A split euro is the solution for Europe’s single currency. —Joseph Stiglitz.
In an article published Wednesday, Nobel-prize winner Joseph Stiglitz tried to answer the question of what to do with the problems created by the euro — as the continent has been struggling for roughly eight years now.
While some have argued that what was wrong in the eurozone economy was not the euro but poorly executed fiscal policies and “poorly designed structural reforms” instead, Stigliz believes the problems are fundamental, structural and possibly “insurmountable.” So, is it time to reevaluate the existence of the euro? Should the EU dismantle its single currency system?
From The Beginning
The famed economist started by looking back at the conception and inception of the euro. Since the very start, the single currency system was flawed, he commented. When the EU implemented the euro, the bloc eliminated two very important adjustment mechanisms: interest rates and exchange rates. To make things even worse, they didn’t create any new macro instruments in case an adjustment was needed.
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“Add to that a central bank mandated to focus on inflation and with countries still further constrained by limits on their fiscal deficits, the result would be excessively high unemployment and gross domestic product consistently below potential output,” Stiglitz went on to expound. “With countries borrowing in a currency not under their remit, and with no easy mechanism for controlling trade deficits, crises too were predictable.”
And, while adjusting real exchange rates could offer an alternative, nobody has found out how to do this successfully yet — look at Greece, Spain or Portugal.
“The rule changes needed to make the euro work are in an economic sense small,” the Nobel-prize winner added. And, while robust currency systems cannot guarantee prosperity, flawed arrangements — like pegs — tend to lead to “recessions and depressions.”
So, he concluded, taking into account the troubles that a single currency creates and given that it is “neither necessary nor sufficient for close economic and political co-operation,” Europe needs to reassess its position, transition slowly out of the Euro or at least into a “flexible-euro” system.
The Split Euro
Stiglitz’s split euro idea might sound pretty cool to macro-geeks. What he proposes is unfolding the currency into at least two of them: a stronger Northern euro and a softer Southern euro.
But, how would debt be dealt with?
Well, Stigliz added, the easiest way would be to redenominate all euro arrears as “Southern euro” obligations.
“As we move to a digital economy, modern technology enables a set of market-based reforms that can simultaneously achieve the triple goals of full employment, trade balance, and fiscal balance, through credit auctions and electronic trade tokens,” the expert explicated. “The flexible euro is a strategy for incorporating the advances in economic integration already made while providing the space for reforms.”
In the end, what Stigliz thinks is that, in order to save the European project, the countries involved will have to undergo an “amicable divorce,” and abandon monetary unity to transit new, separate paths.
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Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned above.
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