Can the Euro be Saved?

Joseph E. Stiglitz

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NEW YORK – The Greek financial crisis has put the very survival of the euro at stake.  At the euro’s creation, many worried about its long-run viability. When everything went well, these worries were forgotten. But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered. Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession. What could replace them?

The Nobel Laureate Robert Mundell laid out the conditions under which a single currency could work. Europe didn’t meet those conditions at the time; it still doesn’t. The removal of legal barriers to the movement of workers created a single labor market, but linguistic and cultural differences make American-style labor mobility unachievable.

Moreover, Europe has no way of helping those countries facing severe problems. Consider Spain, which has an unemployment rate of 20% – and more than 40% among young people. It had a fiscal surplus before the crisis; after the crisis, its deficit increased to more than 11% of GDP. But, under European Union rules, Spain must now cut its spending, which will likely exacerbate unemployment. As its economy slows, the improvement in its fiscal position may be minimal.

Some hoped that the Greek tragedy would convince policymakers that the euro cannot succeed without greater cooperation (including fiscal assistance). But Germany (and its Constitutional Court), partly following popular opinion, has opposed giving Greece the help that it needs.

To many, both in and outside of Greece, this stance was peculiar: billions had been spent saving big banks, but evidently saving a country of eleven million people was taboo! It was not even clear that the help Greece needed should be labeled a bailout: while the funds given to financial institutions like AIG were unlikely to be recouped, a loan to Greece at a reasonable interest rate would likely be repaid.

A series of half-offers and vague promises, intended to calm the market, failed. Just as the United States had cobbled together assistance for Mexico 15 years ago by combining help from the International Monetary Fund and the G-7, so, too, the EU put together an assistance program with the IMF. The question was, what conditions would be imposed on Greece? How big would be the adverse impact?

For the EU’s smaller countries, the lesson is clear: if they do not reduce their budget deficits, there is a high risk of a speculative attack, with little hope for adequate assistance from their neighbors, at least not without painful and counterproductive pro-cyclical budgetary restraints. As European countries take these measures, their economies are likely to weaken – with unhappy consequences for the global recovery.

It may be useful to see the euro’s problems from a global perspective. The US has complained about China’s current-account (trade) surpluses; but, as a percentage of GDP, Germany’s surplus is even greater. Assume that the euro was set so that trade in the eurozone as a whole was roughly in balance. In that case, Germany’s surplus means that the rest of Europe is in deficit. And the fact that these countries are importing more than they are exporting contributes to their weak economies.

The US has been complaining about China’s refusal to allow its exchange rate to appreciate relative to the dollar. But the euro system means that Germany’s exchange rate cannot increase relative to other eurozone members. If the exchange rate did increase, Germany would find it more difficult to export, and its economic model, based on strong exports, would face a challenge. At the same time, the rest of Europe would export more, GDP would increase, and unemployment would decrease.

Germany (like China) views its high savings and export prowess as virtues, not vices. But John Maynard Keynes pointed out that surpluses lead to weak global aggregate demand – countries running surpluses exert a “negative externality” on their trading partners. Indeed, Keynes believed that it was surplus countries, far more than deficit countries, that posed a threat to global prosperity; he went so far as to recommend a tax on surplus countries.

The social and economic consequences of the current arrangements should be unacceptable. Those countries whose deficits have soared as a result of the global recession should not be forced into a death spiral – as Argentina was a decade ago.

One proposed solution is for these countries to engineer the equivalent of a devaluation – a uniform decrease in wages. This, I believe, is unachievable, and its distributive consequences are unacceptable. The social tensions would be enormous. It is a fantasy.

There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions. The euro was an interesting experiment, but, like the almost-forgotten exchange-rate mechanism (ERM) that preceded it and fell apart when speculators attacked the British pound in 1992, it lacks the institutional support required to make it work.

There is a third solution, which Europe may come to realize is the most promising for all: implement the institutional reforms, including the necessary fiscal framework, that should have been made when the euro was launched.

It is not too late for Europe to implement these reforms and thus live up to the ideals, based on solidarity, that underlay the euro’s creation. But if Europe cannot do so, then perhaps it is better to admit failure and move on than to extract a high price in unemployment and human suffering in the name of a flawed economic model.

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amar 01:26 06 May 10

There was / is nothing wrong in experimenting. The agenda was and is: to facilitate more jobs and spread wealth. But it hurts the citizens in the long run, (sacrifice today for a better tomorrow, mentality never ends) and is already hurting in the short run, so your recommendation of moving on, in a neat idea. Some times, it is just the embarrassment that becomes a hurdle in moving on.  Let me add a commonsense thing in my below average English: "Embarrassment is better than SHAME"

blade4199 05:42 06 May 10

I don't really agree with the claim that countries with a trade surplus contribute to a systemic instability. If some countries have a deficit (eg: States / UK) then some must have a fisical surplus. Balanced accounts are a theoretical possibilty but a practical impossibilty. Deficits and surpluses don't occur naturally. They occur because of free trade and the economic design of a particular country

Hannibal 02:38 07 May 10

Another beautifully written piece.

Currently as it stands, Germany's insistence on fiscal austerity when it has a huge trade surplus at the expense of others is predatory. especially when others cannot devalue to adjust to the real exchange rate.

Knowing Europe and its insitutions, I have no illlusion that it can implement or even take any idea of reform seriously. It is a strictly one-narrative-zone, especially in economics. I predict the crisis will drag on until Spain Crisis (keep in mind that we are not talking about just Greece) surfaces and at that point there will be no other choice but to let Euro disappear. m

SeoKungFu 07:48 07 May 10

You can as well real "Europe's Dominos of Doom" by Janis A. Emmanouilidis.

alexferro 01:15 07 May 10

It might all end up instead with the rest of the Euro-zone gang up on the Germans and boot them out of it. 


Hannibal 06:06 07 May 10


Unlikely to happen, Germany is the only European state that can provide the fundings as of this moment; pretty much everybody is running a huge deficit, including France. Think of Berlin as Washington, where the treasury is located.

There are two ways to boot the German out informally: 1) Germans be persuaded to give up their stubborness and willing to go with EU-wide expansionary fiscal and monetary policy; 2) EU commission takes a strong stance agaisnt austerity. Either way it is not gonna happen.

For 1), it is just asking for the impossible. Not only the Germans are stereotypically stubborn, it is that the whole Euro and ECB system is set with German stye of central banking in mind (see Krugman, http://web.mit.edu/krugman/www/euronote.html). What this means is that they need a complete system overhaul.

There is a little leeway for 2), as the EC is the closest thing to a central government (of course it is not) and it has its own parliament, so it can in a sense say that it represents the whole EU, but then the MPs and their consistuencies still think in terms of own nations. Even if it can overcome that, it still does not have the political will and power to suggest any meaningful reform, let alone getting it pass.

Come to think of it, the EU has managed to screw itself up in every possible way. Overly ambitious and too many moving parts, which act against each other in time of crisis, and worse still, there is no way in fixing this mess. The best result for Greece et al. right now seems to be getting out of Euro and never speak of it again. The EU will likely to be another League of Nation.


jnuetzel 02:46 08 May 10

1. wage cuts are no fantasy, but reality

2. bankruptcy does not benefit Greece, but short sellers

3. fiscal responsibility in Euro-land is the agreed upon law,

1. wage cuts are no fantasy, but reality

What Prof. Stiglitz is calling a fantasy, is now reality in at least the third european country (Ireland, Latvia, and Greece), significant wage and pension cuts, therefore de facto devaluation, but keeping the stability of the Euro. 

The only opposition to that are the communists (e.g. in Germany "Die Linke").

2. bankruptcy does not benefit Greece, but short sellers

What might be good for short sellers at Wall Street, residing a few subway stations away from Prof. Stiglitz, might not been seen as beneficial for people in Europe, who enjoyed low interest and inflation rates for the last 20 years precisely because of the agreement on stable fiscal policy. The partial violations have to be rectified, and not the good stable Euro be killed.

3. fiscal responsibility in the EU is the agreed upon law, and not some mean german trick

Deficit rules were agreed upon by everybody joining the Euro in the "stability pact" and not only Germany, but most northern Europe countries did fulfil their obligations, often with significant social pains. I do remember the socialists/communists marching through my town demanding excessive spending.

Prof Stiglitz might be seen as despicable in suggesting that violators should gang up on the contract keepers, like Germany, and the vast majority of Euro members





Joulie 06:58 08 May 10

L'erreur fondamentale de l'analyse de Stiglitz et de croire que les problèmes économiques peuvent se régler, notamment, avec des dévaluations.

La création de l'Euro a d'abord et avant tout été motivée pour supprimer les dévaluations répétées des différents pays européens et avoir les avantages d'une monnaie unique au lieu d'une manipulation de l'économie par des artifices que sont les dévaluations.

L'Euro nous a apporté beaucoup d'avantages : des taux bas, une croissance économique supérieure liée à une circulation plus intense des capitaux, à une concurrence plus forte et à un marché unique plus important. Il a constitué un bouclier efficace contre la crise du subprime de 2008.

En fait la crise actuelle de l'Euro n'est que le résultat de la réponse donné à la crise de 2008 : pour revenir, et c'est là l'erreur, à la situation antérieure, les pouvoirs publiques des différents pays Européens ont aggravé fortement les déficits publiques sans prendre de mesure énergique sur la dépense publique et dans le cas de la Grèce, la corruption généralisée a fini par inquiété les détenteurs de la dette publique qui sont essentiellement étrangers, ils ont tout naturellement retiré leurs capitaux pour les sécuriser.

L'Europe, ce jour, met en place une réforme institutionnelle qui assure une solidarité renforcée mais l'avantage de cette crise c'est qu'elle permet aux opinions publiques de prendre conscience de la nécessité de s'attaquer sérieusement à la dépense publique. Différents gouvernements Européens annoncent déjà un tour de vis inimaginable il y a quelques mois. On ne peut pas dépenser plus que ce que l'on gagne.

Reste que les sociétés Européennes ont une mentalité moins entreprenante que les USA, nous aurons donc plus de souffrance, plus de difficultés, en Europe pour limiter la dépense publique faute de croissance suffisante. L'Euro devrait donc s'affaiblir dans les prochains semestre. Finalement les crises ne sont que le résultat de nos turpitudes.



Hannibal 08:45 09 May 10


Law and contract are funny ideas. Suppose the law and contract are predatory and do you still want to follow that? Well, it depends whether you are the receiving end of them. If law has to be upheld at all cost, one can also make a case for Sharia law, in which the penalty of apostasy is death, is that something you want to follow and not question?

Even if you argue Sharia law is not agreed upon by all the members of the society, then there are predatory, exploitative contracts, which are deemed invalid in any respectable court of law, even if they are agreed upon by both parties.

In the real world, we have imperfect information, we could not have thought of everything and we make bad decisions. The EU made plenty of bad decisions based on one single neo-liberal narrative and made them into law, and you don't want others to question them because they are law?

And there is the social contract, in Greece and other countries, which are suffering from high unemployment. 20% in Spain, this is a scary number and it is going to scar the whole generation (40% youth!) and prevent human development. This is where your law breaks, you law is not made based on real situation but on a complete imaginary ideal. Stiglitz is not despicable, the law is.


"L'erreur fondamentale de l'analyse de Stiglitz et de croire que les problèmes économiques peuvent se régler, notamment, avec des dévaluations"

Non, des dévaluations, ce n'est pas tous (my Frech is not good enough, allow me to guess a bit). Devaluation is only one part of the solution; the main idea is the spend out of the trouble, to invest in real development and let growth solving the debt. Without devaluation, Greek ( Spain et al) products will find a hard time to be exported to other countries, where German products enjoy a huge advantage with its undervalue exchange rate. That export sector is one important part of the growth plan. Even if there is no austerity measures and Euro allows expansionary fiscal and monetary policies, which it doesn't, the investment in development will find no return if there is no consumption. When there is a local demand slump it means that the consumption will have to be overseas. Devaluation is just part of the growth plan.

And one more thing, any economic system is as good as it withstanding shocks. The prior gaining in wealth in Euro zone means nothing if it cannot be sustained in face of economic fluations; not only it is unsustainable, it also means that the wealthy gain more in good times and the poor suffer more in the bad time. The advantages of Euro you speak of are merely illusions, and it does not allow any growth-base solution that makes economic sense, and that's what putting Europe into crisis.

aussiereader4 08:49 09 May 10

I think the real issue is that most Political Leaders no longer have a vision to see the potential future challenges of a single currency. This imbalance was predictable, there was simply no mechanism to deal with it. Its really a story of human behaviour, as humans we usually wait until disaster strikes. The same behaviour is a feature of the Global Warming debate.

jnuetzel 02:27 09 May 10


 you said it best in your own words: law and contract are just funny ideas to you.


Article 18 Everyone has the right to freedom of thought, conscience and religion; this right includes freedom to change his religion or belief

To compare plain muslim murderers in Sharia apostasy cases with the European monetary Union, is just completely outrageous.

Nobody was forced into the Euro Club, nobody is forced to stay.

UK  did not join, Denmark with just half the population of Greece neither.

To even suggest that one rotten apple, habitual violator of voluntary contracts and criminal book forger should be entitled to spoil the whole bag, just shows the moral nihilism, Prof Stiglitz is preaching   


intrinsicfactors 03:44 09 May 10

Euro has been contained intrinsic factors of demise. In at all reason, it has unvailed them to the world.

As long as I comtemplate this issue, optimal option for EU might  be to admit failure to minimize humansuffering.



Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is now available in French, German, Japanese, and Spanish.