The Euro

The Euro
Joseph E. Stiglitz
W. W. Norton & Company NY, London 2016

Should we short the euro? Nobel prize winner Joseph E. Stiglitz does not give us any specific investment advise, but he does a very credible job in this new highly recommended book of explaining why the euro isn’t working, why other single currencies, like the USD seem to be working, and what can be done to save the euro.

The problem with a common interest and exchange rate is simple, according to Mr. Stiglitz. When different countries are in different situations, they ideally want different interest rates to maintain macroeconomic balance and different exchange rates to attain a balance of trade. The founders of the Eurozone may have realized this, but they failed to allow for these differences. Instead, they hoped for convergence. Stiglilitz’s Part II titled “Flawed From The Start” explains how criteria-convergence rules were set up to facilitate this. Governments wishing to join the union had to limit their deficits to less than 3% of GDP, and their debts to less than 60% of GDP. All the countries agreed.

The poor performance of the euro are documented in standard metrics both during and before the world financial crises of 2008. Plus there were no strong countercyclical policies in place to ensure a quick restoration. In addition to physical capital destruction, societal capital has also suffered. Take Greece, where Greek debts caused the Troika to force the tearing up of the Greek social contract where pensions are being cut to below subsistence levels inflicting consequences on Greek society as well as their economy.

If they were not tied to the euro, the Greeks could have devalued their currency, encouraging tourism and other trade. The Greek banks could also have lowered interest rates to encourage production, in contrast to the ECB, which raised rates in 2011.

Why is single currency able to work in the US in spite of marked differences among the states and long standing distinction between Wall St. and Main St.

• some states are agricultural states, some are industrial,
  
• some states are helped by a fall in oil prices, some are hurt,
  
• some states are chronic borrowers, some are lenders,
  
  

Mr. Stiglitz states that there are important adjustment mechanisms in the US that enable a single currency to work, that are are not present in Europe:

• People can move easily in the US and are accustomed to doing so. In Europe, the linguistic, cultural, and licensing differences make moving difficult.
  
• In the US it is not so important if one state loses population. It doesn’t matter if jobs move to people, or people move to jobs according to Mr. Stiglitz.
  
• In the US, people are Americans first, and state residents second.
  
• In the US there are more automatic and discretionary policies available to support states in time of need.
  
  

Mr. Stiglitzs’ outlook for the euro is not pretty. He calls the current strategy “muddling through”. It is not working and the central parties committed to the euro are losing ground with more and more countries leaning to regional independence. Saving the Eurozone is arguably much more important than saving the euro. It is in the best interests of Europe and the world, for any European country not to be alienated from its neighbors. If the euro is to be rescued, there must be major reforms whereby the European countries must share the burden of adjustment, perhaps resulting in a kind of a “flexible” euro. If euro reform does not take place, it might be better to adopt a Plan B where the euro is abolished in order to save the Eurozone.