In his recent New York Review of Books article , Nobel prize winning economist Paul Krugman points to an October report from the International Monetary Fund IMF that basically apologizes for its austerity recommendations in the last few years — backed up with evidence. The report shows that those countries forced into austerity measures by the EU experienced steep downturns in their economies, contrary to predictions.
Further, the more drastic the austerity measured by calculating spending cuts and tax increases as a percentage of GDP , the greater the economic downturn. Yet EU officials — apparently convinced of the infallibility of their theory on how economies work — seem unmoved by such evidence and the human suffering that goes along with it.
As Mr. Consider Portugal. With unemployment rates at dangerous levels, and its economy predicted to contract by 2. In such ways, EU officials are inserting themselves into the governance of member nations. This lack of democratic accountability poses a serious problem for member states and the system as whole.
The lofty purposes the EU originally set for itself included: to give Europeans the convenience of one currency, to enhance mutual prosperity, and to reduce political tensions after centuries of animosity and war.
Moreover, by giving up their national currencies, member countries who experience wage inflation can no longer temporarily deflate their currencies to make their exports more attractive. Having your own currency may not be such a bad idea after all. Fears that the use of such tools will lead to runaway inflation and interest rates have proven completely unfounded. In the US, despite the relatively sizable stimulus enacted by the Obama Administration, interest rates here remain near all-time lows, and our deficit is now half what it was at the depth of the recession in The economic feel-good factor wins a lot of elections, and central banks pay more attention to their political masters than they pretend.
When Lehman Brothers collapsed, in September, , and the global financial crisis hit, it was, to borrow a phrase of Hunter S.
Americans may have got out of the habit of talking about their economy as a success story, but from a European perspective it unmistakably is one. As Stiglitz points out, the U. In some European countries, youth unemployment is more than forty per cent.
To take just one example, Italy, the third-largest economy in the eurozone, has a per-capita G. For Stiglitz and for many of his colleagues, the euro is to blame for all this underperformance. In Europe, the first thing that happened after the crisis was that all the bubbles popped. At this point, as Stiglitz explains, the story took an even darker turn. A complex mixture of international politics, economics, and law meant that the body that stepped in to help the crisis economies was a triple-headed entity, the Troika, made up of the European Commission, the European Central Bank, and the International Monetary Fund.
The Troika had strong views about how the afflicted economies should be fixed. They doled out money on the condition that these policies were implemented, and accompanied the package with charts showing how the economy was going to recover after the austerity medicine took effect. It is, if you have a twisted sense of humor, just possible to see the funny side of these charts, especially the ones concerning Greece.
They now show a cluster of lines going briefly down and then up, with another line a long way below, which goes sharply down, then down a bit more, then goes flat. The optimistic cluster represents the sequence of Troika predictions for the effect of austerity programs on the Greek economy, forecasting recession and recovery. The lower line represents what actually happened—the most severe decline of any developed economy since the Great Depression.
Similar stories can be told of the other eurozone countries that received bailout-and-austerity packages. The numbers are grim, and the human realities are worse—joblessness, hopelessness, forced emigration, spikes in the suicide rate. Stiglitz points out that these kinds of austerity policies—trying to cut your way out of a slump—have been tried many times since the days of Herbert Hoover, and have consistently failed.
They explore the dichotomy between French and German political-economic philosophies. The first values flexibility and solidarity and state intervention; the second stresses rules and consequences and free markets. They note that France and Germany have in effect swapped sides in this debate. In the nineteenth and early twentieth centuries, the French had a strong tradition of economic liberalism, and the newly unified Germany believed in state-centered, state-directed economic policies. These biases were reversed by the disasters of Nazism and the Second World War.
The product, known as Ordoliberalism, involves a mixture of free-market economics with an attitude toward rules that approaches mystic reverence. One way of describing the euro crisis is to say that, on the single most important issue facing Europe, the single most powerful European is wrong. The focus of the Ordoliberal morality tale has been Greece, which is a complicated and sad example because so many contradictory things are true.
The eurozone enjoyed its best year in in a decade showing that it had finally emerged from the debt crisis that threatened the euro. Other countries that suffered after the Great Recession of became stronger and experienced lower unemployment. While the eurozone was finally on an economic upswing, the recession caused by the global financial crisis severely impacted the eurozone's economy. Unemployment rose to 7. Under this agreement, 26 separate European countries agreed to allow free movement of people, goods, services, and capital within the borders of the eurozone.
Not every member of the EU is also a member of Schengen, and not every participant in Schengen is part of the EU , but a collapse of the euro would nonetheless affect countries inside and outside of the region.
Economically, it is possible to have competing currencies in the same economic zone. There is nothing preventing Germans or Italians from trading in both German Deutsche marks and Italian lira, for example. That scenario only seems unlikely because an end to the euro would increase pressure to dissolve the entire EU experiment. If Schengen were to fall, countries inside the eurozone would need to implement border controls, checkpoints, and other internal regulations previously eliminated in the Schengen Agreement.
The costs of this would spill over into private businesses, particularly those relying on continental transportation or tourism. To the extent that import quotas or tariffs are implemented by various member nations, and to the extent that those measures are reciprocated elsewhere, there would be a corresponding decline in international trade and economic growth. A collapse of the euro would affect more countries than those in Europe, although in uncertain ways.
Other regions, particularly major trading partners in North America and Asia, would face financial and possibly political consequences. Many of the supposed economic benefits inside the EU do not transfer to external trading partners. The freedoms of labor and capital do not extend to the United States or China, for example, unless foreign consumers and producers gain access to a member country.
As a result, it can be difficult to predict the potential fallout since it is possible that even stronger pro-growth policies could replace the bureaucratic super-state seated in Brussels. On the other hand, increased economic isolationism from nationalist movements could threaten international businesses and financial markets.
In the short term, markets would likely react negatively to added uncertainty. The EU is a known commodity, even if imperfect, and markets like predictability. However, in the longer term, the markets could benefit from a once-again growing Europe.
If a post-euro world returns continental Europe to competitive economic growth, it is very likely that the global economy will benefit. Redenomination would entail two broad changes. This means adjusting present wages, prices, and other values to the new money on an approximately proportionate basis. Second, the international value of the currency would need to be priced into the foreign exchange forex markets. This is based on many factors, including the productive capacity of each national government and the relative risk of a devalued currency.
It is likely that many indebted countries with lots of foreign creditors, such as Greece, would try to redenominate to reduce their real repayment burden. One way to accomplish this is to redenominate and immediately begin strong inflation to reduce the purchasing power of the repaid debt.
Close historical parallels can be found after the collapse of the Austro-Hungarian Empire, which stood between and After the empire fell apart, many member countries hoped to retain the Austro-Hungarian krone as currency. Unfortunately, several irresponsible governments used highly expansionary monetary policies to pay off the high debts from World War I, triggering hyperinflation in Austria by the early s. Slovenia, Hungary, and others experienced much of the same.
By , each former member nation had to use a new currency often backed by gold or silver.
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