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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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The rise of the green mayor – Sadiq Khan and the politics of clean energy

At an event at Tate Modern, Sadiq Khan pledged to clean up London's act.

On Thursday night, deep in the bowls of Tate Modern’s turbine hall, London Mayor Sadiq Khan renewed his promise to make the capital a world leader in clean energy and air. Yet his focus was as much on people as power plants – in particular, the need for local authorities to lead where central governments will not.

Khan was there to introduce the screening of a new documentary, From the Ashes, about the demise of the American coal industry. As he noted, Britain continues to battle against the legacy of fossil fuels: “In London today we burn very little coal but we are facing new air pollution challenges brought about for different reasons." 

At a time when the world's leaders are struggling to keep international agreements on climate change afloat, what can mayors do? Khan has pledged to buy only hybrid and zero-emissions buses from next year, and is working towards London becoming a zero carbon city.

Khan has, of course, also gained heroic status for being a bête noire of climate-change-denier-in-chief Donald Trump. On the US president's withdrawal from the Paris Agreement, Khan quipped: “If only he had withdrawn from Twitter.” He had more favourable things to say about the former mayor of New York and climate change activist Michael Bloomberg, who Khan said hailed from “the second greatest city in the world.”

Yet behind his humour was a serious point. Local authorities are having to pick up where both countries' central governments are leaving a void – in improving our air and supporting renewable technology and jobs. Most concerning of all, perhaps, is the way that interest groups representing business are slashing away at the regulations which protect public health, and claiming it as a virtue.

In the UK, documents leaked to Greenpeace’s energy desk show that a government-backed initiative considered proposals for reducing EU rules on fire-safety on the very day of the Grenfell Tower fire. The director of this Red Tape Initiative, Nick Tyrone, told the Guardian that these proposals were rejected. Yet government attempts to water down other EU regulations, such as the energy efficiency directive, still stand.

In America, this blame-game is even more highly charged. Republicans have sworn to replace what they describe as Obama’s “war on coal” with a war on regulation. “I am taking historic steps to lift the restrictions on American energy, to reverse government intrusion, and to cancel job-killing regulations,” Trump announced in March. While he has vowed “to promote clean air and clear water,” he has almost simultaneously signed an order to unravel the Clean Water Rule.

This rhetoric is hurting the very people it claims to protect: miners. From the Ashes shows the many ways that the industry harms wider public health, from water contamination, to air pollution. It also makes a strong case that the American coal industry is in terminal decline, regardless of possibile interventions from government or carbon capture.

Charities like Bloomberg can only do so much to pick up the pieces. The foundation, which helped fund the film, now not only helps support job training programs in coal communities after the Trump administration pulled their funding, but in recent weeks it also promised $15m to UN efforts to tackle climate change – again to help cover Trump's withdrawal from Paris Agreement. “I'm a bit worried about how many cards we're going to have to keep adding to the end of the film”, joked Antha Williams, a Bloomberg representative at the screening, with gallows humour.

Hope also lies with local governments and mayors. The publication of the mayor’s own environment strategy is coming “soon”. Speaking in panel discussion after the film, his deputy mayor for environment and energy, Shirley Rodrigues, described the move to a cleaner future as "an inevitable transition".

Confronting the troubled legacies of our fossil fuel past will not be easy. "We have our own experiences here of our coal mining communities being devastated by the closure of their mines," said Khan. But clean air begins with clean politics; maintaining old ways at the price of health is not one any government must pay. 

'From The Ashes' will premiere on National Geograhpic in the United Kingdom at 9pm on Tuesday, June 27th.

India Bourke is an environment writer and editorial assistant at the New Statesman.

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