Nobel price Stiglitz supports Paavo Väyrynen’s euro initiative…

 

Some months ago, Paavo Väyrynen, a Finnish veteran politician of the Centre Party who has held many ministerial portfolios, and is now a member of the European Parliament, announced a citizens’ initiative to organize a referendum on the Finnish membership of the euro area. At this occasion, Väyrynen  reminded us  that when the euro was created, there was in 1994 a proposal from Wolfgang Schäuble (supported by Väyrynen) to have the single currency for only five countries, France, Germany and the Benelux countries, and then the others would have used the euro alongside their national currencies. Schäuble suggested that this group of five countries would intensify their political integration, and would form a “hard core” of the European Union (for more details about the initiative, click here). All this has been treated in Finland as the last fantasy of an old politician, and rejected unanimously.

But now, Nobel price of economy Joseph E. Stiglitz has just published a book, The Euro: And its Threat to the Future of Europe, in which he presents the following amnalysis, which is partly Väyrynen’s: The eurozone was flawed at birth. The structure of the eurozone – the rules, regulations and institutions that govern it – is to blame for the poor performance of the region, including its multiple crises. The diversity of Europe had been its strength. But for a single currency to work over a region with enormous economic and political diversity is not easy. A single currency entails a fixed exchange rate among the countries, and a single interest rate. Even if these are set to reflect the circumstances in the majority of member countries, given the economic diversity, there needs to be an array of institutions that can help those nations for which the policies are not well suited. Europe failed to create these institutions.

He is also accusing the way chosen to develop and build the structures, and in particular le European Central Bank: “Worse still, the structure of the eurozone built in certain ideas about what was required for economic success – for instance, that the central bank should focus on inflation, as opposed to the mandate of the Federal Reserve in the US, which incorporates unemployment, growth and stability. It was not simply that the eurozone was not structured to accommodate Europe’s economic diversity; it was that the structure of the eurozone, its rules and regulations, were not designed to promote growth, employment and stability

And then he is insisting on Germany’s responsibility in the euro failure, when it has obliged the euro countries to follow a discredited neoliberalism: “The founders of the euro were guided by a set of ideas and notions about how economies function that were fashionable at the time, but that were simply wrong. They had faith in markets, but lacked an understanding of the limitations of markets and what was required to make them work. The unwavering faith in markets is sometimes referred to as market fundamentalism, sometimes as neoliberalism. Market fundamentalists believed, for instance, that if only the government would ensure that inflation was low and stable, markets would ensure growth and prosperity for all. While in most of the world market fundamentalism has been discredited, especially in the aftermath of the 2008 global financial crisis, those beliefs survive and flourish within the eurozone’s dominant power, Germany“.

In his views, as there is no chance that Germany is ever recognizing its responsibilities and change its mind, with in addition the emergence of the populists of Alternative für Deutschland (AfD) showing a rejection of European solidarity, Stiglitz considers that we should abandon the euro, as Väyrynen proposes.Stiglitz is then considering that there should be still be one or two eurozones in the EU, with a grouping of countries corresponding to the conditions defined by another Nobel price of economy, Robert Mundell, for an optimum currency area to function smoothly.

These conditions, which are not well met in the EU,  are that:
  1. There is a total labor mobility across the region without restrictions, which include physical ability to travel (visas, workers’ rights, etc.), lack of cultural barriers to free movement (such as different languages) and institutional arrangements (such as the ability to have pensions transferred throughout the region)
  2. Openness with capital mobility and price and wage flexibility across the region. This is so that the market forces of supply and demand automatically distribute money and goods to where they are needed.
  3. A risk sharing system such as an automatic fiscal transfer mechanism to redistribute money to areas/sectors which have been adversely affected by the first two characteristics. This usually takes the form of taxation redistribution to less developed areas of a country/region. This policy, though theoretically accepted, is politically difficult to implement as the better-off regions rarely give up their revenue easily.
  4. Participant countries have similar business cycles. When one country experiences a boom or recession, other countries in the union are likely to follow.
So Stiglitz proposes to group countries which are relatively similar from the economical and political points of view. He is explaining in a recent interview in the French magazine Marianne: “Finland, which is going through a crisis […], would have no interest to be in Germany’s group. And Greece would maybe be in no group at all”. All this is relatively similar to Väyrynen’s ideas.
There has been already a number of critics, from EU economists and politicians. Some of them are noting that, as many economists from across the Atlantic, Joseph Stiglitz is a longstanding critic of the euro area, probably because it took, according to the Bruegel Institute, a think tank in Brussels, 137 years after independence and civil war for the Americans to create their own central bank and stabilize their money…

Another element is that he is considering that things should happen faster, he seems to ignore that any important decision should be taken by 28 countries, which is by necessity a slow and prudent process. In the same way, he criticizes the fact that there is no solidarity within the eurozone, when the European Stability Mechanism  helped Greece, Ireland and Spain. And it is a fact that Germany has been in the last years more and more flexible, proving that it can adapt to the situation, and is accepting to hugely contribute to the EU budget.

 



Categories: Economy, International

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