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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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Former Irish premier John Bruton on Brexit: "Britain should pay for our border checks"

The former Taoiseach says Brexit has been interpreted as "a profoundly unfriendly act"

At Kapıkule, on the Turkish border with Bulgaria, the queue of lorries awaiting clearance to enter European Union territory can extend as long as 17km. Despite Turkey’s customs union for goods with the bloc, hauliers can spend up to 30 hours clearing a series of demanding administrative hoops. This is the nightmare keeping former Irish premier John Bruton up at night. Only this time, it's the post-Brexit border between Northern Ireland and the Republic, and it's much, much worse.   

Bruton (pictured below), Taoiseach between 1994 and 1997, is an ardent pro-European and was historically so sympathetic to Britain that, while in office, he was pilloried as "John Unionist" by his rivals. But he believes, should she continue her push for a hard Brexit, that Theresa May's promise for a “seamless, frictionless border” is unattainable. 

"A good example of the sort of thing that might arise is what’s happening on the Turkish-Bulgarian border," the former leader of Ireland's centre-right Fine Gael party told me. “The situation would be more severe in Ireland, because the UK proposes to leave the customs union as well."

The outlook for Ireland looks grim – and a world away from the dynamism of the Celtic Tiger days Bruton’s coalition government helped usher in. “There will be all sorts of problems," he said. "Separate permits for truck drivers operating across two jurisdictions, people having to pay for the right to use foreign roads, and a whole range of other issues.” 

Last week, an anti-Brexit protest on the border in Killeen, County Louth, saw mock customs checks bring traffic to a near standstill. But, so far, the discussion around what the future looks like for the 260 border crossings has focused predominantly on its potential effects on Ulster’s fragile peace. Last week Bruton’s successor as Taoiseach, Bertie Ahern, warned “any sort of physical border” would be “bad for the peace process”. 

Bruton does not disagree, and is concerned by what the UK’s withdrawal from the European Convention on Human Rights might mean for the Good Friday Agreement. But he believes the preoccupation with the legacy of violence has distracted British policymakers from the potentially devastating economic impact of Brexit. “I don’t believe that any serious thought was given to the wider impact on the economy of the two islands as a whole," he said. 

The collapse in the pound has already hit Irish exporters, for whom British sales are worth £15bn. Businesses that work across the border could yet face the crippling expense of duplicating their operations after the UK leaves the customs union and single market. This, he says, will “radically disturb” Ireland’s agriculture and food-processing industries – 55 per cent of whose products are sold to the UK. A transitional deal will "anaesthetise" people to the real impact, he says, but when it comes, it will be a more seismic change than many in London are expecting. He even believes it would be “logical” for the UK to cover the Irish government’s costs as it builds new infrastructure and employs new customs officials to deal with the new reality.

Despite his past support for Britain, the government's push for a hard Brexit has clearly tested Bruton's patience. “We’re attempting to unravel more than 40 years of joint work, joint rule-making, to create the largest multinational market in the world," he said. It is not just Bruton who is frustrated. The British decision to "tear that up", he said, "is regarded, particularly by people in Ireland, as a profoundly unfriendly act towards neighbours".

Nor does he think Leave campaigners, among them the former Northern Ireland secretary Theresa Villiers, gave due attention to the issue during the campaign. “The assurances that were given were of the nature of: ‘Well, it’ll be alright on the night!’," he said. "As if the Brexit advocates were in a position to give any assurances on that point.” 

Indeed, some of the more blimpish elements of the British right believe Ireland, wedded to its low corporate tax rates and east-west trade, would sooner follow its neighbour out of the EU than endure the disruption. Recent polling shows they are likely mistaken: some 80 per cent of Irish voters say they would vote to remain in an EU referendum.

Irexit remains a fringe cause and Bruton believes, post-Brexit, Dublin will have no choice but to align itself more closely with the EU27. “The UK is walking away,” he said. “This shift has been imposed upon us by our neighbour. Ireland will have to do the best it can: any EU without Britain is a more difficult EU for Ireland.” 

May, he says, has exacerbated those difficulties. Her appointment of her ally James Brokenshire as secretary of state for Northern Ireland was interpreted as a sign she understood the role’s strategic importance. But Bruton doubts Ireland has figured much in her biggest decisions on Brexit: “I don’t think serious thought was given to this before her conference speech, which insisted on immigration controls and on no jurisdiction for the European Court of Justice. Those two decisions essentially removed the possibility for Ireland and Britain to work together as part of the EEA or customs union – and were not even necessitated by the referendum decision.”

There are several avenues for Britain if it wants to avert the “voluntary injury” it looks set to inflict to Ireland’s economy and its own. One, which Bruton concedes is unlikely, is staying in the single market. He dismisses as “fanciful” the suggestions that Northern Ireland alone could negotiate European Economic Area membership, while a poll on Irish reunification is "only marginally" more likely. 

The other is a variation on the Remoaners’ favourite - a second referendum should Britain look set to crash out on World Trade Organisation terms without a satisfactory deal. “I don’t think a second referendum is going to be accepted by anybody at this stage. It is going to take a number of years,” he said. “I would like to see the negotiation proceed and for the European Union to keep the option of UK membership on 2015 terms on the table. It would be the best available alternative to an agreed outcome.” 

As things stand, however, Bruton is unambiguous. Brexit means the Northern Irish border will change for the worse. “That’s just inherent in the decision the UK electorate was invited to take, and took – or rather, the UK government took in interpreting the referendum.”