Sunday, 25 February 2018

Book 5 - 2018 The Euro by Joseph Stiglitz

I read The Euro by Joseph Stiglitz because Gavin Hewitt's Lost Continent had made me so interested in the euro project that I wanted to find out more. As Stiglitz has a Nobel prize, I thought this would be a better book than Hewitt's, but it isn't. Stiglitz writes inelegantly; here are some examples of what I mean:

1. This first is such a badly written sentence that I cannot extract any meaning from it, but perhaps other readers may be able to:

They argued that there were important instances where when governments had contracted government spending, and the result was that the overall economy grew.

2. This one includes the odd usage "intended at", which I don't think is normal:

Some of the reforms seemed intended at increasing the likelihood that creditors would be repaid;

3. This one seems to be missing a preposition:

... necessary if there is to be a transfer of resources from the crisis countries to those that they owe money;

I could go on, but you probably get the picture.

As well, Stiglitz is too personally invested in what has happened in Greece to be persuasive in those sections devoted to that country's travails; one feels he is arguing for his friends rather than for reason.

What does make the book worthwhile though is the fact that, despite being a huge believer in the EU as a concept, Stiglitz regards the organisation and its various institutions as they operate now as undemocratic and far from benign, with Germany his choice as prime villain in the construction of this state of affairs. His view is that the euro has brought nothing but misery to many countries who signed up to it, mainly because they cannot use exchange rate adjustments as a budgetary mechanism when in trouble. One Stiglitz suggestion is that Germany, which he sees as fairly monstrous in its influence over euro policy, be removed from the eurozone. Not something that is going to happen any time soon, but an interesting idea.

I was also pleased to see him argue that the EU's approach to Brexit is as destructive to the EU as it hopes it will be to the UK:

"Anything the EU does to the UK to try to punish it would have an “equal and opposite effect,” hurting itself at least as much in the process."

and that those in the financial sector who argue they have to leave the UK after Brexit are wrong:

Some in the financial sector have argued that without the single market, without free migration between the UK and the EU, with different regulatory systems in the EU and the UK, they would have to leave London and relocate elsewhere in the EU. While there may be some relocation, the case that there would have to be massive shifts is unpersuasive.

He also states that he believes austerity rather than Brexit to be the real threat to European union:

...the unrelenting commitment to austerity by the European Commission will probably do more to encourage exits from the eurozone than anything the UK does.

Unlike many, Stiglitz also highlights Juncker's utter unsuitability for the job of head of the European Commission, given his role as:

"proud architect of Luxembourg's massive corporate tax avoidance schemes."

He also argues well that rather than having regulations that impose uniformity across all the nations of the European Union, it might be better to have disclosure, allowing the consumer to decide which standard of product they want:

...there is a much simpler solution than the hypothetical situation of requiring all ice cream to have a certain cream content: adequate disclosure of the cream content. Provide the relevant information, and let consumers make the choice for themselves. Car windscreens provide a slightly more complex example. It may be slightly cheaper to force all cars to have the same glass standard—but by a small margin

Stiglitz delineates well the utter unfairness of the way that Irish taxpayers have been treated within the eurozone:

The critical issue is this: the Troika was asking ordinary Irish citizens to pick up the tab for regulatory failures of the ECB and other regulatory authorities within the eurozone

The Irish people were unjustly forced to pay the price for others’ mistakes—a double injustice, because it was in effect a transfer of money from the poor to the rich. But Trichet - 

[Stiglitz reserves particular contempt for Jean-Claude Trichet, president of the European Central Bank from 2003-11, going so far as to comment thus at one pointTrichet will be remembered for his colossal misjudgments,] -

knew where he stood: he was an ally of the bankers against ordinary workers, constantly demanding wage cuts that would lower their standards of living.

He never forgets the appalling way in which banks and other corporations were not required to pay for the financial mess they made, getting off scot-free while the unsuspecting general population had to pay off their debts:

In the 2008 crisis, hundreds of billions of dollars were effectively given (or lent at below-market interest rates) by central banks in the advanced countries to commercial banks, in the most massive government-assistance program to the private sector ever conceived. This program of corporate welfare for the suffering banks was greater by an order of magnitude than any welfare program constructed by any government to alleviate the suffering of ordinary individuals

nor the amorality of the actions of the banks themselves, aided and abetted by bad government:

The real moral hazard problem arises for banks, who have an incentive to induce countries to borrow excessively, knowing that current politicians benefit from the increased spending and future politicians pay the price.

He produces some alarming facts, among them this:

In virtually every country in the eurozone there has been an increase in poverty, especially childhood poverty

and also some infuriating ones (well, the whole subject is infuriating really):

.. the Troika demanded that Greek firms, including mom-and-pop operations, pay all of their taxes ahead of time, at the beginning of the year, before they have earned any money and before

Of the total lent to Greece, less than 10 percent ever got to the Greek people. The rest went to pay back creditors, including German and French banks.

and repeatedly highlights what he calls a "democratic deficit" at the heart of the euro project:

In each [eurocrisis] country, the newly elected government was told in effect that they had no choice: accept the conditions or your banking system will be destroyed, your economy will be devastated, and you will have to leave the euro. What does it mean to be a democracy, where the citizens seemingly have no say over the issues about which they care the most, or the way their economy is run? This democratic deficit destroys confidence in democratic processes—and encourages the growth of extremist parties that promise an alternative.

The growing democratic deficit is seen most obviously in the fact that when given the opportunity, the countries of Europe have repeatedly rejected the policies being imposed on them. 

Removing central banking from political accountability, at least in the way that it has been done in the United States and Europe, effectively transfers decision-making to the financial sector, with its interests and ideology.

As soon as some of the countries in the eurozone owed money to other member countries, the currency union had changed: rather than a partnership of equals striving to adopt policies that benefit each other, the ECB and eurozone authorities have become credit collection agencies for the lender nations, with Germany particularly influential.

The power to withhold credit becomes the power to force a country to effectively cede its economic sovereignty, and that is precisely what the Troika, including the ECB, has done, most visibly to Greece and its banks, but to a lesser extent to the other crisis countries.

He indicates how bad policy has helped to create the political climate we have today:

..if Europe continues with changes in labor legislation that weaken workers’ bargaining rights, and if, as expected (and partly as a result), wages do not rise much, that will also increase the resistance to accepting migrants.

He argues strongly against German dominance:

The problem is that Germany has used its economic dominance to impose its own views, and those views are not only rejected by large parts of the eurozone but also by the majority of economists. The problems were collectively created. The only solution is a collective solution. The reforms are based on different economic understandings

and mounts a strong case for the idea that the actual way the eurozone is structured is at the heart of the zone's problems:

There simply isn’t enough flexibility within the eurozone, as currently constituted, for the eurozone to work for the weakest.

Since adjustments in interest rates and exchange rates are among the most important ways that economies adjust to maintain full employment, the formation of the euro took away two of the most important instruments for ensuring that.

Not only did those countries signing up to the eurozone not fully realize the consequences of borrowing in a currency out of one’s control, they also didn’t realize the implications for their national sovereignty: a transfer of power had occurred that could be—and was—abused. When lenders wouldn’t lend to, say, Spain, the only recourse the country had was to turn to their partners in the eurozone, to get money through the European Central Bank or through some other mechanism. It was a fateful development.

While he states that:

The euro created the euro crisis

he also explains that the way in which the ECB was established has constrained it from being a force for good:

While other central banks, most notably the US Federal Reserve, have reformed, focusing much more on unemployment and the stability of the financial market—and even beginning to talk about how their policies affect inequality—the ECB’s mandate is limited by the Maastricht Treaty of 1992 to a single-minded focus on inflation. The deeper problem of the ECB is the absence of democratic accountability.

The result of the ECB’s focus on inflation is that growth and stability are lower than they otherwise would have been —ironic, since the alleged purpose of the economic framework of the eurozone was to promote growth and stability.

The ECB had become Europe’s sledgehammer, the tool by which Greece was forced to accede to what the Troika wanted.

While what he says about Brexit and the best possible outcome from it is probably true, I doubt very much whether it is the outcome the EU will manage to come up with:

The best outcome of the Brexit referendum would be that it acts as a wake-up call to the EU’s leaders: unless they make the EU more democratic, more democratically accountable, and more economically successful, the likelihood of further integration, political or economic, could be nil; the forces for disintegration will only mount.

So all in all the story is fairly grim - and there isn't much glimmer of hope on the horizon, at least not from either Hewitt's or Stiglitz's perspective. I am now thoroughly convinced that, for all its convenience for travellers, the euro is a very bad thing.

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