The euro may be approaching another crisis.
Italy, the eurozone’s third largest economy, has chosen what can at best be described as a Euroskeptic government.
This should surprise no one.
Joseph E. Stiglitz, Project Syndicate 13 June 2018

Bad macroeconomics is rooted in bad microeconomics
Martin Sandbu, FT January 18, 2018

Many of the /euro/countries now performing poorly were doing very well
– above the European average – before the euro was introduced.
Their decline did not result from some sudden change in their labor laws, or from an epidemic of laziness in the crisis countries.
What changed was the currency arrangement.
Joseph E. Stiglitz, Project Syndicate 22 August 2016

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Put simply, the euro was flawed at birth.
It was almost inevitable that taking away two key adjustment mechanisms,
the interest and exchange rates, without putting anything else in their place,
would make macro adjustment difficult.
Joseph Stiglitz, FT 17 August 2016

The alternative to adjusting nominal exchange rates is adjusting real ones — having Greek prices fall relative to German prices.

But there are no rules in place that could force a rise in German prices and the social and economic costs of forcing Greek prices to fall enough are enormous.

Joseph Stiglitz, a Nobel laureate in economics, is author of ‘The Euro: How a Common Currency Threatens the Future of Europe’, FT 17 August 2016

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Internal devaluation - Ådalsmetoden

The overarching thesis of The Euro: And its Threat to Europe is that
the euro itself is flawed and needs to be deeply reformed, or dismantled.
Like critics from the other end of the political spectrum, and indeed many centrists,
Stiglitz is adamant that “the eurozone was flawed at birth” and that “the euro created the euro crisis”.
Review by Martin Sandbu, FT 5 August 2016

He claims that the euro’s design makes disaster inevitable, even as he (rightly) proves that things could have been better with other, perfectly available, policy choices.

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The Euro: And its Threat to the Future of Europe by Joseph Stiglitz
review Evening Standard 11 August 2016

Canada and the US trade to mutual advantage without any of the trappings of a single currency, single market or free movement, so there is an alternative model.

If the euro is not working, and if, as Stiglitz argues, it is actually making things much worse, then the cross-border infrastructure should be created so that it does work.

Otherwise, if this is too much integration for Europe to stomach, the euro should be abandoned.

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Freefall: Free Markets and the Sinking of the Global Economy
Amazon

The underlying problem
– which has plagued the global economy since the crisis, but has worsened slightly –
is lack of global aggregate, demand
Joseph E. Stiglitz, Project Syndicate 13 April 2016

Germany and Greece’s other creditors continue to demand that Greece sign on to a program
that has proven to be a failure, and that few economists ever thought could, would, or should be implemented.
Joseph Stiglitz, Project Syndicate 5 June 2015

The troika’s forecasts have been wrong, and repeatedly so. And not by a little, but by an enormous amount.
Greece’s voters were right to demand a change in course, and their government is right to refuse to sign on to a deeply flawed program.

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Greece

Europe’s leaders viewed themselves as visionaries when they created the euro. Unfortunately, their understanding of economics fell short of their ambition

The politics of the moment did not permit the creation of the institutional framework that might have enabled the euro to work as intended.
Joseph Stiglitz, Project Syndicate 5 June 2015

What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design
and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.
Joseph E. Stiglitz, Project Syndicate 3 February 2015

The real risk for the global economy is in Europe.
Spain and Greece are in depression, with no hope of recovery in sight.
The eurozone’s “fiscal compact” is no solution, and ECB’s purchases of sovereign debt are at most a temporary palliative.
Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, Project Syndicate 31 december 2012

The general view is now that in this, the next round of the Great Recession,
there is a high risk of things getting worse, with no effective instruments at governments’ disposal.
The first point is correct but the second is not quite right.
Throughout the crisis – and before it – Keynesian economists provided a coherent interpretation of events
Joseph Stiglitz, August 9, 2011

What are we learning about the relative role of monetary and fiscal policies?
As Joseph Stiglitz argued in the FT this week... Monetary policy has worked, in practice, via credit expansion.
It is, as a result, at least partly responsible for the debt crisis of today.
Who can now confidently state that reliance on a policy which worked by financing overpriced housing was better than using surplus savings for higher public investment?
Martin Wolf, FT October 19 2010

It is folly to place all our trust in the Fed
The US Federal Reserve may make funds available to banks at close to zero interest rates,
but if the banks make those funds available it is at a much higher rate.
Joseph Stiglitz, FT October 18 2010

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Joseph Stiglitz sees bleak future for euro as New Malaise takes hold
Exclusive extract: In an updated edition of his critically acclaimed book, Freefall, Joseph Stiglitz analyses the response to the financial crisis and finds new threats stalking the global economy
Freefall: America, Free Markets, and the Sinking of the World Economy
Amazon

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Krugman versus Ferguson: Round Two
Not since Ken Rogoff’s famous attack on Joe Stiglitz has the dismal science of economics provoked such pompous, self-important, personalised squabbling.
The reality is that nobody knows what cutting the deficit into a weak economic recovery is going to do to output and jobs
Jeremy Warner, The Daily Telegraph, 20 July 2010

In an unusually personal and public rebuke, the International Monetary Fund's top economist accused Nobel-winning economist Joe Stiglitz of slander, self-aggrandisement and intellectual vanity.
Mail Guardian Online 1 January 2002

The proposed bail-out of Fannie Mae and Freddie Mac entails the socialisation of risk
– with all the long-term adverse implications for moral hazard –
from an administration supposedly committed to free-market principles.
Joseph Stiglitz, Financial Times July 24 2008

Joseph Stiglitz, a Nobel-prize winning economist,
said successive Federal Reserve chairmen have left the U.S. economy facing a ``very significant'' slowdown.
Bloomberg Feb. 26 2008

The Economic Consequences of Mr. Bush
The damage done to the American economy does not make front-page headlines every day, but the repercussions will be felt beyond the lifetime of anyone reading this page.

Nobel laureate Joseph E. Stiglitz, Vanity Fair December 2007

a tax code that has become hideously biased in favor of the rich; a national debt that will probably have grown 70 percent by the time this president leaves Washington; a swelling cascade of mortgage defaults; a record near-$850 billion trade deficit; oil prices that are higher than they have ever been; and a dollar so weak that for an American to buy a cup of coffee in London or Paris—or even the Yukon—becomes a venture in high finance.

Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle “worst president” when it comes to stewardship of the American economy. Once Franklin Roosevelt assumed office and reversed Hoover’s policies, the country began to recover. The economic effects of Bush’s presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting. There is no threat of America’s being displaced from its position as the world’s richest economy. But our grandchildren will still be living with, and struggling with, the economic consequences of Mr. Bush.

The Federal Reserve chairman, Alan Greenspan, spoke of a New Economy marked by continued productivity gains as the Internet buried the old ways of doing business. Others went so far as to predict an end to the business cycle. Greenspan worried aloud about how he’d ever be able to manage monetary policy once the nation’s debt was fully paid off.

The Clinton years were not an economic Nirvana; as chairman of the president’s Council of Economic Advisers during part of this time, I’m all too aware of mistakes and lost opportunities.

Remember the presidential debates in 2000 between Al Gore and George Bush, and how the two men argued over how to spend America’s anticipated $2.2 trillion budget surplus?

You’ll still hear some—and, loudly, the president himself—argue that the administration’s tax cuts were meant to stimulate the economy, but this was never true. The bang for the buck—the amount of stimulus per dollar of deficit—was astonishingly low. Therefore, the job of economic stimulation fell to the Federal Reserve Board, which stepped on the accelerator in a historically unprecedented way, driving interest rates down to 1 percent.

In real terms, taking inflation into account, interest rates actually dropped to negative 2 percent. The predictable result was a consumer spending spree. Looked at another way, Bush’s own fiscal irresponsibility fostered irresponsibility in everyone else. Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support.

During the past six years, America—its government, its families, the country as a whole—has been borrowing to sustain its consumption. Meanwhile, investment in fixed assets—the plants and equipment that help increase our wealth—has been declining.

The most immediate challenge will be simply to get the economy’s metabolism back into the normal range. That will mean moving from a savings rate of zero (or less) to a more typical savings rate of, say, 4 percent.

While such an increase would be good for the long-term health of America’s economy, the short-term consequences would be painful.

Money saved is money not spent. If people don’t spend money, the economic engine stalls. If households curtail their spending quickly—as they may be forced to do as a result of the meltdown in the mortgage market—this could mean a recession; if done in a more measured way, it would still mean a protracted slowdown.

Anya Schiffrin and Izzet Yildiz assisted with research for this article.
Joseph Stiglitz, a leading economic educator, is a professor at Columbia.

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