Wednesday, September 14, 2016

Joseph Stiglitz Misunderstands European Realities?

It has become chic to predict the demise of the Euro. Particularly progressive economists are competing with one another in their predictions when and how the Euro will fall apart. The latest in the fray was Joseph Stiglitz, an economist whose judgment is demonstrated by his Nobel Prize and by his praise of Hugo Chavez' economic policies in Venezuela.

From that standpoint, it was good to be presented, for once, with a differing view. That differing view came from Guillaume Duval, a French editor of an economic magazine and author of several books. Below is the introductory paragraph of Duval's article on the website Social Europe.

"Joseph Stiglitz, American economist and winner of the Nobel Prize in Economics, has come out with a new book, "The Euro: How a Common Currency Threatens the Future of Europe". In recent weeks Stiglitz has appeared in several features in the press, advocating «a smooth exit» from the euro. Still, he expects «the end of the single currency does not mean the end of the European project.» That position, however, betrays a deep misapprehension of the realities of Europe."


  1. Even if the eurozone endures the prolonged stagnation sure to follow in the economic affairs of the EU must be unbearable to many member countries. It is quite obvious by now that something has gone horribly wrong.

  2. I read the article. I found it inadequate, and I'm putting this mildly.

    First of all, for the most part the writer agrees with what Stiglitz says. His main retort is that it took a long and painful time for the USA to become the federal union that it is today. He even agrees with Stiglitz that the main problem with the euro is the unnecessary fiscal austerity (i.e. pursue of public surpluses during a private recession/ depression).

    Secondly, the writer doesn't offer any meaningful support of the monetary union. He merely says that a retreat into national currencies will bring Europe back to the horrors of it's past (!), and also that it will force Europeans to pursue beggar-thy-neighbor policies (i.e. impose austerity in order to "steal" their neighbors' share of the export market). He even claims that Europeans prefer the euro over their national currencies, a blatant lie if I ever heard one.

    I've had enough. What a load of bull.

    The author turns reality upside down. In fact, it is the monetary union which brings Europe back to the horrors of it's past, with the rise of political extremism allover the continent thanks to the absurd pursue of fiscal austerity. Furthermore, it is under the euro that European countries adopt beggar-thy-neighbor policies, via internal devaluations which stymie consumption, devalue labor and bring forth deflation. This also applies to the Eurozone as a whole, and clearly doesn't bode well for the rest of the planet.

    Why would European countries continue this inept policy once they regain control of their central banks? I would argue that it's far more likely that they would borrow from their central banks (as happens allover the world, but not in the Eurozone) in order to stimulate public consumption, boost their depressed internal markets and fight unemployment. And if the markets decide that the value of their currencies should fall, then so be it. After all we are in favor of markets, aren't we, wink, wink.

  3. Having thought about it frequently over the last year and read both articles I am easy to bait. The Euro zone and the EU will change over the next decade and I find it good. The changes cannot yet be pinpointed but the trend will be less and better EU (Donald Tusk), less members in a different Euro zone (two speed?). The reasons? Too many nations with too different values.

    The defense for admitting countries with different values was always that it was easier to change these values within the community. Did Italy become less corrupt in the last 35 years? Did German and Greek values converge in the same 35 years? Did Greece become more democratic in the same 35 years? I don't think Macedonia and Ukraine will be less corrupt within the community. They will join a society where the rewards for corruption and crime are bigger and the punishment less.
    The admittance criteria's were not values, as they are impossible to prove, only track records do that. Economics was one criteria, but as a photo taken at a moment, not as a video showing a track record. The results was some countries dragging themselves in over the threshold, just to fall back into old habits. Others like Greece getting over but only by sacrificing my most precious value, honesty, truth, a habit they continued to cultivate for the next 10 years and still defend.
    A democratic system with all the independent institutions was another criterion. Applicants duly introduced that, at least on paper. Once admitted, several of them proceeded to dismantle what little had been introduced. Some of them like Poland and Hungary overtly by law, Greece continued to do it in their time honored covert manner. You introduce as many contradictory laws as possible, and infiltrate the institutions with politicians who will decide what law will be used from case to case, justice done.
    For want of a better word I will call this sort of democracy government dictatorship. It was the norm in the former Soviet Republics but also prevailed in Nazi Germany. In Greece it is not a Syriza invention, it has existed at least since the civil war under all sorts of parties.

    As for the EU and its numerous institutions, it reminds me more and more of Greece. Laws are introduced and when not upheld additional ones suggested and introduced. Everyone can ignore, bend and break them, the excuse is always that "these are unusual times, the purpose of laws are to regulate things in unusual times. What good is a law that stipulates 20 years of jail for murder, if it only applies when no homicide happens? As a defense for their existence EU claim to have preserved "peace", yes, in all the fair weather years where no homicides were committed. They claim that they have made us all wealthier, maybe, or did they just enable a debt driven consumption? they warn about changing EU in "these unusual times". Have you ever heard about a big company reorganizing in a fair weather boom? They don't do it when they can afford to, but when they cannot afford not to. The fact that some countries behaved in a prudent Keynesian way in the boom years was not due to EU, but in spite of it. Germany did it, but too late and therefore had 10 painful years. My own country do it as a regular exercise, it is ironically called the potato year(s), reflecting the supposed eating habits in those years. Rumors have it that it is not because the politicians are smart, a CPA has build into the accounting programs a function that triggers when two cells have a deviation of more than x %. This releases a loud alarm in the ministries and they all wake up and say "oh no, next year is going to be one of those".

  4. Ops, I overstayed my invitation, in continuation.

    I think yesterdays doublespeak by Mr. Juncker was characteristic. After having scolded the member states for populism, he gives everything to everybody. Yesterdays more EU becomes with more national state. The rule based society becomes "with flexibility". Structural reforms is with hundred billion extra "investment funds". Insignificant, but for its entertainment value, was his promise of free WiFi for all. It certainly ring a bell here in Greece, Samaras did the same, I peed my pants. He seriously believe that European citizens don't realize that he distribute other peoples money, maybe with a priority they don't share. His groundless optimism stating that Brexit is no threat to EU is also reminiscent of Greece's denial of reality. Nothing is wrong with the system, no need to change.

    PS. Sorry for my long letter, I did not have time to write a short. If it is rambling it's because the thoughts have not yet coalesced. If it is focused on Greece and Germany it is because I know more about them that the other involved nations.

    1. Bottom line: Greece and Germany could hardly share the same roof. Time for a spectacular divorce.

    2. Not quite. If Germany wants to do the producing and is happy to supply funding so that Greece can do the consuming, they will make a happy family!

    3. We both know that Greece's economy needs to disengage from consumption; in fact that's the purpose of the current program. So what you are saying could no longer be repeated because we both know what happened in the past.

  5. Each country in Europe had to cope with the European crisis on their own. But within the eurozone, they lacked the ability to reprice money. So in Europe, a chaotic crisis is taking place.
    The European example of a can’t-fail asset class is Germany. Greece can fail, Italy can fail, Hungary can fail, but not Germany. But Germany is in a crucial way the most vulnerable country in all of Europe. It derives about 47 percent of its GDP from exports. For every 10 percent of exports it loses, it loses nearly 5 percent of GDP – an oversimplified but true way of looking at it. The world still has not recovered from 2008. The United States has shown real, if sluggish, recovery since that time. Russia, the Middle East and China are all in serious trouble and struggling to stay stable. They’re not worried about buying German goods.
    Here we have the largest economy in Europe, the fourth largest in the world, utterly dependent on other countries’ ability to buy German goods. If they can’t or won’t, the result is unemployment in Germany, and with unemployment, increasing hostility toward both the EU – which some see as abusing German generosity – and mainstream German parties. We have seen the Christian Democratic Union fall to third place in Chancellor Angela Merkel’s own district as German exports contracted significantly.
    It is easy to dismiss this as a farfetched scenario, but I see the opposite. The world has still not recovered from 2008, and there is global stagnation or worse. Germany depends on exporting to these countries for its well-being and stability.They can’t buy more, and they are likely buying less. That means that Germany’s economy will contract. And if it contracts, then there will be social and political consequences in the European heartland. It seems to me, the idea that Germany can sustain its economy at its present level is far more farfetched than the idea of significant decline. Germany is hypersensitive to fluctuations in exports, and decline is likely given the global environment.
    The 2008 crisis was different than prior crises in that it has been so long-lived and has had so many iterations. What symbolically began with the Lehman Brothers collapse has not finished playing out yet, and the country that will star in the next act logically is Germany.

    1. You make a point which I have made on several occasions in this blog. Back in 1973, I first heard a German entrepreneur saying "our greatest problem is that we produce more than we can consume". At the time, I didn't quite understand what he meant. Today, that assessment is crystal clear. But it's not only Germany's exposure to German exports. Germany sources a lot of its final production in foreign countries. Particularly in the automobile industry, the supply chains go throughout the world. "Made in Germany" has become a misnomer, actually. So a decline in German exports will have repercussions elsewhere as well.

      There is one other aspect of vulnerability which you didn't mention: by mathematical definition, a current account surplus must be offset by a deficit in the capital account of the Balance of Payments. Put differently: a current account surpluser MUST be an exporter of capital. I link below an article where I tried to show the implications of that for Germany.