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Date: 2024-11-12 Page is: DBtxt001.php txt00002436

Money
What can save the euro?

Growth is needed in order to save the euro, not sermons and homilies, says Stiglitz, Nobel Prize-winning economist.

COMMENTARY
I am making this comment in May 2012, some 6 months after the following Stiglitz article was circulated. My views about global economics are evolving all the time, but it is clear that there is a gaping chasm between what economists think are the proiblems and solutions, what politicians think about the same things and what the population at large thinks about these matters, not to mention myself.

I am prepared to argue that the Euro has been a success, and still has an important role in the future of Europe in spite of the present economic turmoil and uncertainty. My reason for this is that I come from a school of economics which is fairly clear that currency like the Euro is a medium of exchange and not a complex financial instrument designed for speculation. The Euro is a far more effective medium of exchange for Europeans and the rest of the world than the former multitude of individual national currencies.

There is clearly a problem in Europe with the way the economies of the different countries are performing. This is not a problem of the Euro, but something more fundamental ... sometimes referred to as a structural problem. Sometimes the problem is referred to as a problem of productivity and competitiveness ... but it is more than this.

In a modern economy, there are less and less economic activities that are under the control of a simple market economy. Almost everything is intermediated in some way and it is difficult to 'connect the dots' so that the cause and effect are understandable and the market works. The banks and other financial institutions have made it more and more difficult for a market economy to work ... in large part because they are in control of huge amounts of capital and can use this capital to suit their own agenda without taking the broader society and the national or international economy into consideration. The fact of life in the present global economy is that vast pools of financial capital are on the sidelines operating in a speculative mode for profit, and hardly any of this capital gets deployed to improve the quality of life of society as a whole. Bankers and those with wealth and political power are not much interested in doing anything that will diminish this power ... and this is a critical conundrum.

The world has a huge need for many things and there are huge numbers of educated and unemployed people who could do the work to satisfy these needs. There is, however, no effective mechanism for the world's financial capital to be allocated and deployed into doing this work.

John Maynard Keynes struggled with this issue in the 1930s and he argued for government to step in where private investment was not adequate. The problem with this has proved to be the terrible lack of accountability in government and the associated corruption, incompetence and inefficiency that is a hallmark of much of what government does.

The corporate world has a reputation for ruthless efficiency ... which in itself is good. The problem with the corporate model is that the goal is merely to make profit for the stockholders and executive class, no matter what the outcome for the society at large, and the national and global economy. This pursuit of profit to the exclusion of all else was highlighted by the CEO of Barclays early in 2012 when he indicated that for a CEO to do anything else would be a dereliction of fiduciary responsibility!

Stiglitz refers in his paper to the idea that the reasonableness of government debt is measured in relation to the GDP of the nation .... but this idea, in my view, is a problem in itself. Debt in itself is good or bad depending on what the debt was used to fund. Too often government decision makers use debt to fund sloppy government expenditures and self serving projects. Decision makers and all the beneficiaries associated with this type of behavior need to be identified and held to account. Debt that is used to fund productivity improving investment whether in human capital or in physical capital is another matter, and should be encouraged. In this case accountability should be used to reward decision makers and every one concerned for high performance.

Unfortunately the prevailing systems of money based accounting do not capture the full picture of investment value. Something better is needed like TrueValueMetrics. A good government investment will produce a positive valuadd that justifies the government taking on debt. Valuadd may not immediately get monetized, but it will in due course. Investments by government that create profit are only valuable for society if they also produce valuadd. Typically profit is private, and too often not subject to much taxation. This can be tolerated when there is valuadd, but not when the valuadd is weak or negative.

It would be great if the high profile economists would embrace the valuadd concept, and move away from the idea that growth is good. Growth may seem to solve the financial problems of the monetary economy, but this type of growth is a challenge for a global society of 9 billion people on a planet with rather modest finite resources. The US model for wealth is unsustainable when it is applied to 9 billion people rather than a mere 300 million people. The scope for productivity investment in the world is huge ... but banker capitalists and the modern corporate elite have no idea how to do it.
Peter Burgess

What can save the euro? Growth is needed in order to save the euro, not sermons and homilies, says Nobel Prize-winning economist.

IMAGE Before the crisis, Spain had budget surpluses and low debt, but now has large deficits and high debt [GALLO/GETTY]

New York, New York - Just when it seemed that things couldn't get worse, it appears that they have. Even some of the ostensibly 'responsible' members of the eurozone are facing higher interest rates. Economists on both sides of the Atlantic are now discussing not just whether the euro will survive, but how to ensure that its demise causes the least turmoil possible.

It is increasingly evident that Europe's political leaders, for all their commitment to the euro's survival, do not have a good grasp of what is required to make the single currency work. The prevailing view when the euro was established was that all that was required was fiscal discipline - no country's fiscal deficit or public debt, relative to GDP, should be too large. But Ireland and Spain had budget surpluses and low debt before the crisis, which quickly turned into large deficits and high debt. So now, European leaders say that it is the current-account deficits of the eurozone's member countries that must be kept in check.

In that case, it seems curious that, as the crisis continues, the safe haven for global investors is the United States, which has had an enormous current-account deficit for years. So, how will the European Union distinguish between 'good' current-account deficits - a government creates a favourable business climate, generating inflows of foreign direct investment - and 'bad' current-account deficits? Preventing bad current-account deficits would require far greater intervention in the private sector than the neoliberal and single-market doctrines that were fashionable at the euro's founding would imply.

Race to save the euro under way

In Spain, for example, money flowed into the private sector from private banks. Should such irrational exuberance force the government, willy-nilly, to curtail public investment? Does this mean that government must decide which capital flows - say into real-estate investment, for example - are bad, and so must be taxed or otherwise curbed? To me, this makes sense, but such policies should be anathema to the EU's free-market advocates.

The quest for a clear, simple answer recalls the discussions that have followed financial crises around the world. After each crisis, an explanation emerges, which the next crisis shows to be wrong, or at least inadequate. The 1980s Latin American crisis was caused by excessive borrowing; but that could not explain Mexico's 1994 crisis, so it was attributed to under-saving.

Then came East Asia, which had high savings rates, so the new explanation was 'governance'. But this, too, made little sense, given that the Scandinavian countries - which have the most transparent governance in the world - had suffered a crisis a few years earlier.

There is, interestingly, a common thread running through all of these cases, as well as the 2008 crisis: Financial sectors behaved badly and failed to assess creditworthiness and manage risk as they were supposed to do.

These problems will occur with or without the euro. But the euro has made it more difficult for governments to respond. And the problem is not just that the euro took away two key tools for adjustment - the interest rate and the exchange rate - and put nothing in their place, or that the European Central Bank's mandate is to focus on inflation, whereas today's challenges are unemployment, growth and financial stability. Without a common fiscal authority, the single market opened the way to tax competition - a race to the bottom to attract investment and boost output that could be freely sold throughout the EU.

Moreover, free labour mobility means that individuals can choose whether to pay their parents' debts: Young Irish can simply escape repaying the foolish bank-bailout obligations assumed by their government by leaving the country. Of course, migration is supposed to be good, as it reallocates labour to where its return is highest. But this kind of migration actually undermines productivity.

Migration is, of course, part of the adjustment mechanism that makes the United States work as a single market with a single currency. Even more important is the federal government's role in helping states that face, say, high unemployment, by allocating additional tax revenue to them - the so-called 'transfer union' so loathed by many Germans.

But the US is also willing to accept the depopulation of entire states that cannot compete. (Some point out that this means that US corporations can buy senators from such states at a lower price.) But are European countries with lagging productivity willing to accept depopulation? Alternatively, are they willing to face the pain of 'internal' devaluation, a process that failed under the gold standard and is failing under the euro?

Even if those from Europe's northern countries are right in claiming that the euro would work if effective discipline could be imposed on others (I think they are wrong), they are deluding themselves with a morality play. It is fine to blame their southern compatriots for fiscal profligacy, or, in the case of Spain and Ireland, for letting free markets have free reign, without seeing where that would lead. But that doesn't address today's problem: Huge debts, whether a result of private or public miscalculations, must be managed within the euro framework.

Public-sector cutbacks today do not solve the problem of yesterday's profligacy; they simply push economies into deeper recessions. Europe's leaders know this. They know that growth is needed. But, rather than deal with today's problems and find a formula for growth, they prefer to deliver homilies about what some previous government should have done. This may be satisfying for the sermoniser, but it won't solve Europe's problems - and it won't save the euro.


Joseph E. Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy.

Follow him on Twitter: @joestiglitz

A version of this article was first published on Project Syndicate.

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera's editorial policy.

Source: Al Jazeera


Joseph E Stiglitz ... Joseph E Stiglitz is a professor at Columbia University, a Nobel laureate in Economics, and author of several books.
Last Modified: 08 Dec 2011 09:11
The text being discussed is available at
http://www.aljazeera.com/indepth/opinion/2011/12/2011126102546181929.html
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