something else at play?
I’ve visited Germany often, and I’m shocked about how strong the belief is in this view that has been totally discredited elsewhere.
But the policies are mixed together with interests. When the Greek crisis broke out in 2010, what was really at risk were German and to some extent French banks. And there was an enormous bailout that was called a bailout of Greece but was really a bailout of German and French banks. Most of the money went to Greece and then right away went back to Germany and France.
When you look at other aspects of the program, you see that it is also helping special interests within Europe.
How so?
Let me give you an example of one of the really absurd things they did. They demanded that Greece scrap a rule that fresh milk is no more than four days old. If milk was older than four days, it needed to be labeled.
Of all the things that were going on, why would you have a debate about that?
The German and the Dutch dairy industries wanted to ship their factory-farmed milk across Europe and sell it to Greek consumers. That would devastate the small Greek producers. Here was something that could only be seen as benefiting special interests in the eurozone and actually weakening the Greek economy.
You argue that some European leaders secretly welcomed mass unemployment as a means of adjusting to the crisis because this was the only way they could see to spur investment — lowering wages. The strictures of the euro took other options off the table: Crisis countries could not let their currency fall or lower interest rates or expand government spending. Was unemployment really embraced as a fix?
They wanted to break the back of workers. Their view was that workers needed to accept a wage cut and we are going to change the bargaining rules to make it more difficult for them to resist. And if we need to add on a little dose of unemployment, well, that’s unfortunate.
Doesn’t that goal predate the crisis?
It’s very clear that the euro was a neo-liberal project in its construction. Employers like low wages. They have broken the back of the unions in many of the countries of Europe. They would view that as a great achievement.
The whole point of the European project has been to get past the hostilities of World War II and build a sustainable community. Yet, in your telling, the euro and the policies delivered to preserve it left much of Europe nursing fresh grievances. How are these grievances coloring politics?
The most important divergence is between creditor, Germany, and debtor, the rest. The criticisms that you hear in Greece of the Germans, they are reliving the horrors of World War II; the criticism in Germany of the Greeks, saying that they are lazy even though the number of hours that they work per week is higher than the Germans’. The flinging of accusations, whether true or not, has been enormous and the divisiveness has been enormous.
We just saw Britain vote to exit the European Union — in part, a reaction to the sense that the European Union is a place of weak economic growth and poor leadership. In Italy, the so-called Five Star political movement is gaining support with calls to abandon the euro — in part, a backlash against German-led austerity. Is there any evidence that these sorts of events are leading to a re-examination of the economic philosophy guiding Europe?
I wish that were happening. Unfortunately, what I’ve seen is almost the reverse. It’s doubling down on a failed experiment. It’s a hard-line approach in which the European leaders in response to Brexit, people like Jean-Claude Juncker, who is the head of the European Commission, have said, “We’re going to be very, very tough on the U.K. because we want to make sure that no other country leaves.”
To me that was shocking. You hope that people want to stay in the E.U. because it’s delivering benefits, because there’s a belief in European solidarity, the belief that it’s bringing prosperity. He’s saying the only way we are going to keep the E.U. together is by the threat of what happens if you think about leaving.
You conclude that the best-case scenario from here is to reform and save the euro. But absent that, you contend that it is better to just scrap it as a failed experiment. What needs to happen to make the euro viable?
A banking union with deposit insurance. Something like a euro bond. An E.C.B. that doesn’t just focus on inflation — you want it to focus on employment. A tax policy that deals with the inequalities. And you have to get rid of limits on government deficits.
What’s your sense of what will actually happen?
It is hard to believe that the muddling-through can continue for another five years. Greece is still in depression, no better than it was a year ago. The likelihood is there that in one country or another there will be enough support for another referendum, and an exit will occur. That will begin the process of a real unraveling of the eurozone.
