The Euro: How a Common Currency Threatens the Future of Europe

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_visd_0001jpg09m22I have never understood how the euro is supposed to work and how the EU can have an economic union without a political one. In “The Euro: How a Common Currency Threatens the Future of Europe,” Stiglitz explains that the original creators hoped that political integration would follow the economic union, but the system’s imbalances started increasing inequality immediately on implementation. The subsequent snowball effect of money and talent going from poor to rich countries made those political changes less feasible. The ‘08 banking crisis exposed that the elimination of exchange risks did not also mean the elimination of sovereign risk. Stiglitz argues the subsequent choice to combat the banking crisis fallout with austerity measures has lead Europe into a lost decade, which could continue into a lost quarter century. Individual states cannot devalue their currencies and the EU has not developed other tools, institutions, programs in place to help stabilize the economy in turbulent times. In contrast to the US, where the federal budget is 20% of the economy, in the EU it’s 1%. To make Europe work, Stiglitz argues for “more Europe” — i.e. more institutions, larger shared social safety net and common taxes. In the absence of the political will required for a “more Europe” solution, he suggests there is a “less Europe” alternative of splitting the euro into 2 or 3 currencies. Europe’s potential for future growth has already been depressed and to avoid additional hysteresis effects, Stiglitz calls for action be taken now.

Nicole Charbonnet

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