The Euro how a common currency threatens the future of Europe

Book Review: The Euro How a Common Currency Threatens the Future of Europe
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Book Review: The Euro How a Common Currency Threatens the Future of Europe
With a common currency and increased integration between member states, the European Union (EU) was supposed to move further away from economic crises and cross-border turmoil and move towards economic, social, and political integration. However, recurrent recessions have been a common feature in the Eurozone, which led the author to comment on the problems and solutions of the single currency project in Europe. Joseph E. Stiglitz is a Nobel-Prize winning economist, who has worked closely with most of the European governments within the crisis countries offering economic advice. He also served as the chairperson of the Council of Economic Advisers during the reign of President Bill Clinton in America and chief economist in the World Bank CITATION Sti16 l 1033 (Stiglitz, 2016). The aim of the book, he says, is to provide a guide for which Europe can use to reconstruct its currency arrangements to achieve an economy that supports stability, prosperity, strengthened democracy, and social cohesion. This paper will review the key knowledge points presented in the book to determine the effectiveness of the book in fulfilling its objectives.
The main idea of the book is that the existing financial system in the Eurozone is marked for failure and failure to make adjustments could lead to the fall of the Euro.

Stiglitz argues that the crisis that is being experienced by the member states in the Eurozone dates back to its inception in 1992 CITATION Cou92 l 1033 (Council of the European Communities, 1992). He opines that the structure of the single currency model is to blame for the economic crisis as opposed to the economies of individual countries CITATION Sti16 l 1033 (Stiglitz, 2016). Throughout the text, Stiglitz reiterates that the problem with the currency union in the Eurozone is rooted in ideologies of neoliberalism that were fashioned by politicians who seek short-term political gain. The author also points out the misconceptions about markets and economy led to the establishment of the Euro project, which in times of economic crisis provided no guidance and lacked the flexibility to undergo reforms CITATION Sti16 l 1033 (Stiglitz, 2016).
Stiglitz states that crises are part of the capitalist economies based on the knowledge that markets on their own are not efficient CITATION Sti16 l 1033 (Stiglitz, 2016). Similarly, Beckworth (2017) observes that the situation in the Eurozone is further exacerbated by the reforms proposed by the Euro in response to the crisis, which focused on reducing government spending even while it affected development projects for infrastructure and underutilized resources in the countries affected by the crisis. The problem in this economic ideology is that it overlooks the private sector banking which provided credit across borders. Consequently, the economies of countries such as Greece and Ireland were negatively affected while the poorly supervised bank in Germany saw a boom in their economy CITATION Lan12 l 1033 (Lane, 2012). Additionally, the European Central Bank, which consolidated the monetary policies in the EU, had rigid fiscal policies that placed stringent deficit spending regulations that led to two recessions and a sovereign debt crisis in countries affected by the Eurozone crisis CITATION Bec17 l 1033 (Beckworth, 2017). Lane (2012) provides an analytical overview of the Eurozone crisis relationship with banking and macroeconomics. He concludes that lack of a banking and fiscal union was a design flaw of the European Monetary Union which propagated the eurozone crisis.
Stiglitz notes that the neoliberal monetary policies governing the Euro have deepened the divide not only between the rich and poor but also between countries in the Eurozone. Lehmann (2018) examines the complexities of the European Crisis citing ‘birth defects’ during the design of the single currency model. Lehmann (2018) reiterates Stiglitz’s idea of lack of political cohesion that has led to the decline in economic and political integration. The Eurozone crisis has borne new cleavages such as between the creditor and the debtor member states. The original Maastricht Treaty ignored the deficits in Ireland and Spain and the surpluses in Germany that already existed in the economy, thereby creating an imbalance in the EU macroeconomics CITATION Sti16 l 1033 (Stiglitz, 2016). This economic imbalance is reflected in the German’s economic boom and Greece deep recession. The situation in the Eurozone may be worse than Stiglitz portrays since economic indicators such as GDP are a matter of averages. While the European economic decline is reported at 5% and the unemployment rates at 12%, some countries like Greece are experiencing their worst economic depression with GDP declines of 25% and unemployment rates of 44% and 35% in Italy and Spain respectively CITATION Sti16 l 1033 (Stiglitz, 2016). Germany in comparison to the rest of the Eurozone has had an economic growth of 6.8% since 2007, which by global economic standards, is not successful CITATION Sti16 l 1033 (Stiglitz, 2016). Additionally, the German example, however, has its flaws since the aggressive reforms it adopted earlier on during the crisis involved making significant cuts to government spending in terms of social safety net. Ultimately, the ordinary citizen bore the brunt of the harsh economy since the real wage either stagnated or dropped and the gap between the middle-income earners and the low-income earners increased by 9% CITATION Sti16 l 1033 (Stiglitz, 2016).
Stiglitz notes that since its inception, the single currency model was going to be an enormous task within a region with vast political and economic diversity CITATION Sti16 l 1033 (Stiglitz, 2016). The problem lies in EU recognizing its struggles but failing to make improvements in its management. Stiglitz opines that the idea that free and unfettered markets shaped the policies behind the Eurozone project was a flaw in reasoning during its inception. Countries in surplus such as Germany create a deficit in another country by the logic of market equilibrium. Stiglitz highlights that the Euro did not only eliminate exchange risk with a single currency, it also increased sovereign risk as each country in the Eurozone ceded control over interest rates to the European Central Bank. The countries that were experiencing economic decline could not adjust the exchange rates to devalue during times of decline to control the exports and imports within their countries.
Stiglitz did an excellent job of illuminating his audience on the dangers of neoliberal economics, albeit at the risk of alienating some of the audience from the economically stable countries in the Eurozone. He seems to be in a collective war with the Troika, the ECB, the European Commission, and the IMF, who he constantly faults in their approach in dealing with the crisis CITATION Sti16 l 1033 (Stiglitz, 2016). Lehmann (2018) attests that the IMF policies are a linear approach the EU, which instead of dealing with the problem cause, they are treating the symptoms which perpetuates the dysfunction of the system. Stiglitz easily lets off the crisis and bears heavily on countries such as Germany for having increased their surplus while its surrounding neighbors suffered deficits and economic decline. The book portrays the crisis country as powerless in mitigating the financial crisis within their countries and harshly criticizes the institutions for intervening in these countries. Stiglitz is not wrong in criticizing austerity policies encouraged by the institutions, but his focus on the institutions rather than the bad policy takes away from his argument.
While Stiglitz makes compelling arguments regarding the shortfalls of economic ideologies, he vaguely alludes to a key thing that played a fundamental role in fueling the Eurozone crisis: national pride. Some countries in the Eurozone like Germany fought to maintain sovereignty by proposing that national governments be in charge of supervision of private sector banking as opposed to the EU CITATION Sti16 l 1033 (Stiglitz, 2016). Consequently, the lack of financial systems regulations led to the economic instability experienced in the Eurozone characterized by busts and booms. However, crisis countries such as Greece had their own fiscal policies that resulted in them having a bloated public sector CITATION Sti16 l 1033 (Stiglitz, 2016). In redressing the balance for where to place blame for the economic crisis, Stiglitz downplays the mistakes made by the crisis countries.
Stiglitz suggests that the fault with the Euro lies with EU making member states reduce spending during times of economic decline. For such a policy change to be effective, the assumption is that governments will compensate for the excessive spending during an economic decline by cutting back on spending during an economic boom. This model follows Keynesian economics, which is politically flawed CITATION Sti16 l 1033 (Stiglitz, 2016). A country’s economy is a measure of the society’s well-being, with currency being a means to achieve that. Stiglitz’s text reads more like a political commentary than an economic outlook in the way he faults the creators of the Euro in designing a system that does not serve the interests of the ordinary citizens. Economic indicators such as GDP per capita focus on averages and may therefore not be a true reflection of the well-being of the citizenry CITATION Sti16 l 1033 (Stiglitz, 2016). The European Central Bank is responsible for making monetary policies, which affect the unemployment rates and livelihoods of citizens. The European Central Bank austerity policies have affected the flexibility with which the crisis countries can address the recession within its economy, which translates to high unemployment rates CITATION Bec17 l 1033 (Beckworth, 2017).
Stiglitz has succeeded in simplifying complex and technical economic terms in a manner that is easy to understand the link between politics and economic implications. He has drawn power configurations and political underpinnings when designing a financial system to avoid economic instability. The book does not use too many technical terms that the general audience will feel alienated by the book, while the economic expert may also find the reasoning of the book valid. The author, however, fails to mention the increase in the aging population in Europe that will change the economic landscape in Europe. Over the next few decades, the larger percentage of the European population will go into retirement, which means that the percentage of the productive population will drastically decrease. Additionally, the demographic change will increase the healthcare burden all over Europe and increase government expenditure due to the costs of pensions. Without drastic policy reforms, the increase in government expenditure on healthcare and pensions will reduce the ability of the EU governments to borrow for projects that promote growth in an economy. Stiglitz places blame for the Eurozone crisis squarely on the Euro and the policies it represents.
In conclusion, Stiglitz contradicts himself when he mentions that the struggles of the Euro in the Eurozone are more about social constructs such as political power, democracy, and competing ideologies than they are about economics and monetary policies. He mentions that the impositions placed on the struggling economies are a violation of the democratic process since the public perception regarding the policy did not seem to favor their implementation CITATION Sti16 l 1033 (Stiglitz, 2016). However, at the beginning of the book, Stiglitz faults the founders of the Euro project for not having adequate economic knowledge of what a single currency could mean to the economic landscape of the Eurozone. He reiterates throughout the text that the Euro required a reform within its structure and proposes economically sound solutions such as a common bank insurance system and writing off some of the Greek debt. However, to some extent, one may argue that the policies he proposes are rooted in social and political integration. Although the book’s title suggests that the single currency project is a major source of the Eurozone crisis, Stiglitz offers that it is worth salvaging. He proposes making the regulations and policies surround the Euro more flexible although he does not go into detail regarding how the Eurozone can achieve flexibility. References
BIBLIOGRAPHY Beckworth, D. (2017). The monetary policy origins of the eurozone crisis. International Finance, 20, 114-134.
Council of the European Communities. (1992). Treaty on European Union. Luxembourg: Office for Official Publications of the European Communities.
Lane, P. R. (2012). The European Sovereign Debt Crisis. Journal of Economic Perspectives, 26(3), 49-68.
Lehmann, K. E. (2018). The Crisis of the European Union as a Complex Adaptive System. Journal of Common Market Studies, 1-18. doi:10.1111/jcms.12702
Stiglitz, J. E. (2016). The Euro: How a Common Currency Threatens the Future of Europe. London: W. W. Norton & Company.