This important book, by one of the world's leading economists, addresses the euro-crisis on a bigger intellectual scale than any predecessor.

The euro has few friends. It is attacked both by nationalists and internationalists, paradoxically unified in their conviction that Europe’s monetary union was flawed from the moment of its birth in 1999. The latest “j’accuse” comes from Joseph Stiglitz, whose critique of the euro aligns itself unabashedly with the anti-establishment left. Yet there is much in this new book by the Nobel Prize-winning economist with which the Eurosceptic right will agree.
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”.
But the best and most original part of Stiglitz’s analysis weakens that thesis more than it supports it. The middle of the book methodically points out the myriad ways in which eurozone leaders chose to pursue terrible policies when far better alternatives were available, notwithstanding the euro. In three hard-hitting chapters, Stiglitz hammers away at the European Central Bank’s monetary policy, the macroeconomic policies imposed by the troika of official creditors on crisis countries, and the troika’s structural reforms. He is merciless: “the Troika’s grasp of the under­lying economics was abysmal … downturns were largely because the [crisis] countries had faithfully followed the Troika’s instructions.”
Those familiar with eurozone policies during the crisis — particularly towards Greece — will nod in recognition. Others will shake their heads in disbelief at how much unnecessary damage policymakers have caused.

The tightening of monetary policy during the credit crunch that followed the 2008 financial crisis, along with the imposition of sharp fiscal deficit cuts (not just in crisis countries), threw the eurozone into a self-inflicted second recession in 2011-12 while the rest of the world marched blithely along the road of recovery. The details of the troika’s structural reforms — Stiglitz mentions their demands to change permitted milk labelling and bread loaf sizes in Greece — added insult to injury (and sometimes added injury to injury when particular reforms harmed aggregate demand, living standards and exports alike).

Stiglitz, however, does much more than a demolition job. These chapters are full of constructive proposals — a glimpse of what the “rescues” would have looked like had the troika, perish the thought, hired their critic Stiglitz to design them. He demonstrates that respecting basic principles of standard economics would have made a much better job of these adjustment programmes. He rightly endorses significant debt writedowns, and correctly argues that fiscal consolidation could have been much more growth-friendly by choosing tax rises and spending cuts with more favourable effects on demand. In addition, he suggests that one could have exploited the “balanced-budget multiplier”, the boost to demand that can be had by raising both taxes and spending by the same amount. Detractors deride this as “tax and spend” policies, but Stiglitz is right that these can boost demand without worsening fiscal deficits. He blames rightwing ideology. “That the balanced-budget multiplier was virtually never even discussed … implies a hidden agenda: downsizing government, decreasing its role in the economy.”

It goes on. Stiglitz sensibly recommends policies that enhance whatever private growth impetus there may be — productive infrastructure, education and training to upgrade skills, as well as the institution of property registries that would improve Greece’s tax administration.

His aim, it must be said, is not always entirely true. He makes far too much of the supposed design flaw of the ECB, for example, which he says “has a mandate to focus only on inflation”. In fact, the ECB’s treaty mandate not just allows but requires it to support a number of economic goals as long as they don’t threaten price stability. The structure and rules of the euro did not block the ECB from providing a better monetary policy. Quantitative easing, negative interest rates and “whatever it takes” were as possible, and as legal, under Jean-Claude Trichet’s presidency up to 2011, as under his successor Mario Draghi, but Draghi chose to pursue these while Trichet did not. A strong case can even be made that the ECB’s worst actions (the pressure on elected governments in Ireland, Italy and Spain over fiscal and structural matters, and the cut-off of emergency liquidity to Greek banks in 2015) were in violation of its mandate, not required by it.

This illustrates the contradiction in Stiglitz’s thesis. 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.

The real test of Stiglitz’s argument is to ask how the eurozone would have fared if the right crisis policies — largely the ones he advocates — had been adopted. The answer is: quite well and, in all likelihood, the eurozone would not look any worse for wear than other major world economies did after the crisis. That weakens the rest of his book, which blames the euro’s design for the outcomes, sets out what he claims are required reforms and, most radically, suggests ways to undo the euro if those reforms are not pursued.
n describing the economic disaster that actually transpired, however, Stiglitz fails to note that on his own chart of eurozone GDP, it returned to the pre-crisis growth rate for two years and only fell off that trend when all the bad policies began to bite around 2011.

Lamenting Greece’s tragedy, he does not mention that the country briefly started growing and that foreign capital returned in 2014. Neither fact fits the idea that the eurozone cannot thrive in its current form.

Instead he makes much of the conventional view that the crisis was caused by the permanent fixing of exchange rates, which he thinks brought about the large current account asymmetries between Germany and the periphery. This view assumes that floating exchange rates behave in an orderly way to eliminate current account surpluses and deficits. But Stiglitz himself complains about the irrationality of financial markets. Isn’t it as likely that without the euro Ireland would have looked much like Iceland (whose floating exchange rate facilitated a big trade deficit before the crisis), and Germany like Switzerland (whose flexible rate did not prevent a surplus)?

This leads to one of his more outlandish reform proposals: a system of trade chits to ban excessive trade deficits. In his view that it is better for countries to have roughly balanced trade, Stiglitz paradoxically aligns himself with the German policy consensus, which the book otherwise bombards with criticism. The single-minded attacks on Germany are both unbalanced (he has nothing to say about France’s significant responsibility for the crisis policies, for example) and lacking in nuance (he does not mention Germany’s insistence on Greece’s 2012 debt writedown).

Stiglitz’s indictments of the single currency, and his solutions to its supposed structural flaws, are conventional and also unconvincing. By contrast, his critique of specific policies is original and extremely helpful. If eurozone leaders took his advice on policy choices, they would disprove his bigger claims about the euro’s supposedly unsustainable structure.