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A knot in the purse strings: where the European monetary union went wrong

Joseph Stiglitz's new book The Euro: and Its Threat to the Future of Europe shows up faults in the design, and implementation, of the European project.

A long time ago, when I worked at the Treasury, I got to look at a copy of the most impressive economist’s CV I have ever seen. It was the size of a monograph, full of articles in the best journals. It was the CV of Joseph Stiglitz, who was even then an extraordinary economist. I recalled this while reading his new book on the euro, because I cannot imagine many members of his profession moving with such effortless authority from discussing the microeconomic flaws of the “structural reforms” in Greece demanded by “the Troika” – the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund – to the macroeconomic incompetence of the ECB and the political economy that lay behind both. What’s more, it is all written in a very accessible style.

The book begins by outlining the initial hopes for the euro and its floundering since the crisis that began in 2009. Even before the financial crisis, growth was “unbalanced”, with too much lending to the private sectors of periphery countries and wage growth that was (deliberately) too slow in Germany. Nothing was done about either because of a dominant market-fundamentalist ideology. Stiglitz recalls suggesting to senior people in Spain’s central bank that action should be taken to shrink the housing bubble, and the perplexed response was: how can we be smarter than the market?

As a result of this ideology, the only government that had unsustainably overspent, Greece, became the exemplar for politicians and the EC. Yet even here policy went in the wrong direction because the main goal was to protect the financial sectors of the leading economies. Rather than allow Greece to default in 2010, we had a policy that bailed out the banks that had lent to the Greek government. This policy could only work on paper in combination with large-scale austerity and wildly optimistic forecasts for the Greek economy which presumed that austerity would have little macroeconomic impact. As Stiglitz shows, the loss by Greece of a quarter of its GDP was quite predictable, but in an effort to save politicians from the embarrassment of explicitly bailing out their own banks, the Troika chose to believe in the confidence fairy.

Compounding these macroeconomic errors, the Troika embarked on incompetent meddling in the Greek economy. The extent of this was absurd. In the past, bread had been sold by specified weight (0.5 kilograms, a kilogram, and so on), but the Troika insisted that this regulation be removed, as it “restricted competition”. Yet, Stiglitz notes, there is a long-standing literature about how such standards can enhance competition. Other changes made by the Troika had significantly harmful effects, such as making it more difficult to collect taxes. Sometimes the interference happened to benefit firms outside Greece. The excuse that the Troika now makes for the Greek disaster – that its reforms were not fully implemented – reverses the truth. Greece is in a dire position because it did what it was told.

Greece suffered most, but other countries that received support were often treated in a similar way. The behaviour of the ECB is particularly questionable. It made help for Spanish banks conditional (in secret letters) on the Spanish government enacting labour-market reforms. And it forced the Irish to bail out bank shareholders. Stiglitz is scathing about the lack of democratic oversight at the ECB, which responded to the eurozone crisis by raising interest rates. Although he is right that in the absence of such oversight central banks will generally act in the interests of finance, he is a little too lenient to his own profession, which praised central bank independence.

Where I was slightly disappointed was in Stiglitz’s prescriptions for the years to come. He suggests, as many economists do, that the eurozone can either go backwards, abandoning the euro, or forward with greater economic and political integration. He offers extensive advice on both options, including some quite imaginative schemes. Earlier in the book, however, he writes about how attempts at further integration have failed at the ballot box. He might also have noted that the euro remains popular, even in Greece. Grand schemes for either dissolving the EU or extending it are not feasible solutions to the current problems.

If that seems fatalistic, the author’s argument suggests that it need not be. Throughout the book, he notes how policymakers made bad choices within the existing structure. The fiscal rules imposed were the wrong rules. Active financial regulation was not used. Greece was not allowed to default in 2010. Rather than providing a long list of desirable reforms, it would have been much more helpful if Stiglitz had set out the minimal set of changes that would have been required to turn those bad decisions into good decisions. That would involve some of the changes that he suggests, such as better fiscal rules, but not others that require much deeper integration, such as mutualisation of debt.

But perhaps this is asking for perfection. The book provides an authoritative, comprehensive and, in my view, correct account of the mistakes that were made in the design and implementation of the European monetary union – one which, alas, remains very different from the beliefs of most European politicians and civil servants.

Simon Wren-Lewis is a professor of economics at Oxford University

The Euro: and Its Threat to the Future of Europe by Joseph Stiglitz is published by Allen Lane (496pp, £20)

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 13 October 2016 issue of the New Statesman, England’s revenge

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Our union backed Brexit, but that doesn't mean scrapping freedom of movement

We can only improve the lives of our members, like those planning stike action at McDonalds, through solidarity.

The campaign to defend and extend free movement – highlighted by the launch of the Labour Campaign for Free Movement this month – is being seen in some circles as a back door strategy to re-run the EU referendum. If that was truly the case, then I don't think Unions like mine (the BFAWU) would be involved, especially as we campaigned to leave the EU ourselves.

In stark contrast to the rhetoric used by many sections of the Leave campaign, our argument wasn’t driven by fear and paranoia about migrant workers. A good number of the BFAWU’s membership is made up of workers not just from the EU, but from all corners of the world. They make a positive contribution to the industry that we represent. These people make a far larger and important contribution to our society and our communities than the wealthy Brexiteers, who sought to do nothing other than de-humanise them, cheered along by a rabid, right-wing press. 

Those who are calling for end to freedom of movement fail to realise that it’s people, rather than land and borders that makes the world we live in. Division works only in the interest of those that want to hold power, control, influence and wealth. Unfortunately, despite a rich history in terms of where division leads us, a good chunk of the UK population still falls for it. We believe that those who live and work here or in other countries should have their skills recognised and enjoy the same rights as those born in that country, including the democratic right to vote. 

Workers born outside of the UK contribute more than £328 million to the UK economy every day. Our NHS depends on their labour in order to keep it running; the leisure and hospitality industries depend on them in order to function; the food industry (including farming to a degree) is often propped up by their work.

The real architects of our misery and hardship reside in Westminster. It is they who introduced legislation designed to allow bosses to act with impunity and pay poverty wages. The only way we can really improve our lives is not as some would have you believe, by blaming other poor workers from other countries, it is through standing together in solidarity. By organising and combining that we become stronger as our fabulous members are showing through their decision to ballot for strike action in McDonalds.

Our members in McDonalds are both born in the UK and outside the UK, and where the bosses have separated groups of workers by pitting certain nationalities against each other, the workers organised have stood together and fought to win change for all, even organising themed social events to welcome each other in the face of the bosses ‘attempts to create divisions in the workplace.

Our union has held the long term view that we should have a planned economy with an ability to own and control the means of production. Our members saw the EU as a gravy train, working in the interests of wealthy elites and industrial scale tax avoidance. They felt that leaving the EU would give the UK the best opportunity to renationalise our key industries and begin a programme of manufacturing on a scale that would allow us to be self-sufficient and independent while enjoying solid trading relationships with other countries. Obviously, a key component in terms of facilitating this is continued freedom of movement.

Many of our members come from communities that voted to leave the EU. They are a reflection of real life that the movers and shakers in both the Leave and Remain campaigns took for granted. We weren’t surprised by the outcome of the EU referendum; after decades of politicians heaping blame on the EU for everything from the shape of fruit to personal hardship, what else could we possibly expect? However, we cannot allow migrant labour to remain as a political football to give succour to the prejudices of the uninformed. Given the same rights and freedoms as UK citizens, foreign workers have the ability to ensure that the UK actually makes a success of Brexit, one that benefits the many, rather than the few.

Ian Hodon is President of the Bakers and Allied Food Workers Union and founding signatory of the Labour Campaign for Free Movement.