The list of big-name economists who say the euro can be saved only by cutting off the euro zone’s weak links is becoming a long one. Somewhat surprisingly, Nobel laureate Joseph Stiglitz, Columbia University professor and enfant terrible of the economics establishment, is not on that list -- at least not yet.
Prof. Stiglitz, attending a gathering of Nobel Prize recipients and young economists, mounted something of a defense of the euro zone. “There is a great deal of cost in breaking it up,” Prof. Stiglitz said. “It’s hard to unscramble a scrambled egg.”
There is a big “told you so” element to the predictions that the euro zone’s days are numbered. When the euro was created without a formal fiscal union to support it, plenty of economists predicted a central bank alone would fail to ease the inevitable strains in a bloc featuring economies as different as Germany and Greece.
The thing about the debate over the future of the euro is that the critics and defenders are agreed on this fact. Prof. Stiglitz would rather avoid the economic and social cost of a breakup. He cited Argentina, where the economy deteriorated after the country defaulted on its debt and dropped its peg to the dollar.
Argentina now ranks among the worlds’ faster growing economies, thanks to the global boom in commodities. There is a bit of luck in that, and the pain the country suffered after the collapse of the peso shouldn’t be forgotten. Just ask yourself how strong Argentina would be now if its debt crisis had been better managed in the 1990’s?
Prof. Stiglitz’s point was to remind that there will be no simple, painless remedies to the European situation. He criticized the tendency to compare the case of Greece to that of Latvia, which required an IMF bailout after its gross domestic product contracted almost 20 per cent in 2009. Latvia’s government instituted dramatic austerity measures to get its finances in order. The former Soviet bloc country could do so because its citizens still have a better quality of life than they did in the recent past, Prof. Stiglitz said. There are limits to the austerity that the Greek population will accept because it remembers better days. That doesn’t mean the Greek government shouldn’t get its finances under control. But it does mean that pushing too hard risks a revolt that would doom the efforts to contain the crisis.
Prof. Stiglitz’s message is that fixing Europe’s mess is going to cost money whether the euro zone is shrunk or whether more money is spent to bring life back to economies of the weaker members of the group. Since that’s the case, Prof. Stiglitz argues that Europe’s leaders might as well strive to keep their project intact. He recommended pumping more money into the European Financial Stability Fund, preferably through direct transfers from governments, but by allowing the European Central Bank to loan to the fund if necessary. Prof. Stiglitz also backed the issuance of bonds backed by the entire euro zone, which Germany and France oppose in the immediate term.
Of course, time is off the essence. Prof. Stiglitz expressed frustration with the how long it’s taking politicians in Europe to devise a coherent solution. The only people benefiting from the delay are speculators -- the very people who European politicians tend to blame for their problems. “Europe is providing the framework for the volatility off which they live,” Prof. Stiglitz said.