Opinion: Stiglitz’s attack could tilt debate on the euro

The euro was flawed from birth, the political will to create institutions that could mitigate its fundamental problems is not there, and an “amicable divorce” may be the only realistic solution.

This is the thrust of the message from Nobel economist Joseph Stiglitz in a media blitz to promote his new book, “The Euro: How a Common Currency Threatens the Future of Europe.”

Stiglitz, a former chief economist for the World Bank and former chairman of the U.S. Council of Economic Advisers who is now a professor at Columbia University, is one of the most prominent economists in the world and has been a persistent critic of the euro EURUSD, -0.3083%  and European Union economic policies.

So there is not much new in his latest critique, but the timing of his new book in the fragile post-Brexit environment and the compelling nature of his arguments presented in a detailed and systematic fashion may represent a tipping point in debating the future of the EU.

Stiglitz said on CNBC’s “Squawk Box” that he thinks markets are underpricing risks in the wake of Britain’s vote to leave the EU, including growing distrust of pro-EU centrist leaders amid dismal economic conditions caused by the failure of the euro.

In his media rounds, Stiglitz makes the familiar argument that by robbing individual nations of interest-rate and exchange-rate mechanisms to adjust to external shocks, the euro has condemned many of the participating nations to depression-like economic declines. This has been exacerbated in Europe by misguided austerity policies.

Reforms that could permit some amelioration would be a banking union (complete with common deposit insurance), strict rules to curtail trade surpluses, and mutualization of the debt with eurobonds or something similar.

“But these seem well beyond the politics of Europe today,” Stiglitz wrote this week in an op-ed for the Financial Times, “with Germany still arguing that ‘Europe is not a transfer union.’”

Germany, as usual, is the villain of the piece. For one thing, there is Berlin’s blinkered insistence on austerity even when an economy is crying out for stimulus.

“There is a broad consensus, not only in the United States but in most of the world, that if you are in an economic downturn, you need to stimulate,” Stiglitz said in an interview with The New Republic. “Germany seems to be an exception.”

Germany has further worsened the problem with its huge trade surpluses, almost double those of China as a percentage of gross domestic product. The U.S. has criticized China’s surplus as a threat to global stability.

Trade balances are a zero sum game. Surpluses in one country mean deficits in another. “If China’s surpluses are a global problem, so too are Germany’s,” Stiglitz writes in his book.

In Europe, Germany lent its surpluses to EU periphery countries, so that they became debtors and Germany became the creditor, widening the divergence within Europe. “There is no greater divide than the one between creditors and debtors,” the economist says.

So where does that leave us?

“In the absence of reform, an amicable divorce would be far preferable to the current approach of muddling through,” Stiglitz writes in his book.

One form the divorce could take would be splitting into two or three currency zones, a “flexible euro” that would allow the different zones to develop at their own pace. Over time, the separate currencies could evolve back into a single currency.

Among other things, splitting Germany off from the Southern countries would increase the value of Germany’s currency and reduce its trade surplus, even as a devaluation in the South would stimulate those economies.

“Germany would then be forced to find other ways of stimulating its economy,” Stiglitz says, such as increasing wages at the bottom, reducing inequality and increasing government spending.

It would have to rely on fiscal policy to maintain full employment, he says, because monetary policy would remain relatively ineffective in the current environment.

In the course of the 448-page book, Stiglitz provides numerous details to bolster his points, and his solutions include lengthy descriptions of how to improve banking and credit creation to promote growth in Europe.

But his overall message is simple and clear.

“The euro really didn’t start until 1999, so it didn’t even have a decade of success before the crisis,” Stiglitz said in The New Republic interview. “The crisis period has now been almost as long as the period before the crisis, and you have to say it’s been an utter economic failure.”