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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

Arsène Wenger. Credit: Getty
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My biggest regret of the Wenger era? How we, the fans, treated him at the end

Arsenal’s greatest coach deserved better treatment from the Club’s supporters. 

I have no coherent memories of Arsenal before Arsène Wenger, who will leave the Club at the end of the season. I am aware of the Club having a new manager, but my continuous memories of my team are of Wenger at the helm.

They were good years to remember: three league titles, seven FA Cups, the most of any single manager in English football. He leaves the Club as the most successful manager in its history.

I think one of the reasons why in recent years he has taken a pasting from Arsenal fans is that the world before him now seems unimaginable, and not just for those of us who can't really remember it. As he himself once said, it is hard to go back to sausages when you are used to caviar, and while the last few years cannot be seen as below par as far as the great sweep of Arsenal’s history goes, they were below par by the standards he himself had set. Not quite sausages, but not caviar either.

There was the period of financial restraint from 2005 onwards, in which the struggle to repay the cost of a new stadium meant missing out on top player. A team that combined promising young talent with the simply bang-average went nine years without a trophy. Those years had plenty of excitement: a 2-1 victory over Manchester United with late, late goals from Robin van Persie and Thierry Henry, a delicious 5-2 thumping of Tottenham Hotspur, and races for the Champions League that went to the last day. It was a time that seemed to hold the promise a second great age of Wenger once the debt was cleared. But instead of a return to the league triumphs of the past, Wenger’s second spree of trophy-winning was confined to the FA Cup. The club went from always being challenging for the league, to always finishing in the Champions League places, to struggling to finish in the top six. Again, nothing to be sniffed at, but short of his earlier triumphs.

If, as feels likely, Arsenal’s dire away form means the hunt for a Uefa Cup victory ends at Atletico Madrid, many will feel that Wenger missed a trick in not stepping down after his FA Cup triumph over Chelsea last year, in one of the most thrilling FA Cup Finals in years. (I particularly enjoyed this one as I watched it with my best man, a Chelsea fan.) 

No one could claim that this season was a good one, but the saddest thing for me was not the turgid performances away from home nor the limp exit from the FA Cup, nor even finishing below Tottenham again. It was hearing Arsenal fans, in the world-class stadium that Wenger built for us, booing and criticising him.

And I think, that, when we look back on Wenger’s transformation both of Arsenal and of English football in general, more than whether he should have called it a day a little earlier, we will wonder how Arsenal fans could have forgotten the achievements of a man who did so much for us.

Stephen Bush is special correspondent at the New Statesman and the PSA's Journalist of the Year. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.