[the EURO — Joseph E. Stiglitz] — 1
How I met the book
I bought this book on April 25th 2019 before I went to UK.
I recently started reading it since I have got discharged from the army. I have not finished but I think it is good to make some notes for the future reference and for a better understanding of the author’s claims.
If I am remembering it correctly, 2019 was particularly a rough year for EU because the United Kingdom was facing Brexit. British Prime Minister Boris Johnson announced that the UK would leave EU no matter what, and both the UK and EU were jointly formulating a comprehensive settlement scheme. It was indeed a historic divorce one can say.
As I am reading this book page by page, I begun to realize that it would have been much nicer if I had read it before I actually set my foot in the UK to study Economics. Joseph Stliglitz, a novel prize-winning Economist, argues that the Euro is built on a system that must fail. I think this book provides a good rationale for those who support Brexit. In other words, those who support the European project and have belief in Troika — European Central Bank, European Commission, and International Monetary Fund- would not favor Stliglitz’s argument. However, as the author constantly says, the European project is an unprecedented experiment that not only Europeans but also everyone want it to succeed. This book is not to dismay the European project but to suggest a way for it to work as supposed.
The EURO beliefs
The 2010 euro crisis was originated from the 2008 global financial crisis in the United States, which is also known as the Great Recession. Having said that, it is quite surprising that the recovery rate of European countries- particularly those that are in eurozone- are weaker than that of United States where the crisis began. The author attributes the dampened recessions in European countries to the foundation of eurozone which in fact promised its member nations prosperity. Essentially, what author is trying to say is that there are several flaws in the nature of euro.
The European project is often considered an economic project as it involves the creation of a currency called Euro, but it is actually a political one that is aimed to bring peace and guarantee free movements of both labor and capital after the Cold War. Recalling the history of Europe in 20th century, I can understand why the leaders of Europe wanted this type of system. Euro was in fact only a tool for achieving the goal of the European “integration.” However, the author thinks the introduction of euro was a bad idea as Europe was not ready for such currency system. There were not enough institutions and rules established for Europe to succeed with Euro,
Before digging deep into the reason for the failure of Euro, it is essential to understand the foundation and core values of Euro system.
1. Inflation over unemployment
2. No exchange rate
3. Convergence criteria
4. Deficit Fetishism
5. Internal devaluation
(There should be more but these three are what I remember at the moment)
- Inflation over Unemployment
European Central Bank(ECB) prioritizes stable inflation rate over stable unemployment rate. This can go very wrong with member nations as each nation face different situation. As theory of Economics suggests, interest rate is a strong tool for a nation to fight economic upheavals. As members of eurozone does not have control of issuance of the currency, they also do not have a right to adjust interest rate according to the unique situations that their economies face. Say a country like Germany is experiencing high inflation rate as demands soars while a country like Greece has extremely high unemployment rate. Normally, if a country is facing what Greece is facing, it will simply lower interest rate to boost economy. However, as the goal of ECB is to stabilize inflation, it would raise interest rate. This was what ECB did when Greece was experiencing its sovereign debt crisis. Increase in interest rate will have adverse impact on Greek economy and widen the gap between German economy and the Greek counterparts. This is what happen when a country cedes its strongest tool to deal with economy.
This resonates well with the claim that Euro system is divergent system in nature. The Euro system will eventually collapse if member states within the Eurozone are diverging, not converging over time.
*However, this somehow raises a question on whether the policy makers and designers of Eurozone were really not aware of this drawback of losing control of interest rate. I mean they should not be that naive to believe that market or invisible hand would automatically fix every problem. Stiglitz points out that the Euro system was not only an economic project but also a political one, but I think this solely does not provide good reason…(or maybe I missed some of the explanation)
….To be continued…. will start with “2. No exchange rate”
(Written soley based upon my memorization, so might be incorrect; I welcome any feedbacks :)
