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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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How Theresa May laid a trap for herself on the immigration target

When Home Secretary, she insisted on keeping foreign students in the figures – causing a headache for herself today.

When Home Secretary, Theresa May insisted that foreign students should continue to be counted in the overall immigration figures. Some cabinet colleagues, including then Business Secretary Vince Cable and Chancellor George Osborne wanted to reverse this. It was economically illiterate. Current ministers, like the Foreign Secretary Boris Johnson, Chancellor Philip Hammond and Home Secretary Amber Rudd, also want foreign students exempted from the total.

David Cameron’s government aimed to cut immigration figures – including overseas students in that aim meant trying to limit one of the UK’s crucial financial resources. They are worth £25bn to the UK economy, and their fees make up 14 per cent of total university income. And the impact is not just financial – welcoming foreign students is diplomatically and culturally key to Britain’s reputation and its relationship with the rest of the world too. Even more important now Brexit is on its way.

But they stayed in the figures – a situation that, along with counterproductive visa restrictions also introduced by May’s old department, put a lot of foreign students off studying here. For example, there has been a 44 per cent decrease in the number of Indian students coming to Britain to study in the last five years.

Now May’s stubbornness on the migration figures appears to have caught up with her. The Times has revealed that the Prime Minister is ready to “soften her longstanding opposition to taking foreign students out of immigration totals”. It reports that she will offer to change the way the numbers are calculated.

Why the u-turn? No 10 says the concession is to ensure the Higher and Research Bill, key university legislation, can pass due to a Lords amendment urging the government not to count students as “long-term migrants” for “public policy purposes”.

But it will also be a factor in May’s manifesto pledge (and continuation of Cameron’s promise) to cut immigration to the “tens of thousands”. Until today, ministers had been unclear about whether this would be in the manifesto.

Now her u-turn on student figures is being seized upon by opposition parties as “massaging” the migration figures to meet her target. An accusation for which May only has herself, and her steadfast politicising of immigration, to blame.

Anoosh Chakelian is senior writer at the New Statesman.

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