On Thursday, 21 March, Joseph Stiglitz and the Foundation for European Progressive Studies (FEPS) presented a report entitled “Rewriting the Rules of the European Economy” in Brussels. His Nobel Prize was then discussed with Commissioner for Economic and Financial Affairs Pierre Moscovici and Jeppe Kofod (S&D, Denmark).
During this event, the American economist called for the eurozone to be made concrete in order to achieve real convergence among the countries in the European Union.
“The fateful 1992 decision to create the euro was not wholly wrong, but [...] European leaders did not (or refused) to fully grasp what was required to make a currency arrangement work, especially for such a diverse set of countries”, indicates Mr Stiglitz’s report, which was co-authored with a team of academics and politicians from all over Europe.
According to this document, whereas the creation of a single currency has automatically deprived some European countries of two key adjustment tools (the exchange rate and the interest rate), nothing has been put in place to compensate for this loss. Consequently, rather than achieving its initial convergence objective, the euro would have led to economic and political divergence in European countries.
The report also sharply criticises the “convergence criteria” defined by the 1992 Maastricht Treaty, which require that the budget deficit not exceed 3% of the GDP, public debt not exceed 60% of GDP, inflation be low, the exchange rate be stable, and long-term interest rates be low.
Mr Stiglitz and FEPS thus consider that – far from promoting the convergence of growth rates or income levels and, even less so, economic structures – it was foreseeable that these “arbitrary numbers” (i.e., not economically justified) would have very harmful consequences in times of severe economic downturn.
In their view, the limits imposed on budget deficits in particular prevent, for example, eurozone countries from lowering taxes or increasing spending in times of economic downturn, whereas since John Maynard Keynes, this kind of anticyclical policy has been recognized by economists as essential to pulling an economy out of a deep recession.
“The case of Portugal proved that growth, not austerity, is the best way forward”, the report then argues.
Thus, the report also criticises the EU’s austerity policies in response to the 2008 financial crisis to ensure that each Member State met these convergence criteria.
Faced with this criticism, Pierre Moscovici stressed the usefulness of these criteria in combating Member State debt and defended the work of the Commission, which, in his opinion, showed flexibility with regard to these rules.
“The idea of reducing deficits is not in itself stupid [...] What is stupid is to be completely rigid”, he stated.
The report moreover calls for a reform of the European Central Bank (ECB) – whose primary task is to maintain an inflation rate “below, but close to, 2% over the medium term” – because, in its view, “the problem in today’s world is unemployment, not inflation”.
By way of response, the European Commissioner simply stated: “Good luck to those who want to change the ECB’s mandate because, as long as Germany is Germany, it won’t happen”.
Read the report: https://bit.ly/2HxFKnM. (Original version in French by Damien Genicot – intern)