NOTES - Summary and Analysis of The Euro: How a Common Currency Threatens the Future of Europe - Joseph E. Stiglitz

Summary and Analysis of The Euro: How a Common Currency Threatens the Future of Europe - Joseph E. Stiglitz (2016)



1 More precisely, around 45 percent at the start of 2016, according to Eurostat.

2 The address was published as Robert E. Lucas Jr., “Macroeconomic Priorities,” American Economic Review 93, no. 1 (2003): 1-14; the quote appears on p. 1.

3 With every country’s currency pegged to gold, the value of each currency relative to the other was also fixed.

4 Bryan uttered this phrase in his July 9, 1896, speech at the Democratic National Convention in Chicago.

5 See Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (New York: Oxford University Press, 1992).

6 The equivalent value for US and China GDPs are $17.9 trillion and $11.0 trillion, respectively. (In purchasing power parity, PPP, a standard way of making cross-country comparisons, the EU was about 1.0 percent smaller than China, but 7.0 percent larger than the United States.) Because of varying exchange rates (the value of the euro relative to the dollar varied during 2015 alone from 1.06 to 1.13), the relative size (at current exchange rates) varies. In 2014, the EU was actually the largest economic block—the fall largely reflects the changing exchange rate, which fell by some 17 percent.

7 Formally known as the Treaty on European Union.

8 Not surprisingly, many other economists and political scientists have found the euro crisis similarly fascinating, and a large literature has grown up trying to understand it, approaching the subject from many different perspectives—as a financial crisis, a political crisis, and an economic crisis. The distinctive approach taken by this book is to focus on those aspects of the structure of the eurozone itself—its rules, regulations, and governance—that essentially made the crisis and its overall poor economic performance virtually inevitable. For an early survey of the crisis, see Philip R. Lane, “The European Sovereign Debt Crisis,” Journal of Economic Perspectives 26, no. 3 (Summer 2012): 49-68. For a thoughtful European perspective written in the early years of the monetary union, see Tommaso Padoa-Schioppa, The Euro and Its Central Bank: Getting United After the Union (Cambridge, MA: MIT Press,2004); and for a view of the next steps, see Henrik Enderlein et al., “Completing the Euro: A Roadmap Towards Fiscal Union in Europe, Report of the ‘Tommaso Padoa-Schioppa Group,’ ” Notre Europe, 2012, available at For a somewhat more up-to-date survey, see Enrico Spolaore, “What Is European Integration Really About? A Political Guide for Economists,” Tufts University and NBER Working Paper, June 2013, and a special volume of the Journal of Macroeconomics dedicated to the euro crisis, “The Crisis in the Euro Area. Papers Presented at a Bank of Greece Conference,” 39, part B (March 2014). The volume includes papers by (in order of appearance in the journal) Heather D. Gibson, Theodore Palivos, George S. Tavlas, George A. Provopoulos, Vítor Constâncio, Seppo Honkapohja, Michael Bordo, Harold James, Barry Eichengreen, Naeun Jung, Stephen Moch, Ashoka Mody, John Geanakoplos, Costas Azariadis, Paul De Grauwe, Yuemei Ji, Vito Polito, Michael Wickens, C. A. E. Goodhart, Lucrezia Reichlin, Stephen G. Hall, Karl Whelan, Anabela Carneiro, Pedro Portugal, and José Varejão, among others.

9 In Globalization and Its Discontents (New York: W. W. Norton, 2002), I describe these failures and my interpretation of the politics, interests, and ideologies behind them.

10 See Globalization and Its Discontents.

11 See, in particular, The Price of Inequality: How Today’s Divided Society Endangers Our Future (2012), The Great Divide: Unequal Societies and What We Can Do About Them (2014), and Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity (2015) (with Nell Abernathy, Adam Hersh, Susan Holmberg, and Mike Konczal), all from W. W. Norton. These recent books are built on my earlier work—such as “Distribution of Income and Wealth Among Individuals,” Econometrica 37, no. 3 (July 1969): 382-97—and on “Dynastic Inequality, Mobility and Equality of Opportunity,” written with Ravi Kanbur, Centre for Economic Policy Research Discussion Paper No. 10542, April 2015, to be published in Journal of Economic Inequality in 2016. Kanbur served as one of my principle advisers at the World Bank.

12 Robert E. Lucas Jr., “The Industrial Revolution: Past and Future,” The Region (May 2004), Federal Reserve Bank of Minneapolis, pp. 5-20, available at He went on to say, “The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.” While the potential for improving the lives of the poor may be enormous, all too often this has not actually happened. Both Europe and the United States today provide living examples.

13 See, for example, Stiglitz, Price of Inequality and the references cited there; OECD, “In It Together: Why Less Inequality Benefits All,” May 21, 2015, available at; Andrew G. Berg and Jonathon D. Ostry, “Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” IMF Staff Discussion Note 11/08, April 8, 2011, available at; and Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note 14/02, February 2014, available at

14 Bruce C. Greenwald and Joseph E. Stiglitz, “Externalities in Economies with Imperfect Information and Incomplete Markets,” Quarterly Journal of Economics 101, no. 2 (1986): 229-64.

15 I became particularly engaged in “the economics of crises” during my time at the World Bank and wrote extensively on the subject, both alone and with my colleagues at the World Bank. A popular account is provided in Globalization and Its Discontents. See also my articles “Lessons from the Global Financial Crisis,” in Global Financial Crises: Lessons from Recent Events, ed. Joseph R. Bisignano, William C. Hunter, and George G. Kaufman (Boston: Kluwer Academic Publishers, 2000), pp. 89-109 (originally presented at the Conference on Global Financial Crises, Bank for International Settlements and Federal Reserve Bank of Chicago, May 6, 1999); “Financial Market Stability and Monetary Policy,” Pacific Economic Review 7, no. 1 (February 2002): 13-30; “Lessons from East Asia,” Journal of Policy Modeling 21, no. 3 (May 1999): 311-30 (paper presented at the American Economic Association Annual Meetings, New York, January 4, 1999); “Responding to Economic Crises: Policy Alternatives for Equitable Recovery and Development,” Manchester School 67, no. 5 (September 1999): 409-27 (paper presented to North-South Institute, Ottawa, Canada, September 29, 1998); “The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis,” with G. Ferri and L.-G. Liu, Economic Notes 28, no. 3 (November 1999): 335-55; “Must Financial Crises Be This Frequent and This Painful?,” Policy Options 20, no. 5 (June 1999): 23-32 (paper originally given on September 23, 1998, as University of Pittsburgh McKay Lecture); “Knowledge for Development: Economic Science, Economic Policy, and Economic Advice,” in Annual World Bank Conference on Development Economics, ed. Boris Pleskovic and Joseph E. Stiglitz (Washington, DC: World Bank, 1998), pp. 9-58.

I wrote several papers addressing what kinds of reforms in financial systems—both nationally and globally—would lead to greater stability: “Reforming the Global Economic Architecture: Lessons from Recent Crises.” Journal of Finance 54, no. 4 (August 1999): 1508-21; “The Underpinnings of a Stable and Equitable Global Financial System: From Old Debates to New Paradigm,” with Amar Bhattacharya, in Annual World Bank Conference on Development Economics 1999, ed. Boris Pleskovic and Joseph E. Stiglitz (Washington, DC: World Bank, 2000), pp. 91-130; “Robust Financial Restraint,” with Patrick Honohan (who later went on to be head of Ireland’s Central Bank, and with whom I had the opportunity to discuss many aspects of the Irish crisis—some of which are discussed below), in Financial Liberalization: How Far, How Fast?, ed. Gerard Caprio, Patrick Honohan and Joseph E. Stiglitz (Cambridge, UK: Cambridge University Press, 2001), pp. 31-63.

With Jason Furman, who would later go on to be the chairman of President Obama’s Council of Economic Advisers, I wrote a paper trying to understand the factors contributing not only to the East Asia crisis but to crises more generally: “Economic Crises: Evidence and Insights from East Asia,” Brookings Papers on Economic Activity No. 2, September 1998, pp. 1-114 (presented at Brookings Panel on Economic Activity, Washington, DC, September 3, 1998).

And also with three World Bank colleagues—Daniel Lederman, Ana María Menéndez, and Guillermo Perry—I wrote a couple of papers trying to understand the Mexican crisis of 1994-1995: “Mexican Investment after the Tequila Crisis: Basic Economics, ‘Confidence’ Effect or Market Imperfection?,” Journal of International Money and Finance 22, no. 1 (February 2003): 131-51; and “Mexico—Five Years After the Crisis,” in Annual Bank Conference on Development Economics 2000 (Washington, DC: World Bank, 2001), pp. 263-82. Finally, with two other World Bank colleagues—William R. Easterly and Roumeen Islam—I wrote two papers trying to understand the forces underlying economic volatility: “Shaken and Stirred: Explaining Growth Volatility,” in Annual Bank Conference on Development Economics 2000 (Washington, DC: World Bank, 2001), pp. 191-212; and “Shaken and Stirred: Volatility and Macroeconomic Paradigms for Rich and Poor Countries,” in Advances in Macroeconomic Theory, ed. Jacques Dreze, IEA Conference Volume 133 (Houndsmills, UK: Palgrave, 2001), pp. 353-72 (speech given for Michael Bruno Memorial Lecture, 12th World Congress of IEA, Buenos Aires, August 27, 1999).

Importantly, my engagement with these crises helped me understand what was wrong with conventional monetary economics, as I explain in Towards a New Paradigm in Monetary Economics, with Bruce Greenwald (Cambridge: Cambridge University Press, 2003), to which I shall make reference often below.

16 The standard model is called the Dynamic Stochastic Equilibrium model. It does not even explain how this “equilibrium” is attained. It simply assumes that it is.

17 See, for instance, Stiglitz and Greenwald, Towards a New Paradigm in Monetary Economics; and my book Freefall: America, Free Markets, and the Sinking of the World Economy (New York: W. W. Norton, 2010).

Chapter 1. The Euro Crisis

1 For consistency, where possible, the IMF was the source of data, unless otherwise noted. (At the time of writing, some 2014 and 2015 figures were IMF staff estimates.) Different data sources will yield different figures, but the overarching story remains the same.

There are 28 countries in the European Union: Bulgaria, Croatia, the Czech Republic, Denmark, Hungary, Poland, Romania, Sweden, and the UK belong to the EU but do not use the euro. The UK and Sweden have made it clear that they are unlikely to do so anytime soon. There are currently 19 countries in the eurozone, though as recently as 2007 there were only 13—Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, and Spain. (Cyprus, Estonia, Latvia, Lithuania, Malta, and Slovakia joined between 2008 and 2015.) As we discuss later in chapter 2, there are many other economic groupings within Europe.

Throughout this book, when making comparisons between the present and the time before the financial crisis, I have generally used only data from the 13 countries that were in the eurozone as of January 1, 2007. In discussions of data from later years, I generally use the definition of the eurozone at that moment in time. Whenever possible, I have made a note about which countries are included for a particular discussion—when doing so would not unduly disrupt the narrative.

2 Having fallen from €30,294 (gross domestic product per capita, constant prices, 2010) in 2007 to an estimated €29,752 in 2015.

3 There is no generally accepted definition among economists of “depression.” I employ the term as in common usage, a severe economic downturn, with high levels of unemployment and GDP below its previous peak.

4 The Eurostat database was used throughout the book for unemployment, poverty, inequality, labor cost, and emigration data, unless otherwise noted. (Eurostat is the official statistical agency of the EU.) Eurozone’s unemployment rate was 10.2 percent in March 2016, after peaking above 12 percent in 2013. The rate has generally been stuck in double digits since the end of 2009. In contrast, the US rate briefly peaked above 10 percent in October of 2009 and has been in nearly smooth decline since 2010, reaching 5.0 percent in April 2016. I will delve more deeply into these statistics in chapter 3.

5 The March 2016 youth unemployment rate for the eurozone was 21 percent. For Greece and Spain, the worst-hit countries, 52 percent (in January, the last reported month) and 46 percent, respectively.

6 Or in the case of Spain, at 5.9 percent in 2012. The usual way of measuring how bad things are is to look at the spread, the excess of the interest rate that a country has to pay over, say, that paid by Germany. The spread reached 21 percent for Greece in 2012 and 4.4 percent for Spain in 2012. Source: OECD data on long-term interest rates (rates for government bonds with 10-year maturity), available at

7 Even so, much responsibility for setting public policy is not actually devolved in practice—it flows from the Council of Ministers. And subsidiarity is a principle more honored in the breach than in the observance.

8 European Union data.

9 Congressional Budget Office, “Summary of the Budget and Economic Outlook: 2016 to 2026,” January 19, 2016, available at

10 It is important to realize that this is true even for countries not under a “program,” where they have borrowed money from their partners, and with the loan come conditions that they have to satisfy. The European Commission (EC) has the power to veto a budget that it believes does not satisfy certain conditions.

In October 2015, 62 percent of Portuguese voters supported parties opposed to austerity. This was the main issue in the election. When the newly elected government of António Costa proposed a less austere budget, the European Commission threatened to veto it. In the end, there was a compromise, with Costa agreeing to a €135 million cut, illustrating the fine-tuning to which the EC would go (€135 million represented less than 0.01 percent of Portugal’s GDP). Peter Spiegel and Peter Wise, “Portugal Agrees Extra 135m Euro Budget Cuts to Avoid Brussel Veto,” Financial Times, February 7, 2016, p. 4.

11 The UK now looks at stability as well—having learned the lessons of the crisis. One of the key problems with the eurozone is that it lacks the flexibility to incorporate the “lessons of history” as they occur.

12 As we noted earlier, this book cannot provide a history of the euro. Pivotal in its creation was the work of the head of the European Commission, Jacques Delors, formerly France’s finance minister, and his 1989 report (called the Delors report), which set the stage for the Maastricht Treaty three years later.

13 I will use the terms market fundamentalism and neoliberalism interchangeably and somewhat loosely. Of course, not everyone adheres to these theories to the same extent. Some might, for instance, believe that normally markets allocate resources efficiently and can be relied upon, and still believe in the need for bank regulation, recognizing that there are in that sector specifically large market failures. Most European neoliberals never went as far as those in some countries in advocating the privatization of virtually every aspect of what the government undertakes, including the judicial system.

14 The widespread skepticism about the EU should have made European leaders even more cautious about going forward with an “incomplete” project. In the next chapter, I’ll describe the magnitude of “euro-skepticism,” as reflected in both polls and referenda.

15 Throughout this book, I make reference to “real GDP,” “real wages,” etc. In these situations, we are adjusting current GDP or wages for inflation.

16 As noted earlier, when I refer to the eurozone GDP here, we mean the 13 eurozone member countries as of January 1, 2007. (See note 1 in this chapter.)

17 Throughout the book, average growth rate means the average annualized growth rate, the growth rate that would have achieved the observed increase over the period.

18 And as we note in chapter 3, Germany’s performance was markedly weaker than even Japan’s.

19 See Oxfam, “The True Cost of Austerity and Inequality: Germany Case Study,” September 2013. According to Oxfam, real wages in Germany fell an average of 1.6 percent a year from 2002 to 2012. OECD data show the large decline in wages of the ninth decile relative to the fifth, and the share of low-paid workers (full-time workers earning less than two-thirds of gross median earnings of all full-time workers) increasing from under 16 percent to almost 20 percent. While Germany did a far better job than the United States in “correcting” the large increase in market income inequality, the increase in poverty suggests that it was far from fully successful.

20 The euro is usually dated to January 1, 1999, when the exchange rates between the countries became fixed, though the euro itself did not come into circulation until 2002.

21 I discuss the East Asia crisis in my book Globalization and Its Discontents.

22 The seminal work in this area is that of Robert Mundell. See his “A Theory of Optimum Currency Areas,” American Economic Review 51, no. 4 (1961): 657-65.

23 A 2013 study in the British Medical Journal and a 2014 study in the British Journal of Psychiatry found that suicide increased especially in Europe in the wake of the Great Recession. A study in the journal BMJ Open found that suicides had increased by 35 percent in Greece between 2010 and 2012. Yet another study in the journal Social Science & Medicine in 2014 demonstrated that the increase in Greek suicides could be closely tied to fiscal austerity. See Nikolaos Antonakakis and Alan Collins, “The Impact of Fiscal Austerity on Suicide: On the Empirics of a Modern Greek Tragedy” 112 (2014): 39-50.

24 The current account is the balance of trade, net primary income or factor income (earnings on foreign investments minus payments made to foreign investors), and net cash transfers, that have taken place over a given period of time.

25 As Keynes once wrote, “In the long run we are all dead.” A Tract on Monetary Reform (London: Macmillan, 1923), p. 80.

26 For instance, they do not build in, or build in in a fully adequate way, essential market imperfections—for example, the irrationality of financial markets, as emphasized by the research of Nobel Prize-winning economist Rob Shiller (see, for instance, his book Irrational Exuberance [Princeton, NJ: Princeton University Press, 2000]) or the pervasive imperfections of information (as emphasized by Nobel Prize-winning economists Michael Spence, George Akerlof, and myself).

For a more extensive discussion of the failures of the standard macroeconomic models, see, for instance, Stiglitz, “Rethinking Macroeconomics: What Failed and How to Repair It,” Journal of the European Economic Association 9, no. 4 (2011): 591-645; and Stiglitz, “Stable Growth in an Era of Crises: Learning from Economic Theory and History,” Ekonomi-tek 2, no. 1 (2013): 1-38 (originally delivered as keynote lecture to the Turkish Economic Association, Izmir, November, 2012). See also Olivier J. Blanchard, David Romer, Michael Spence, and Joseph E. Stiglitz, eds., In the Wake of the Crisis: Leading Economists Reassess Economic Policy (Cambridge, MA: MIT Press, 2012).

27 Some observers have pointed out that even Germany domestically follows a social model at odds in many ways with the conditions imposed on Greece and elsewhere. But, as I note below, such economic and social arrangements arise out of a sense of solidarity; Germany’s internal solidarity appears quite different from the solidarity that it expresses outside its boundaries.

Current debates demonstrate the complexity of the politics: while Germany has recently for the first time imposed a minimum wage, it has also imposed constraints on spending (called a debt brake), a mild form of austerity that risks slowing Germany’s growth below its recent anemic performance.

The migrant crisis that gained unprecedented attention since the summer of 2015 also illustrates the complexity of these issues. Germany was, at least initially, enormously generous. Some 1 million migrants arrived in the country over the course of 2015, and Germany announced intentions to accept 500,000 refugees a year for the next several years. Germany has, however, distinguished strongly between refugees and those wishing to move to Germany simply to escape economic suffering. And toward the end of the year, it became unclear whether the country would grant long-term protection to those fleeing war.

By early 2016, conditions among migrants in Germany were sufficiently bad that many chose to return to the war-afflicted areas than to remain in Germany, and Germany has facilitated the return flow by paying for their transport back. In 2015, 37,000 signed up for its voluntary repatriation program, triple the 2014 number. Guy Chazan, “Frustrated Iraqis Head Home as German Services Struggle,” Financial Times, February 7, 2016, p. 4.

28 There are many variants of the European social model. Some involve unions and employers working with government (the social partners) to solve societal problems. Some have country-wide labor bargaining; others, sectoral bargaining. Some have stronger systems of social protection than others.

29 There is, however, a large literature in behavioral economics suggesting that individuals do not exhibit this kind of rationality.

30 This is called confirmatory bias. There is a large literature showing the importance of this phenomenon.

31 Bonds are the way that countries, companies, and other institutions borrow through capital markets, rather than through banks. They are nothing more than an IOU, a promise to pay, with interest, which can be bought and sold.

32 My earlier book Freefall explained how the neoliberal ideology that underpinned the eurozone led to the financial crisis, and in Globalization and Its Discontents, I explained how the same ideology has resulted in globalization not living up to its promise. Later in this book, I describe some of the basic economic research that overturned the premises of market fundamentalism/neoliberalism.

33 The pathbreaking work was that of Kenneth Arrow and Gerard Debreu (for which both received the Nobel Prize). (Kenneth J. Arrow, “An Extension of the Basic Theorems of Classical Welfare Economics,” in Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability, ed. J. Neyman [Berkeley: University of California Press, 1951], pp. 507-32; and Gerard Debreu, “Valuation Equilibrium and Pareto Optimum,” Proceedings of the National Academy of Sciences 40, no. 7 [1954]: 588-92; and Debreu, The Theory of Value [New Haven, CT: Yale University Press, 1959.]) The circumstances that they identified where markets did not lead to efficiency were called market failures. Subsequently, Greenwald and Stiglitz showed that whenever information was imperfect and markets incomplete—essentially always—markets were not efficient (“Externalities in Economies with Imperfect Information and Incomplete Markets”). Of course, even earlier, Keynes had emphasized that markets do not by themselves maintain full employment.

34 See James Edward Meade, The Theory of International Economic Policy, vol. 2, Trade and Welfare (London: Oxford University Press, 1955); and Richard G. Lipsey and Kelvin Lancaster, “The General Theory of Second Best,” Review of Economic Studies 24, no. 1 (1956): 11-32.

35 See David Newbery and J. E. Stiglitz, “Pareto Inferior Trade,” Review of Economic Studies 51, no. 1 (1984): 1-12.

36 The ERM was effectively broken in 1992 with the attack on the British pound, followed by attacks on Sweden and Spain’s currency. Since the start of the euro, it continues as what is sometimes called ERM II, a band linking the Danish krone to the euro.

37 Though the basic idea of full employment is clear—that everyone who would like a job can get one at the prevailing wages for those with the individual’s skills and talents—there is some controversy over the precise definition of full employment. The general notion is that the labor market is just sufficiently loose—with job seekers matching employers looking for employees—that there is no inflationary pressure. Because of labor market frictions—it takes time to find a good match between employers and employees—this “natural rate” is greater than zero, normally around 2 to 3 percent. Unemployment might also exist because of rigidities in the adjustment of relative wages—the labor market for skilled labor might be so tight that wages are rising, but there may still be unemployment of unskilled workers. This level of unemployment is sometimes referred to as structural unemployment. “Full employment” simply indicates that what unemployment that exists isn’t the result of weak demand in the economy. (For further discussion of the concept and problems in ascertaining the rate of unemployment below which inflation starts to increase, see chapter 9, note 9.)

Chapter 2. The Euro: The Hope and the Reality

1 With the United States, as measured by exchange rates, with the precise ranking depending on the fluctuations in the exchange rate.

2 See my book with Linda Bilmes, The Three Trillion Dollar War: The True Cost of the Iraq Conflict (New York: W. W. Norton, 2008).

3 The fact that it was willing to support strong economic sanctions is testimony to the importance of noneconomic considerations.

4 Indeed, in the design of the programs for Greece and the other crisis countries we are seeing the questionable “benefits” of Europe acting together—policies dragging one country after another into depression. Even in this case, unity is not arrived at as a result of a consensus of perspectives. There are, of course, many countries who agree with Germany and the “consensus.” Eurozone consensus is arrived at least partly through fear of Germany. Italy and France have loudly expressed unhappiness with austerity. They know that austerity does not work, especially in the extremes to which it has been carried out. So, too, for some of the other crisis countries. But countries dependent on German assistance—or potentially so—do not want to offend Germany. In still other countries, the question is not about whether austerity will or will not work. It is simply that their voters will not countenance providing assistance to countries whose citizens are better off than they are. In this sense, the consensus in support of the crisis policies is really a reflection of the lack of solidarity within Europe.

5 There are, of course, other arenas besides military interventionism where if Europe spoke with a single voice, it might have more influence—at the UN, at the World Bank, at the IMF, and in international negotiations more broadly.

6 It is necessary here to draw something of a distinction between the hopes and expectations Europe’s leaders had for the European Union and the euro in particular—it was the former that they more prominently promoted as an effort to bring together the continent. However, it is undeniable that many considered the realization of a common currency to be an integral part of that vision. When German chancellor Helmut Kohl proclaimed in 1995 that the stakes of European integration were “war and peace in the 21st century,” he was promoting not only the idea of the European Union—which though nascent, had already successfully been established—but also Europe’s full economic and monetary integration. According to his biography, “Kohl’s ultimate goal was … [to] make sure that peace prevails. ‘We are determined to make this process irreversible,’ he says. In his view, the means to do so [was] the common currency, which will create a strong bond between the European economies.” Henrik Bering, Helmut Kohl: The Man Who Reunited Germany, Rebuilt Europe, and Thwarted the Soviet Empire (Washington, DC: Regnery, 1999), p. 164. The fact that his goal was to make the process of integration irreversible underlines how important it was for the euro’s founders to get all the details right—something that, unfortunately, they did not accomplish. See chapter 1 for a longer discussion of the euro’s founding, and see, as well, Alan Cowell, “Kohl Casts Europe’s Economic Union as War and Peace Issue,” New York Times, October 17, 1995. There is, of course, the notion that economic interdependence increases the costs of war, and therefore makes war less likely. The EU brought about extensive economic integration. The question is, whether the additional economic integration (if any) resulting from a monetary union would have any significant incremental effect.

7 Adam Smith’s classic work was The Wealth of Nations (1776).

8 Ricardo (1772-1823) was the father of the theory of comparative advantage.

9 The existence of which can actually strengthen arguments for economic integration.

10 Joseph E. Stiglitz, “Devolution, Independence, and the Optimal Provision of Public Goods,” Economics of Transportation 4, nos. 1-2 (March-June 2015): 82-94.

11 See my book with Bruce C. Greenwald, Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (New York: Columbia University Press, 2014; abridged reader’s edition, 2015).

12 Economists use the term public goods, or pure public goods, in a technical sense, to refer to goods that are inherently public—that is, there are no costs associated with an additional individual enjoying those goods. Many publicly provided goods are not public goods in this sense. Knowledge is an example of such a public good: when one more individual knows something, it doesn’t subtract from what others know.

13 Germany’s obsession with inflation, in turn, is usually attributed to its interwar experience and the rise of Hitler. But we should be clear: Hitler arose as Germany faced high unemployment. It was not inflation but unemployment that gave rise to the Nazis. (See Robert Skidelsky, John Maynard Keynes: The Economist as Saviour 1920-1937 [London: Macmillan, 1992].) Those who claim otherwise are rewriting history. Knowing the political and social costs of high unemployment, one would accordingly have thought that ensuring that high unemployment did not occur would be at the center of their attention. But as we will explain in chapter 7, it has been just the opposite: the policies that they have demanded in Greece and Spain predictably have generated very high unemployment rates; and we are already beginning to see the worrisome political consequences.

14 Citizens of, for instance, Romania have the right to migrate to the UK (since they are both in the EU), but because UK is not in Schengen, they still have to go through passport controls.

15 Croatia, Hungary, and Romania are candidates but not yet participating.

16 The EU’s controversial Common Agricultural Policy accounts for some 40 percent of the budget. See European Commission, The European Union Explained: Agriculture, Luxembourg: Publications Office of the European Union, 2014, available at; and European Commission, “European Budget for 2016 Adopted,” November 25, 2015, available at

17 Though as recent events in Greece have demonstrated, not even that risk has been fully eliminated. Moving to a currency union may change the nature of risk—from frequent small realignments to large episodic and cataclysmic changes. In a fundamental sense, the latter may entail even greater risk.

18 Advocates of fixed exchange rates suggest that wages and prices could, instead, adjust. In later chapters, we will explain why wage and price adjustments typically fail as a substitute.

19 The default was, at that time, the largest in history. Of course, the high commodity prices, largely a result of China’s rapid growth, played an important role in Argentina’s success during the period after devalution.

20 Elsewhere, I have explained why especially in such circumstances, GDP is not a good measure of overall economic performance. See Joseph E. Stiglitz, Amartya K. Sen, and Jean-Paul Fitoussi, Mismeasuring Our Lives: Why GDP Doesn’t Add Up (New York: The New Press, 2010).

21 Similar observations hold within countries: when there is too much inequality, it is often hard to support the kinds of collective action necessary to ensure the overall performance of the society. This is one reason that there is such a high price to inequality. See Stiglitz, Price of Inequality.

22 See Scott J. Wallsten, “An Econometric Analysis of Telecom Competition, Privatization, and Regulation in Africa and Latin America” Journal of Industrial Economics 49, no. 1 (2001): 1-19; Anzhela Knyazeva, Diana Knyazeva, and Joseph E. Stiglitz, “Ownership Change, Institutional Development and Performance,” Journal of Banking and Finance 37, no. 7 (2013): 2605-27.

23 See David E. Sappington, and Joseph E. Stiglitz, “Privatization, Information and Incentives,” Journal of Policy Analysis and Management 6, no. 4 (1987): 567-82; Herbert A. Simon, “Organizations and Markets,” Journal of Economic Perspectives 5, no. 2 (Spring 1991): 25-44.

24 Using Eurostat data on labor cost index (LCI) on wages and salaries, the LCI was 108.7 for Greece in 2007, and in 2014 (latest year data available), it was 91.5, a 15.8 percent decline. Other measures of labor costs generate somewhat smaller reductions.

25 For instance, see the detailed discussion in chapter 8 of the agreement that Greece’s prime minister Alexis Tsipras made with the Troika on July 12, 2015 (widely viewed as Greece’s “terms of surrender”).

26 These labor issues are discussed more extensively in chapter 8.

27 See Robert N. Mefford, “The Effect of Unions on Productivity in a Multinational Manufacturing Firm,” Industrial and Labor Relations Review 40, no. 1 (1986): 105-14; and Kim B. Clark, “The Impact of Unionization on Productivity: A Case Study,” Industrial and Labor Relations Review 33, no. 4 (1980): 451-69.

28 Economists also emphasize that no rule can fully contemplate all the relevant contingencies. Thus, one of the reasons that I and others in the Clinton administration so strongly opposed an amendment to the US Constitution that would have forbidden deficits (i.e., required balanced budgets) is that we knew that there would be circumstances like the Great Recession of 2008. One can, of course, write more complicated rules, anticipating some contingencies. But it is impossible to anticipate all. Conservatives like Milton Friedman argued, similarly, that monetary authorities use simple rules, like expanding money supply at a fixed rate. It turned out that the underlying model, as well as it may have worked in earlier decades, broke down beginning in the 1970s. Governments that adopted his simplistic rule found that their economies did not perform well.

29 Interestingly, while the eastern and central European countries that joined the EU did far better than those that did not, the growth of most of these countries has been disappointing, with the exception of Poland.

30 The turnout in the referenda rejecting the euro was impressively high: in Denmark, 53 percent voted against, with a turnout of 87.6 percent on September 28, 2000, and in Sweden, 56 percent voted against, with a turnout of 81 percent, on September 14, 2003. Some 69 percent of Irish voters voted yes on the Maastricht Treaty in 1992, but following the rejection of the constitution by voters in France and Netherlands, the planned Irish referendum on the euro was never held. The UK decided not to join the eurozone but did not put the matter to a vote. A 2015 poll showed that 70 percent of voters in the UK opposed joining the euro (Daily Mail, December 30, 2015). A 2009 poll showed similar opposition (71 percent). (Guardian, January 1, 2009). Remarkably, a 2012 poll showed that even 65 percent of Germans thought they would be better off without the euro and 64 percent of French would reject the Maastricht Treaty (creating the euro) if they were to have voted then (Reuters, September 17, 2012).

31 These and other details of the program can be found in the document “Memorandum of Understanding between the European Commission Acting on Behalf of the European Stability Mechanism and the Hellenic Republic and the Bank of Greece,” August 19, 2015, available at Contemporaneous news accounts describe the bargaining that went into the agreements, though of course the official documents do not refer to differences of stances of various parties.

Chapter 3. Europe’s Dismal Performance

1 The IMF reports that Ireland grew 7.8 percent in 2015, a rate exceeding the second-fastest-growing economy, Malta, about 1.5 percentage points. In the rest of Europe, only Malta grew faster than 5 percent for the year.

Throughout this chapter (and the book), I look at the increase in real GDP—that is, I correct for inflation. In making such comparisons, one has to choose a base year and express, say, GDP in each year in terms of the value in dollars or euros in that year. In looking at growth, the choice of base years makes little difference; but of course, GDP in, say, 2015, using 2010 as a base, will be different than using 2009 as a base. In most instances, I have adjusted GDP to use 2010 as the base, because that is the base used by most of the official sources. In cases where other bases have been used, I have had to adjust the data to the 2010 base. (For US data, for instance, because the US price level—as calculated for GDP, called the GDP deflator—has increased by 8.4 percent between 2015 and 2010, to convert 2010 GDP numbers into 2015 dollars, one simply multiplies the 2010 numbers by 1.084.)

There is a technical issue in making comparisons over time. There may be changes in the market basket of goods, and the rate of inflation may depend on the market basket of goods. Thus, there can be slight differences in estimated rates of real growth depending on which year is chosen as a base. Economists have “solved” this problem by constantly adjusting the base (called chain-weighted GDP). Because we are looking at growth over a relatively short span of time, these technical issues, by and large, are of second-order importance.

There is one more technical issue: a lag in the production of data. One wants numbers to be as up to date as possible. All data are subject to revision. Such revisions occur sometimes years after the initial release, and sometimes even give a slightly different picture of what happened.

2 As I will note later in this chapter, the International Commission on the Measurement of Economic Performance and Social Progress (the Stiglitz-Sen-Fitoussi Commission) explained why GDP is not a good measure of economic performance. (See Stiglitz, Sen, and Fitoussi, Mismeasuring our Lives: Why GDP Doesn’t Add Up.)

3 GDP is adjusted throughout for inflation, but because inflation rates differ across countries, important technical issues arise in the analysis of aggregates, such as eurozone GDP. Still more complicated issues arise when comparing GDP across countries, because the market basket of goods consumed in different countries differs and different goods cost different amounts in different countries. In this book, we focus on the effect of the euro on growth, and we assess growth by using each country’s own price deflator. When comparing levels of GDP to take account of differences in prices of different goods in different countries, a standard approach is to calculate real PPP (purchasing power parity) GDP, discussed briefly in note 6 in the preface. It compares incomes using a standardized basket of goods.

4 GDP in 2015 for the 13 countries that had adopted the euro as of January 1, 2007, was merely 0.6 percent above that in 2007. Figures were actual, with the exception of Belgium and Luxembourg, as reported by the IMF.

5 Graph shows the largest contractions over 2007-2015. For countries with multiple contractions within 2007-2015, I took the time-weighted average. See Social Democracy for the 21st Century: A Post Keynesian Perspective, “The Great Depression in Europe: Real GDP Data for 22 Nations,” July 7, 2013, available at

6 Throughout this chapter, non-eurozone Europe refers to Norway, Sweden, Switzerland, and the UK.

7 This is the 2007 GDP-weighted average of the growth rates of real GDP of the non-eurozone countries. Though eurozone real GDP increased in 2015, real GDP per capita declined, as we will note in more detail below. The key point, that non-eurozone Europe has performed far better than eurozone Europe, remains.

8 Emigration data from Eurostat. The latest reported is 2013, and data was not reported for Greece for 2007.

9 By more than 1 percent from 2008 to 2013, according to data from the World Bank. If 2014 is included (the latest available year), the decrease in population is about 2 percent. This likely changed, of course, as Greece became the main recipient of refugees from Syria and elsewhere in the last couple of years, though this is a different kind of migration altogether—refugees choose Greece as a gateway to Europe and not because it is the most attractive destination for settlement.

10 Greece’s working-age population as percentage of total population fell from 66.7 percent in 2007 to 64.6 percent in 2015. Thus, the share of the declining population that was of working-age population decreased by more than 2 percentage points. Even if the unemployment rate had been unchanged and even if productivity had remained the same, GDP on this account alone would have fallen by more than 4 percent, reducing the country’s ability to pay back its debts.

11 Government expenditure converted to real terms using GDP deflator using IMF data.

12 World Bank data.

13 Eurostat data.

14 And well below that of the much maligned Japan, whose real GDP per working age population exceeds by a considerable amount both Europe and the United States. Source: Economic Report of the President, 2015, based on World Bank data, available at

15 These productivity numbers are based on real output per worker. But the crisis has not only increased unemployment but also decreased hours worked per worker—implying that productivity, as measured by output per hour worked, has performed somewhat better than these numbers would suggest. In Greece, for instance, before the crisis, workers worked, on average, 17 percent more hours than did Americans. The crisis had hardly any effect on hours worked per employee in the United States (less than 0.5 percent as of 2014), but hours worked per Greek worker fell by about 3.3 percent, implying a decline in output per hour of just 2.1 percent; Germany, meanwhile, had a decline in hours worked per employee of 3.7 percent, resulting in a slight increase in output per hour. Source: hours worked are from OECD database.

16 From 26.3 percent in 2013 to 20.5 percent in Spain at the beginning of 2016, and from 27.9 percent to 24.4 percent in Greece at the end of 2015 (the most recent data). Source: Eurostat.

17 There is a large body of economic research showing that young people entering the labor force in a year of high unemployment have substantially lower lifetime incomes than their peers who entered just a few years earlier or later when the unemployment was lower. T. von Wachter, Oreopoulos, and A. Heisz, “Short- and Long-Term Career Effects of Graduating in a Recession,” American Economic Journal: Applied Economics 4, no. 1 (January 2012): 1-29.

18 Source: OECD data. Note that once account is taken of the decline in hours worked, productivity, as measured by output per hour, looks better. At the same time, the fact that hours worked is so much higher in Greece than in Germany means that productivity per hour worked is so much lower.

19 From Oxfam, “The True Cost of Austerity and Inequality: Greece Case Study,” September 2013, available at; and Hellenic Statistical Authority, “Living Conditions in Greece, 2013,” available at

20 See UNICEF, “Children of the Recession," September 2014, available at See also Yekaterina Chzhen, “Child Poverty and Material Deprivation in the European Union During the Great Recession,” Innocenti Working Paper No. 2014-06, UNICEF Office of Research, Florence, 2014, available at

21 Euro area here includes Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain. Slovenia is not included in this analysis due to data unavailability in the 1980s. Euro area GDP is obtained from aggregating GDP (in national currency, constant prices) of these countries using IMF WEO data available accessed on May 4, 2016. Also used was the GDP deflator (index) of the involved countries from IMF WEO data available at the same source (accessed on May 4, 2016) to make all GDP (in national currency, constant prices) data series in our aggregation have the same base year of 2010. The GDP (in national currency, constant prices) of Belgium and Luxembourg in 2015 are IMF estimates instead of the actual outputs. Projection (i.e., trend fitting) was based on data from 1980 to 1998.

22 Future dollars are valued at less than present dollars. To reflect this, economists use the concept of “present discounted value.” The present discounted value depends on the (real) interest rate. The €200 trillion loss is based on a real discount rate of 1 percent (somewhat higher than the current real interest rate).

23 Economists call the relationship between inputs and output the production function. It seems as if the production function has shifted down—certainly down from where it otherwise would have been, given the nature of progress of technology.

24 Kenneth J. Arrow, “The Economic Implications of Learning by Doing,” Review of Economic Studies 29, no. 3 (June 1962): 155-73. The general theory described here is developed at greater length in my book with Bruce C. Greenwald, Creating a Learning Society.

25 See Rewriting the Rules of the American Economy for some of the underlying forces contributing to this shortsighted behavior.

26 For a longer discussion of these trends, see Kai Daniel Schmid and Ulrike Stein, “Explaining Rising Income Inequality in Germany, 1991-2010,” Macroeconomic Policy Institute, Dusseldorf, Germany, 2013. By one measure used there, the income share of the bottom 10 percent of Germans decreased by 11.2 percent from 1991 to 2010.

Moreover, to repeat the important point raised earlier: as in most countries, the standard of living of ordinary workers may be hurt even more than the conventional statistics indicate, as they face more insecurity and cutbacks in public programs that are essential to their well-being.

27 The income share of the German top 1 percent, including capital gains, increased from about 10.6 percent in 1992 to about 13.1 percent in 2010. Latest data from the World Wealth and Income Database, available at

28 See OECD, “Country Note: Germany,” 2008, from the OECD’s 2008 publication Divided We Stand, available at

29 This is illustrated by the more recent OECD study, which notes that “low-educated persons in Germany own 60% less than those with upper/postsecondary education, while persons with a tertiary degree own 120% more. This is the widest gap after that recorded in the United States.” Moreover, “In Germany, the lower 60% of the population own a mere 6% of all household wealth.” OECD, “In It Together.”

30 The issues are obviously more complex than I can do justice to in this short summary. Supporters of the euro might also point out that the devaluation could set off an inflationary spiral, and as wages and prices increase, the benefits of the lower nominal exchange rate would be diminished. Typically, however, wages and prices do not rise when there is significant unemployment and excess capacity—the situation being discussed here.

31 In addition to the studies I referred to in chapter 1, an Oxfam study notes a 26.5 percent increase in the suicide rate of Greece from 2010 to 2011 alone. Based on data from the Hellenic Statistical Authority and the nongovernmental organization Klimaka. See Oxfam, “The True Cost of Austerity and Inequality: Greece Case Study,” September 2013, available at

Chapter 4. When Can a Single Currency Ever Work?

1 At its inception, there were 11 countries.

2 It used to be that most countries fixed the value of the exchange rate in terms of gold; and with each specifying the amount of gold to which they were equivalent, relative exchange rates—the exchange rate between, say, the US dollar and the British pound—were fixed. But since the early 1970s, exchange rates have not been so fixed. In some cases, they are market determined—that is, the value of the dollar relative to the pound is determined by the laws of supply and demand. But it is oversimplified to say that they are just market determined, since among the most important determinants of demand are those set by government policies. In some cases, governments intervene directly into the foreign exchange market to affect the value of their currency; in these instances, the country is said to have a managed exchange rate. In a few cases, countries peg the value of their currency relative to another; to maintain the peg, they have to adjust the interest rate and buy and sell foreign exchange. Often, eventually they find it impossible to maintain the peg—this is what happened in the case of Argentina in 2001.

3 There is considerable controversy over the relative importance of the different channels by which monetary policy affects the economy. While many economists believe that lower interests directly affects consumption and investment, others believe that it is really the greater availability of credit associated with the loosening of monetary policy (lowering interest rates) that really matters. See, for instance, my book with Bruce Greenwald, Towards a New Paradigm in Monetary Economics.

4 An area that could easily share a common currency came to be referred to as an optimal currency area: big enough that the currency would be taken as a serious currency, but not so big that the differences among the countries would impede macroeconomic stability and impose excessive costs. The debate surrounding the eurozone has, however, not been about whether it was an “optimal” grouping. It is about whether it is a grouping that can be made to work. As the discussion that will follow of the United States illustrates, the amount of diversity compatible with sharing a currency depends on political arrangements and a variety of social and economic factors. The challenge is, how, with a single currency, can a diverse region maintain full employment in all of its parts? If there is easy migration, then people can easily move from areas where there is a shortage of jobs to one where there is a surplus. If the government has active policies for creating jobs in places where there is high unemployment, then that can substitute for exchange-rate and interest-rate flexibility. If, of course, all parts of the region are similar, the same interest-rate policy and exchange rate would enable all to experience full employment simultaneously. The following discussion will make clear that these conditions are not satisfied within the eurozone. See Robert Mundell, “A Theory of Optimum Currency Areas,” American Economic Review 51, no. 4 (1961): 657-65.

5 I have not seen any persuasive analysis justifying these particular numbers. Almost surely, they were partly politically driven: one wanted the toughest numbers that were realistically achievable by the countries planning to join the eurozone. In fact, the numbers proved sufficiently tough that France and Germany missed the targets in the early years of the euro. Further conditions were imposed on a country wishing to join the euro in the years before joining the euro—for example, stipulations concerning stability of its exchange rate and its long-term interest rates.

6 The obligations go beyond the deficit and debt levels to “medium-term budgetary objectives,” designed to ensure fiscal sustainability over a longer horizon. The details of the requirements and procedures are complicated and need not derail us here.

7 South Dakotans may care, of course, though surely not with the same passion that Greece does.

8 Although it is worth observing that even in the United States, free migration has not eliminated large differences in standards of living across states.

9 In a purely agrarian economy, as more people leave, there is more land per worker, so incomes rise. This limits the extent of migration. In a modern industrial economy, there may be economies of scale. As more people leave, the ability to sustain the basis of a modern knowledge-based economy weakens. Productivity may actually decline.

10 Actually, it wouldn’t have been quite that bad—Washington Mutual’s assets were about the size of Washington’s GDP. But still, if Washington had had to bail out WaMu, it, too, would have faced a fiscal crisis.

11 Data for Portugal, Germany, and Latvia are from IMF, comparing gross domestic product per capita, constant prices; for Connecticut and Mississippi, from the US Bureau of Economic Analysis and the Census. The Portugal-Germany divide was the largest at the time of the euro’s establishment.

12 Eurostat data. Estonia also did not exceed the deficit limit, but it did not join the eurozone until 2011.

13 See “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation,” chapter 3 of International Monetary Fund, World Economic Outlook: Recovery Risk and Rebalancing (Washington, DC: International Monetary Fund, 2010), pp. 93-124. See also the excellent earlier studies cited in chapter 7, note 57.

14 Of course, if at the same time the euro appreciates, then in spite of the fact that it has become more competitive relative to other countries in the eurozone, it will be less competitive relative to other countries.

The value of the UK currency, the pound sterling, relative to the dollar, is called the nominal exchange rate. Even if it does not change, if UK inflation is lower than that of the United States, then we say that the real exchange rate has decreased.






























16 The 2010-2015 average growth rate for volume of exports of goods and services: Cyprus, 1.75 percent; Greece, 1.18 percent; Ireland, 6.40 percent; Portugal, 4.68 percent; and Spain, 5.42 percent.

17 Based on Eurostat data.

18 I think that goes too far. The confusion these scholars make is that they observe that those countries that went off the gold standard did better, some recovering quite strongly. But that was in part because others remained on the gold standard, so that they could benefit from a competitive devaluation. If all had gone off the gold standard, then that would not have been true. Even then, in a world in which monetary authorities feel constrained in expanding the money supply by their reserves of gold, going off the gold standard can lead to a monetary expansion, which can have significant beneficial effects on aggregate demand.

See Barry J. Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (New York: Oxford University Press, 1992); Ben Bernanke and Harold James, “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison,” in Financial Markets and Financial Crises, ed. R. Glenn Hubbard (Chicago: University of Chicago Press, 1991), pp. 33-68; Peter Temin, Lessons from the Great Depression (Cambridge, MA: MIT Press, 1989); Barry Eichengreen and Jeffrey Sachs, “Exchange Rates and Economic Recovery in the 1930s,” Journal of Economic History 45, no. 4 (1985): 925-46.

19 Even from a social point of view, some government restrictions on firing (requiring severance pay) may be desirable. See Carl Shapiro and Joseph E. Stiglitz, “Equilibrium Unemployment as a Worker Discipline Device,” American Economic Review 74, no. 3 (1984): 433-44; and Patrick Rey and Joseph E. Stiglitz, “Moral Hazard and Unemployment in Competitive Equilibrium,” 1993 working paper.

20 These theories arguing that lowering wages lowers workers’ productivity were first developed in the context of developing countries, where it was observed that low nutrition resulting from low wages hurt productivity. See Harvey Leibenstein, Economic Backwardness and Economic Growth (New York: Wiley, 1957). In a series of papers, I then extended the idea to advanced countries, focusing on the fact that lower wages lead to more labor turnover, and that increases training costs, beginning with Joseph E. Stiglitz, “Alternative Theories of Wage Determination and Unemployment in L.D.C.’s: The Labor Turnover Model,” Quarterly Journal of Economics 88, no. 2 (1974): 194-227. I then showed that similar effects arise as a result of imperfect information: lowering wages leads to a lower quality and less motivated labor force. This research was part of the work that provided the basis of the Nobel Prize that was awarded to me. There is now a huge literature on the subject, providing empirical verification as well. See, for instance, George A. Akerlof and Janet L. Yellen, eds., Efficiency Wage Models of the Labor Market (New York: Cambridge University Press, 1986); and Jeremy Bulow and Laurence Summers, “A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination, and Keynesian Unemployment,” Journal of Labor Economics 4, no. 3 (1986): 376-414.

21 The combination of austerity and poorly thought-out structural reforms associated with the IMF/Troika programs simply increased this uncertainty. In Europe, with the free flow of capital, money left the banks in the crisis countries, further compounding the problems, as I explain in the next chapter.

22 And that’s why it’s so difficult parsing out each of the effects separately. In East Asia, where bankruptcy and debt default rates reached 50 percent or more, the adverse effects on demand of the increased risk of delivery was palpable. The quantitative importance of this effect in different European countries has not been assessed.

23 Source: Eurostat data for 2015. Percentage of EU member states exports in value with other EU members was 63.2 percent.

24 The fact that a few countries and the ECB have “broken” the bound by having slightly negative interest rates does not change the analysis. The real point is that when economies are very weak, monetary policy is typically relatively ineffective. Though economists argue about the reason for this, there is a broad consensus over the limitations of monetary policy—emphasized, for instance, even by successive chairs of the Federal Reserve. (Elsewhere, I have argued that the zero lower bound is not the critical reason for the ineffectiveness of monetary policy. Even if real interest rates could be lowered from, say, minus 2 percent to minus 4 percent, there would be little effect on investment. The high level of economic uncertainty predominates, and businesses won’t respond much to these changes in interest rates.)

25 See Joseph E. Stiglitz and Bruce C. Greenwald, “A Modest Proposal for International Monetary Reform,” in Time for a Visible Hand: Lessons from the 2008 World Financial Crisis, ed. S. Griffith-Jones, J. A. Ocampo, and J. E. Stiglitz, Initiative for Policy Dialogue Series (Oxford, UK: Oxford University Press, 2010), pp. 314-44.

26 By my former student, Columbia colleague, and former chief economist of the Inter-American Development Bank, Guillermo A. Calvo. See, for instance, “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops,” Journal of Applied Economics 1, no. 1 (1998): 35-54.

27 Many countries attempt to postpone the day of reckoning, finding some high-cost way of raising short-term funds accompanied by severe budget cutbacks. These usually turn out to be only short-term palliatives.

28 Typically, too, the loan is denominated in foreign currency. As the flow of money coming into the country diminishes, there is a shortage of dollars (or other “hard” currencies). This leads to a currency crisis.

29 This is the reverse causality discussed in the previous section: it is not that the fiscal deficit caused the trade deficit; it is the other way around.

30 In the case of countries with a flexible exchange rate, facing the situation just described, the value of the dollar soars—the value of the local currency plummets. (Sometimes governments try to postpone the day of reckoning by using their scarce foreign exchange reserves to prevent the exchange rate from plummeting. But these interventions, too, are typically short-term palliatives.) The currency crisis interacts with the debt crisis. Those in the country who have borrowed in foreign exchange but make their income in local currency now are even harder pressed to repay—their income doesn’t buy as much foreign exchange as it used to. The currency crisis exacerbates both the debt and financial crises. (These results should be contrasted with what happens in the absence of debt—the fall in the exchange rate would just stimulate demand.)

When the country turns to the IMF for help, the IMF sometimes intervenes to prevent the exchange rate from falling. The money the IMF lends to the country is used to support the currency. In addition, it typically forces the country to raise interest rates and taxes, and cut spending. That sometimes works—by killing the economy enough that consumers stop importing and demand for foreign exchange becomes aligned with the supply. But the price of saving the currency is high.

31 Economists refer to these as “political economy problems.”

32 The particular form that the “haircut” took in Cyprus was a tax on deposits. Selfishness on the part of Cyprus’s partners was perhaps the dominant motive, but many of the depositors seemed to be Russians engaged in trying to move money out of their country, in not always totally aboveboard means. Cyprus had achieved a reputation as one of the offshore venues of choice for Russians. Not surprisingly, many in the eurozone felt reluctant to engage in what they saw as a subsidy for these Russians. However motivated, even the widespread discussions that there might be a haircut had serious consequences.

In the end, small depositors were not forced to take a haircut. And European leaders typically shift blame for what is now viewed as the hare-brained proposal to make them do so onto the Cyprus government. As we note below, whoever was responsible matters little: the result is a loss in confidence in the banking system in weak countries.

33 Just as the IMF’s announcement in 1998, after shutting down 16 private banks in Indonesia, that more banks would be shut down and depositors would be left unprotected induced a run on the banking system. For a more extensive discussion of these ideas and how they applied in the East Asia crisis, see my book Globalization and Its Discontents.

34 According to OECD data on long-term interest rates (rates for government bonds with 10-year maturity).

35 According to data aggregated by the St. Louis Fed.

36 One of the rating agencies, S&P, seemed unaware of this, as it downgraded US debt in 2011. The value of those dollars might diminish were it to resort to such measures, but there was no evidence that government borrowing had any effect on inflationary expectations; indeed, at the time that S&P downgraded US debt, inflationary expectations were so low that the United States could borrow even long-term at unprecedentedly low rates.

37 There is overwhelming evidence, however, that the markets do not work well in this respect.

38 For instance, by insisting the banks’ foreign exchange liabilities and assets be matched.

39 Such a mechanism, called the European Stability Mechanism (ESM), was set up in 2012.

40 Not surprisingly, the creditor countries have done all they can to prevent the creation of an international rule of law to deal with such defaults. A UN resolution calling for such a framework was passed on September 9, 2014. A set of principles was overwhelmingly adopted—over the opposition of the creditor countries—on September 10, 2015.

41 In 2014, China’s trade surplus was 3.7 percent of GDP, while Germany’s was 6.7 percent. Source: World Bank data.

42 Some in Germany like to make a distinction between their surplus, which they think of as a virtue, and that of China’s. China’s surplus is a result of its “manipulation of the exchange rate,” it is claimed. But exchange rates and trade surpluses are a result of a wide gamut of policies. If China removed restrictions on its citizens investing abroad, the exchange rate would almost surely fall, and its trade surplus would increase. So, too, if it followed Europe’s and America’s lead in lowering its interest rate. Germany’s wage and public expenditure policies are among the factors that contribute to Germany’s surplus. Indeed, in early 2016, it was only because of direct government intervention in the exchange rate that China’s currency did not experience a substantial devaluation. By contrast, the IMF, in its regular review of the German economy (called the Article 4 consultation) for 2014 estimated that Germany’s exchange rate was undervalued by some 5 to 15 percent.

43 See John Maynard Keynes, General Theory of Employment, Interest and Money (London: Macmillan, 1936), chapter 23, “Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-Consumption.”

44 Macroeconomics focuses on net capital flows. Behind these net flows there can be complicated patterns: Germany need not lend directly, say, to Spain. A German bank may lend to a party in a third country, and some (possibly other) party in that third country lends to Spain.

45 ILO data for 2015. See ILO, World Employment Social Outlook—Trends 2016, available at This situation, where there has been a deficiency of aggregate demand, has persisted for a long time. Indeed, one of the reasons that the Fed encouraged the reckless lending that led to the housing crisis was to make up for what would otherwise have been a weak aggregate demand within the United States.

Ben Bernanke, former chairman of the Federal Reserve, referred to the situation as a “savings glut.” See “The Global Saving Glut and the U.S. Current Account Deficit,” Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia, March 10, 2005, available at

Of course, there are many good investment opportunities, but the world’s financial system wasn’t then—and isn’t now—capable of intermediating effectively between the savers and these investments.

46 This number is higher than the US minimum wage but much lower than the $15 an hour that is being adopted in some American cities, and even lower than the $10.10 an hour required for enterprises doing business with the US government.

47 Thus, the eurozone’s surplus was substantially larger than China’s, which stood at $293.2 billion. Germany’s surplus alone was estimated to be $285.2 billion in 2015. In 2014, Germany’s surplus of $286 billion alone exceeded China’s $220 billion, and if we add those of Italy and Netherlands, the surpluses exceeded that of China by more than 50 percent.

48 Keynes suggested a tax on surpluses, and more recently, I and my coauthor Bruce C. Greenwald have proposed a new system of global reserves that would include strong incentives for countries not to run surpluses. See Joseph E. Stiglitz and Bruce C. Greenwald, “Towards a New Global Reserves System,” Journal of Globalization and Development 1, no. 2 (2010), Article 10. The idea behind such a system has been promoted by the international Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System, which released its report in September 2009, which in turn was published as The Stiglitz Report (New York: The New Press, 2010). See also John Maynard Keynes, “The Keynes Plan,” 1942-43, reproduced in J. Keith Horsefield, ed., The International Monetary Fund 1945-1965: Twenty Years of International Monetary Cooperation, vol. 3, Documents (Washington, DC: International Monetary Fund, 1969), pp. 3-36; and Martin Wolf, Fixing Global Finance (Baltimore: Johns Hopkins University Press, 2010).

Chapter 5. The Euro: A Divergent System

1 A quite different antigravity force has been at play elsewhere in the world, as money has moved from developing and emerging markets to the developed countries. In Making Globalization Work (New York: W. W. Norton, 2006), I explain how this is a result, in part, of the global reserve system.

2 For instance, in 2000 the GDP per capita in southern Italy was 55 percent of the wealthy northwestern region, a figure that remained unchanged in 2014. And GDP per capita in the south actually decreased slightly as compared to the northeast between 2007 and 2014. Comparisons made using Eurostat data.

3 The fate of history was that many of these countries were faced with an external situation that would, in any case, make matters difficult. China’s rise led to an increase in the demand for Germany’s sophisticated manufactured goods. At the same time, there’s less Chinese demand for some of the less sophisticated goods produced elsewhere in Europe—China provides low-cost substitutes for such goods. For a discussion of some of these trends, see Stephan Danninger and Fred Joutz, “What Explains Germany’s Rebounding Export Market Share?,” CESifo Economic Studies 54, no. 4 (2008): 681-714; and Christoph Schnellbach and Joyce Man, “Germany and China: Embracing a Different Kind of Partnership?,” Center for Applied Policy at the University of Munich Research Working Paper, September 2015, available at

4 Each number is the percentage decrease, from the precrisis peak, of new loans to nonfinancial corporations of €1 million or less, as reported by those countries’ national banks. The precrisis peak varies depending on the country but is generally 2007 or 2008. Data for Greece is from Institute of International Finance, “Restoring Financing and Growth to Greek SMEs,” June 18, 2014, available at See also Institute of International Finance, “Addressing SME Financing Impediments in Europe: A Review of Recent Initiatives,” January 12, 2015, available at The source of the figures for Portugal, Spain, Ireland, and Italy is a report from Bain and the Institute of International Finance, “Restoring Financing and Growth to Europe’s SMEs,” 2013, available at’s_SMEs.pdf.

5 See European Commission, “Annual Report on European SMEs 2014/2015,” November 2015.

6 See Helmut Kraemer-Eis, Frank Lang, and Salome Gvetadze, “European Small Business Finance Outlook,” European Investment Fund, June 2015, available at

7 Later, I’ll discuss other reasons that returns to capital in the crisis countries may be lower than elsewhere in the eurozone.

8 Similarly, there is a high correlation between the insurance premiums that each has to pay to insure against the risks of default. See V. V. Acharya, I. Drechsler, and P. Schnabl, “A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk,” Journal of Finance 69, no. 6 (December 2014): 2689-2739.

There are many other aspects of the link between sovereign risk and the banks within its jurisdiction. Banks typically hold significant amounts of the country’s bonds in their portfolio. Thus, a weakening of the sovereign results in a weakening of its banks, and their ability and willingness to lend. See Nicola Gennaioli, Alberto Martin, and Stefano Rossi, “Banks, Government Bonds, and Default: What Do the Data Say?,” IMF Working Paper, July 2014. (Obviously, a bank whose balance sheet has worsened is likely to lend less. See Stiglitz and Greenwald, Towards a New Paradigm in Monetary Economics.)

At the same time, given the fact that governments do in fact bail out banks, weaker banks lead to an increase in government’s implicit liabilities, increasing sovereign risk.

For further discussions, see, for instance, Adrian Alter and Yves Schueler, “Credit Spread Interdependencies of European States and Banks during the Financial Crisis,” Journal of Banking and Finance 36, no. 12 (December 2011): 3444-68; and Patrick Bolton and Olivier Jeanne, “Sovereign Default Risk and Bank Fragility in Financially Integrated Economies,” IMF Economic Review 59, no. 2 (2011): 162-94.

9 See, for instance, the discussion in my book Freefall or in Simon Johnson’s 13 Bankers (New York: Pantheon Books, 2010).

10 The exit from Spanish banks, while significant—and leading to a credit crunch—has been slower than some had anticipated. Some refer to it as a “capital jog” rather than capital flight. This, in turn, is a consequence of institutional and market imperfections (for example, rules about knowing your customer, designed to curb money laundering), which, interestingly, the neoclassical model underlying much of Europe’s policy agenda ignored. There is far less of a single market than is widely thought to exist.

11 There are similar distortions within countries. Because the likelihood of a government bailout is greater for big banks—especially the banks that are viewed to be too big to fail—such banks can acquire funds at a lower rate than small banks. They can thus expand, not based on their relative competency or efficiency, but on the basis of the relative size of the implicit subsidy that they receive from the government. But the system is again divergent: as the large banks get larger, the likelihood of a bailout increases, and thus the difference in the implicit subsidy gets larger.

12 This would not fully fix the problem: given that banks in weak countries would, in any case be weaker and perceive the risks they face as higher, lenders to these banks would demand higher interest rates, and the banks in turn would charge higher interest rates, putting firms in their country at a disadvantage. Thus, there would still not be a level playing field. But it would be more level than the current system. See Stiglitz and Greenwald, Towards a New Paradigm in Monetary Economics.

13 Central banks are supposed to lend to banks that are facing liquidity problems and can’t get access to funds, but not to banks that are insolvent and have a negative net worth. In fact, if everyone knew that the bank was solvent, then presumably, if markets worked well, there would be no problem of access to funds. Of course, the bankers always believe that they are fundamentally solvent; it is only the temporary irrationality of markets that has created their problem. Evidently, while the bankers are among those who most consistently preach the religion of free market fundamentalism, when “markets” rate them less highly than they believe they deserve, their faith in markets vanishes, and as suddenly, there is a surge in the belief in government—at least that government should bail out deserving institutions such as themselves.

14 While before the crisis, London and New York competed vigorously against each other in reducing regulations, perhaps the real winner—or I should say loser—was Iceland, which garnered for itself a banking system with assets that were at least ten times the size of its GDP. Iceland also showed the consequences: British and Netherlands depositors in its banks lost their money. Not only had they (wrongly) assumed that the Icelandic banks were effectively regulated; they assumed that the deposit insurance actually would pay off. They typically did not turn to their lawyers before putting money into Icelandic accounts, to find out whether the deposit insurance scheme was adequately capitalized and what the Icelandic government’s obligations would be if it were not. The widely held assumption was that the deposit insurance was adequately capitalized (it was not), and the obligations of Icelandic government if the deposit insurance fund went broke were unlimited—but as it turned out, the deposit insurance funds were insufficient to cover the losses and the relevant European court held that the Icelandic government was not responsible for making up for the deficiencies. Depositors experienced large losses.

15 Many other major banks paid billions in fines or made settlements related to the Libor scandal. These include Citigroup, Deutsche Bank, JPMorgan, Rabobank, Royal Bank of Scotland, and UBS. As this book goes to press, traders convicted in the scandal were appealing their verdicts. Meanwhile, some banks were still under investigation. In another case of massive market manipulation, Citigroup, JPMorgan, Barclays, Royal Bank of Scotland, and UBS agreed to plead guilty to a felony of market manipulation.

16 George A. Akerlof and Robert A. Shiller, Phishing for Phools: The Economics of Manipulation and Deception (Princeton, NJ: Princeton University Press, 2015).

17 In the United States almost unbounded campaign contributions are made to the individual and the party that comes the closest to leaving the sector unregulated, with significant amounts given to the opposition for good measure. This diversified portfolio approach to campaign giving has worked well for the banks, generating large bailouts under both Democratic and Republic administrations. These investments in America’s political process paid off far better than the financial investments that were supposed to be their expertise, but episodically turned out to be disastrous.

18 See later discussion of Chile’s experience with stripping away virtually all regulations.

19 In December 2014, the US Congress put a provision undoing one of the key parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act regulating banks—a provision intended to ensure that government-insured institutions do not engage in risky trading in derivatives—in a budget bill that the president had to sign to keep the government open.

20 As one example: it would have the right to ban insurance products where the buyer of the insurance has no insurable risk—that is, I cannot buy a life insurance product on someone whose death would have no consequence for me. I can’t, in short, take out such bets. This is a well-known principle, because it creates perverse incentives—to have the insured-against person die. But modern financial markets have not recognized this principle: a bank could place a bet that company X will collapse and then subtly take actions that might affect X’s collapse. It would have an incentive to do so. A good regulatory regime would ban such financial products.

21 That is debt undertaken by a particular country within the eurozone.

22 The result is more general: it applies to any mobile factor of production.

23 See the discussion in chapter 7 on how the ECB secretly forced Ireland to do so.

24 Interestingly, this problem has long been recognized in the theory of fiscal federalism/local public goods. See, for instance, J. E. Stiglitz, “Theory of Local Public Goods,” in The Economics of Public Services, ed. M. S. Feldstein and R. P. Inman, (London: Macmillan, 1977), pp. 274-333; J. E. Stiglitz, “Public Goods in Open Economies with Heterogeneous Individuals,” in Locational Analysis of Public Facilities, ed. J. F. Thisse and H. G. Zoller (Amsterdam: North-Holland, 1983), pp. 55-78; and J. E. Stiglitz, “The Theory of Local Public Goods Twenty-Five Years after Tiebout: A Perspective,” in Local Provision of Public Services: The Tiebout Model After Twenty-Five Years, ed. G. R. Zodrow (New York: Academic Press, 1983), pp. 17-53.

The magnitude of the distortion (instability) is related to the elasticity of the demand for labor. If the marginal product of labor does not rise much as labor moves out, and, say, the debt burden rests totally on workers, then after-tax wages can fall as labor migrates out. Then there exists a corner “solution” where no one lives in the country. Alternatively, there can exist an inefficient equilibrium, where the number of people living in Ireland has diminished so much that the wage after tax is the same as in, say, the UK.

More generally, this literature has shown that free migration into and out of a country does not result in the efficient allocation of labor, once again demonstrating that those relying on elementary textbook economics can easily be led astray.

25 Whether these “benefits” to migration outweigh the long-run adverse effects noted above is an empirical question.

26 By the same token, if some of the burden of taxation is imposed on capital, it will induce capital to move out of the country.

27 As I make clear later in the book, there are alternative institutional arrangements for achieving much the same result. And there are many details in the institutional design, ensuring that countries do not get overindebted and/or that the Eurobond debts incurred are for productivity-increasing capital expenditures.

28 Recall from the last chapter that deficits cannot exceed 3 percent of GDP.

29 See Joseph E. Stiglitz, “Economic Organization, Information, and Development,” in Handbook of Development Economics, ed. H. Chenery and T. N. Srinivasan (Amsterdam: Elsevier Science Publishers, 1988), pp. 93-160; and Robert J. Lucas, “On the Mechanics of Economic Development,” Journal of Monetary Economics 22, no. 1 (1988): 3-42.

30 CAF (Corporacion Andina de Fomento), the Development Bank of Latin America, is an example.

31 This is sometimes referred to as a capital budget. One worry is that it will result in certain types of investment (for example, in infrastructure) being given preference over others (such as in the health of young people, which is typically not treated as “investment”).

32 See, for instance, J. E. Stiglitz, “Leaders and Followers: Perspectives on the Nordic Model and the Economics of Information,” Journal of Public Economics 127 (2015): 3-16.

33 See World Bank, The East Asian Miracle (New York: Oxford University Press, 1993); and World Development Report 1988-89: Knowledge for Development (New York: Oxford University Press, 1998).

34 See my book with Bruce C. Greenwald, Creating a Learning Society.

35 Even the World Bank has changed its views on industrial policies; yet views about industrial policies are to a large extent enshrined in the eurozone’s basic economic framework. See Joseph E. Stiglitz and Justin Yifu Lin, eds., The Industrial Policy Revolution I: The Role of Government Beyond Ideology (Houndmills, UK, and New York: Palgrave Macmillan, 2013); Joseph E. Stiglitz, Justin Yifu Lin, and Ebrahim Patel, eds., The Industrial Policy Revolution II: Africa in the 21st Century (Houndmills, UK, and New York: Palgrave Macmillan, 2013). For a more general theoretical discussion, see Stiglitz and Greenwald, Creating a Learning Society, 2014.

36 Trade agreements often purport to similarly create a level playing field. A closer look at these agreements raises questions. While industrial subsidies that might help those lagging behind to catch up are circumscribed, massive agriculture subsidies—a result of a powerful lobby group in Europe and America—are allowed.

37 Called the European Stability Mechanism. Countries drawing upon the funds must have signed the Fiscal Compact (discussed later) and agree to a “program.” Later chapters will discuss how the programs so far have been counterproductive.

38 Increases in government spending to pay for the greater unemployment and decreases in government revenue as the economy slows down (for example, as a result of progressive taxes) are called automatic stabilizers. They help prevent downturns from getting worse. Automatic stabilizers, built into the economy in the years since World War II under the influence of Keynesian analysis, are one of the reasons that economies have been much more stable since then than they were, say, before World War I.

39 Poorly designed bank regulation and enforcement also often act as automatic destabilizers: as the economy gets weaker, bank losses mount, and a rigid bank enforcer, insensitive to the concerns of forbearance discussed earlier, will force the bank to cut back on lending, and that reinforces the economic downturn automatically. Earlier in this chapter we discussed proposals for tighter uniform regulation across the eurozone in which forbearance would play little or no role. The worry is that the eurozone will have created a powerful automatic destabilizer.

40 The EU subsequently ruled that some of what they were doing circumvented European rules.

41 See OECD, “Crisis Squeezes Income and Puts Pressure on Inequality and Poverty,” briefing from May 2013, available at See also the OECD series of inequality reports, including “In It Together.”

Chapter 6. Monetary Policy and the European Central Bank

1 In his July 26, 2012, speech in London: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

2 While it is authorized to pursue more general purposes: to “support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union,” these objectives are secondary. See “On the Statute of the European System of Central Banks and of the European Central Bank,” Official Journal of the European Union, May 9, 2008.

3 Germany’s obsession with inflation was central. As we noted earlier, Germans had rewritten history to believe that it was inflation, not high unemployment, which had brought on Hitler and fascism. But however untethered belief systems are to reality, once established, they are part of the reality that has to be dealt with. With Germany becoming the dominant power within the eurozone, its beliefs, its conviction that the central problem was inflation, became embedded into the “constitution” of ECB.

4 “On the Statute of the European System of Central Banks and of the European Central Bank.”

5 From Article 127 of the Treaty on the Functioning of the European Union.

6 Of course, the gold standard of more recent times was different from that in earlier centuries, before the widespread adoption of paper money. Around the time of the European discovery of the New World, actual gold specie (along with other precious metals) was circulated on the continent. It was the medium of exchange. Later, cumbersome coins were replaced by cloth or paper bills that were backed with specific amounts of gold. But for our purposes in this particular discussion, the effect is similar: the value of money was tied to the oscillations of gold’s value, and not to policy that government could tweak.

7 The act also created the Council of Economic Advisers, to advise government on how to achieve those goals. I served as chairman of that council under President Clinton.

8 See Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises (New York: John Wiley & Sons, 1978).

9 A term used by Alan Greenspan in a famous speech delivered in Washington at the American Enterprise Institute on December 5, 1996, titled “The Challenge of Central Banking in a Democratic Society.” I was there when he delivered the speech, and was interested in the reaction of the audience and the media to it. They were reading the speech to see what it portended for short-run monetary policy (and as he explained to me, he was aware that that was what they would be looking at). The bigger implications for the conduct of monetary policy—including his argument that monetary authorities should not direct their policies toward asset price inflation—were largely ignored. His remarks were partially directed at what many saw as the bubble in Japanese stock markets and led to an almost immediate decrease in the Tokyo stock market by 3 percent, with follow-on effects around the world. The phrase “irrational exuberance” has now entered into the standard lexicon, and though widely attributed to Greenspan, he may have gotten the term from Nobel Prize-winning economist Robert Shiller in a private conversation. See the blog post at See also my more extensive discussion in my book The Roaring Nineties: A New History of the World’s Most Prosperous Decade (New York: W. W. Norton, 2003).

10 Compensation was typically not based on long-term results. Particularly harmful were stock options, which encouraged them to report results and to take actions which increased stock prices in the short run, with little regard for the long-run consequences. See my book The Roaring Nineties and Stiglitz et al. Rewriting the Rules of the American Economy.

11 There is no general theory that argues the optimal response to the higher oil price should be that the demand for all nontraded goods should be lowered so that a particular index, the weighted average price, should be unchanged.

12 Indeed, as we have noted elsewhere, the ECB, worried about inflation, actually increased interest rates twice in 2011.

13 See chapter 4 for a discussion of competitive devaluation.

14 See Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton, NJ: Princeton University Press, 1963).

15 The rate itself was determined mechanically—the rate of growth of the real economy.

16 Japan began its quantitative easing in earnest in 2011, buying hundreds of billions of dollars’ worth of bonds since then. The United States’ quantitative easing, which was even larger (though not relative to the size of its economy), began in 2008 and eventually entailed buying trillions of dollars’ worth of bonds. The Bank of England’s somewhat smaller program ran from 2009 to 2012. The theory behind QE is discussed at greater length at the end of this chapter.

17 This presumes that the local banks have the capacity to lend. As we noted in the last chapter, one of the problems of the eurozone construction was that it facilitated the flight of capital out of the banks of weak countries, undermining their ability to lend. In practice, there is a risk that Europe would tilt the playing field even more: if they treated lending to weak countries as riskier, it would discourage even stronger banks in stronger countries from engaging in cross-border lending into the weaker countries. For a discussion of the general principles at play, see Stiglitz and Greenwald, Towards a New Paradigm in Monetary Economics.

18 Even more ambitiously, the US CRA (Community Reinvestment Act) requirements have successfully induced banks to provide more credit to underserved communities.

19 Defenders of these policies claim that the government was repaid. But whether that is so is not the point: the government lent money to the banks at far below the market interest rate, and that in itself is a major gift. There were many other ways that central banks (sometimes working in conjunction with government, sometimes seemingly independently) provided hidden subsidies to the banks. They perpetuated the prevalence of too-big-to-fail (too-correlated-to-fail, and too-interconnected-to-fail) banks; indeed, on both sides of the Atlantic, governments encouraged mergers, exacerbating the problem. The lower interest rates that such banks can obtain acts as a hidden subsidy. Quantitative easing itself represented in part a hidden recapitalization of the banks, much as the policies pursued in the Clinton administration had done after the savings and loan (S&L) crisis. Long-term bonds went up in value, and banks that held these were in effect given a major transfer of wealth. In the case of the United States in the S&L crisis, banks had been encouraged to hold these bonds through regulatory accounting that treated these bonds as zero risk, though it was obvious that there was considerable variability in their price, and the returns they received reflected this volatility. (See my book The Roaring Nineties.) In the aftermath of the 2008 crisis, such hidden recapitalizations (sometimes referred to as stealth recapitalization) became even larger, and began to be talked about by market analysts. For instance, Meredith Whitney in a discussion with Bloomberg’s Jonathan Weil, estimated that “$100 billion in capital was replenished just through what she calls the Federal Reserve’s ‘Great Agency Trade.’ … (As quoted by Edward Harrison, “Q1 Bank Earnings Due to Marking Up Assets, Not Fundamentals—Meredith Whitney,” Seeking Alpha, May 6, 2010, available at

In the eurozone, the “bootstrap” operation described in chapter 7 provided the conditions for a similar hidden recapitalization. The ECB’s LTRO (Long-Term Refinancing Operation) program beginning in late 2011 lent money to the banks at low interest rates. Many used the funds to purchase long-term government bonds. Nine months later, the ECB’s OMT (Outright Monetary Transactions) program, authorized government bonds to be purchased from the market. Though the program was never used, the seeming confidence it gave helped drive up their prices, recapitalizing the banks. QE continued the recapitalizations, which the economist Markus K. Brunnermeier of Princeton University and his coauthors have referred to as stealth recapitalizations (see his presentation at the G7 Conference in Frankfurt, March 27, 2015, available at

20 In the World Economic Forum’s 2012 and 2013 Global Risk reports, “severe income disparity” was ranked number one.

21 See Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, “Redistribution, Inequality, and Growth,” IMF Staff Discussion Note, SDN/14/02, 2014, available at; and Federico Cingano, “Trends in Income Inequality and its Impact on Economic Growth,” OECD Social, Employment and Migration Working Papers No. 163, 2014, available at

22 In countries with big ethnic and racial divides (such as the United States and France), there can be further dimensions to this growth in inequality. When the economy goes into a slump, it is the workers from these groups that are first laid off. When there is a heated economy (as in the late 1990s in the United States), these divides narrow markedly.

23 El Dilema (Barcelona: Planeta, 2013). Translation obtained from

24 The demands were remarkably specific and far reaching. There was a demand to eliminate the linking of wages with prices, important if workers are to be protected against inflation but clearly of no concern at the moment, since prices were, if anything, falling. (“We are enormously concerned about the fact that the government has not adopted any measure to abolish inflation-indexing clauses. Such clauses are not an appropriate element for the labour markets in a monetary union, as they represent a structural obstacle to the adjustment of labour costs.”) There was a demand to virtually eliminate job protections, at least temporarily. (“We see important advantages in the adoption of a new exceptional work contract that is applied for a limited period of time, and where compensation for dismissal is very low.”) There was a “suggestion” that the government figure out how to stifle wage increases (described as “exceptional measures to promote wage moderation in the private sector”).

Of course, the ECB also focused on fiscal policies, but here it was far more stringent than the eurozone’s official rules. (“The government should prove in a clear manner, by action, its unconditional commitment to the achievement of its fiscal policy targets, irrespective of the economic situation [italics added].)” And the ECB showed no hesitation in intruding into an area of enormous sensitivity in Spain, the fiscal relations between the central government and the regions—the central government needed to ensure “control over regional and local budgets (including the authorisation for debt emissions by regional governments)”.

25 Interestingly, these and similar labor market reforms remain at the center of political tensions in Spain as this book goes to press.

26 As we noted earlier, in most cases, the reason that the central bank has to act as a lender of last resort—providing liquidity when others are unwilling to do so, or at least unwilling to do so at any “reasonable” interest rate—is that the “market” has made a judgment that there is a high risk that they will not be repaid because the institution may be insolvent. Though central banks are only supposed to lend to solvent but illiquid institutions, necessarily, in doing so, they are putting their judgment against that of the market.

27 In the United States, almost all of the hundreds of billions of bailout dollars went to help the banks and their bondholders and shareholders. A negligible amount went to help homeowners, even though the crisis had begun as a housing crisis. The administration and the Fed believed in trickle-down economics: throw enough money at the banks, and the whole economy will benefit. It would have been far better for the economy had they tried a larger dose of trickle-up economics: help the homeowners, and everyone will benefit.

28 The Troika, in effect, threatened to bankrupt Ireland if the government tried to make bondholders bear some of the costs of bank restructuring. The threats were kept secret and only revealed later by the central bank governor, Patrick Honohan. See Brendan Keenan, “Revealed—the Troika Threats to Bankrupt Ireland,” Independent, September 28, 2014.

29 As in the case of the United States, it was necessary and desirable to save the depositors, but not to save the bankers, the bondholders and shareholders. For a broader discussion of these issues, see my book Freefall.

30 The problems of governance are worse because of the inclination of bankers for secrecy and lack of transparency. (We have already seen two instances: the secret letter to Zapatero and the secret demand by the ECB that Ireland bail out its banks.) Bankers, almost by their very nature, are inclined to secrecy. Bankers realize that even more than knowledge being linked to power is that knowledge is linked to profits: differential information is the source of economic rents. Though central banks are public institutions, central bank culture is too often contaminated by the culture of private banks.

31 As quoted in William Greider’s Secrets of the Temple (New York: Simon and Schuster, 1987), p. 473.

32 They don’t typically represent the interests of all of those in the financial market; they are much more attuned, for instance, to the concerns of the banks than they are to the hedge funds or the venture capitalists.

33 Nonetheless, there are other sources of expertise (academia), and the expertise that is of critical importance for a central bank—understanding macroeconomics and the behavior of the financial sector as a system—is markedly different from that of the typical participant from the financial sector. (Draghi, with a PhD in economics from MIT, is an exception, combining the real world experience with the appropriate intellectual training that other central banks should strive for.) Some central banks proscribe those from the financial sector from even serving on their board, recognizing the conflicts of interest and the dangers of “cognitive capture.”

34 In the United States and in many other countries, the massive bailouts, as the banks virtually demanded government money, revealed that the battles they had been fighting to get government out of the way were not about principles but about money. They demanded, too, that the government suspend the normal rules of capitalism, where shareholders and bondholders are responsible for the losses of a firm.

35 In the case of the United States, at least Alan Greenspan, the chairman of the Fed in the run-up to the crisis, made a mea culpa, as he admitted to the flaw in his reasoning, his belief in self-regulation. “I have found a flaw,” he told Congress in October 2008. “I don’t know how significant or permanent it is. But I have been very distressed by that fact.” (See “The Financial Crisis and the Role of Federal Regulators: Hearing before the Committee on Government and Oversight Reform,” October 23, 2008, available at But even then, he failed to note the perverse incentives facing the banks and bankers, of which he should have been aware. But interestingly, Ben Bernanke, who assumed chairmanship of the Fed on February 1, 2006, never gave a similar mea culpa, and the worst abuses in the banking system actually occurred after he assumed office. Similarly, no such admission has come from those responsible for European banking.

36 Typically, though, the market has realized that the old bonds will never be repaid, so the market price of these bonds is much below the face value. The market price of the new bonds is often closely related to the market price of the old bonds.

37 Even then, if the banks in, say, Germany had had a problem, it would have been an easy matter for the German government to bail them out—a relatively light burden on a very rich country compared to the relatively huge burden imposed on a small and relatively poor country. The power relations within Europe were again manifested and reflected in the policy of the ECB.

38 By contrast, in the East Asia crisis, the IMF demanded that the Indonesian government not bail out its banks, or even its depositors.

39 See Sebastian Gechert, Katja Rietzler and Silke Tober, “The European Commission’s New NAIRU: Does It Deliver?” Institut für Makroökonomieund Konjunkturforschung (Macroeconomic Policy Institute), January 2015, available at For a more extensive discussion of this issue, see chapter 9, note 9.

40 See Stiglitz et al., Rewriting the Rules of the American Economy.

41 In the past, some governments may have tried to manipulate the economy before elections through monetary policy. But there are long and uncertain lags, making monetary policy not a very good tool for these purposes. Fiscal policy is, in fact, more effective. Some have suggested that, in the past, some central banks that were not independent at least attempted this kind of manipulation. Even if that is the case, the cure—making central banks so independent that they can easily be captured by the financial sector—is worse than the disease. There is, in fact, a wide range of institutional arrangements between full independence and being just another department of government. The governance of the ECB goes too far in the former direction.

42 The heyday of monetarism at central banks was in the 1980s and ’90s; inflation targeting was first explicitly adopted by New Zealand in 1984, and subsequently spread around the world. After the 2008 financial crisis, most central banks revised their policy frameworks toward a more flexible framework, with more mandates (including financial stability) and a more nuanced view of inflation—with their responses depending on the source of inflation. See Luis Jácome and Tommaso Mancini-Griffoli, “A Broader Mandate,” Finance and Development 51, no. 2 (2014): 47-50.

43 Moreover, because the administration and the Fed had done so little to address the underlying problems in the real estate and mortgage markets, real estate prices remained low; real estate was a major source of collateral for loans to small and medium-size enterprises, and this, too, inhibited lending to them.

44 See Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58, no. 1 (1968): 1-17; Milton Friedman, “Inflation and Unemployment,” Journal of Political Economy 85, no. 3 (1977): 451-72; Edmund S. Phelps, “Money-Wage Dynamics and Labor-Market Equilibrium,” Journal of Political Economy 76, no. 4 part 2 (1968): 678-711.

45 See, for instance, Roger E. A. Farmer, “The Natural Rate Hypothesis: An Idea Past Its Sell-By Date,” NBER Working Paper No. 19267, 2013, available at

Chapter 7. Crises Policies: How Troika Policies Compounded the Flawed Eurozone Structure, Ensuring Depression

1 See, for instance, Suzanne Daly, “Hunger on the Rise in Spain,” New York Times, September 25, 2012.

2 See European Commission Directorate-General for Economic and Financial Affairs, “The Economic Adjustment Programme for Ireland,” February 2011, available at

3 See IMF, “Letter of Intent of the Government of Portugal,” May 17, 2011, available at, p. 71. The rate actually peaked above 13 percent in 2012 before decreasing.

4 See European Commission, “The Economic Adjustment Programme for Portugal 2011-2014,” October 2014, available at

5 See Ricardo Reis, “Looking for a Success: The Euro Crisis Adjustment Programs,” Brookings Papers on Economic Activity, BPEA Conference Draft, September 10-11, 2015, available at See also

6 The austerity consisted of both that imposed by the Troika and that which the conservative government adopted itself, in an effort to conform to the prevailing ideology.

7 The German Council of Economic Experts wrote, in a July 28, 2015, press release for a longer report: “The economic turnarounds in Ireland, Portugal, Spain and—until the end of last year—also in Greece show that the principle ‘loans against reforms’ can lead to success. For the new program to work, Greece has to show more ownership for deep structural reforms. And it should make use of the technical expertise offered by its European partners.” See German Council of Economic Experts, “German Council of Economic Experts Discusses Reform Needs to Make the Euro Area More Stable and Proposes Sovereign Insolvency Mechanism,” July 28, 2015, available at and German Council of Economic Experts, “Executive Summary,” July 2015, available at

Chapter 3 has documented some of the reasons that this perspective seems unpersuasive. For other critiques, see Suzanne Daley, “For Many in Spain, a Heralded Economic Recovery Feels Like a Bust,” New York Times, August 10, 2015 available at; and Zero Hedge, “Sorry Troika, Spain’s Economic Recovery Is ‘One Big Lie,’” August 12, 2015, available at

8 The ban was on foreclosures of homes where €200,000 or less was owed on the mortgage.

9 This is a drama that has played out through much of the United States: empty homes quickly deteriorate. The banks will only be able to resell them for a pittance. Communities, as well as families, get destroyed. There is a downward vicious circle, since homes that are not well maintained decrease the value of neighboring homes, leading to even more defaults.

10 See Kerin Hope, “Athens Backs Reforms to Unlock Bailout Funds,” Financial Times, November 19, 2015.

11 In 2007, Greece had to pay only 0.3 percent more interest than Germany did. In 2010, that number had risen to 6.4 percent. Source: OECD data on long-term interest rates (rates for government bonds with 10-year maturity).

12 Two years after the program started, they expected the economy to be well on the road to recovery. But in fact, the downturn just continued. The Troika could not ignore the evidence. But rather than rethinking the program, or even rethinking their model, they took the same model, predicting a quick recovery, now from a lower base. Again, it didn’t happen. And they repeated the same thing over and over again. The same story could be told for each of the crisis countries—for instance, in Spain or Portugal.

13 Projections from IMF’s World Economic Outlook (WEO) September 2011, available at

14 Papandreou became prime minister in 2009. As we comment below, his term ended in 2011 after he proposed a referendum on the program being imposed on his country—a proposal that his eurozone colleagues viewed almost with horror. His father, Andreas Papandreou, had been prime minister from 1981 to 1989 and from 1993 to 1996, and was largely responsible for the creation of the left-of-center party PASOK. His grandfather, Georgios Papandreou, served as prime minister in 1944-1945, in 1963, and in 1964-1965. He was arrested during a military coup in 1967 that was widely believed to have been supported by the United States (or at least the CIA). The fight against Germany’s cruel occupation of Greece, with forced loans to Germany that were never repaid, color not just Greece’s history but attitudes toward more recent events.

15 Some of the budget chicanery had begun earlier, as Greece struggled to satisfy the conditions required for it to join the eurozone. In this, a critical and dishonorable role was played by Goldman Sachs, which constructed a nontransparent derivative that helped Greece hide its true situation. See Louise Story, Landon Thomas Jr., and Nelson D. Schwartz, “Wall St. Helped to Mask Debt Fueling Europe’s Crisis,” New York Times, February 13, 2010; and Beat Balzli, “Greek Debt Crisis: How Goldman Sachs Helped Greece to Mask Its True Debt,” Spiegel, February 8, 2010.

16 Still, the focus on deficits was not surprising, given the fixation on deficits and debt built into the construction of the eurozone noted in chapter 4.

17 At one time, it had demanded a primary surplus of 6 percent by 2014! By 2015, it was insisting on a surplus of 3.5 percent by 2018.

18 I saw a similar process at work when I was chief economist of the World Bank. Essentially, whenever there was a debt restructuring on the table, the forecasts would be rosy—the rosier the forecast, the less need for debt write-offs, which was, of course, what the creditors wanted. What struck me as particularly strange was the way the forecasts were often arrived at: they were as much the result of a negotiation as of an economic model.

19 Even an increase in investment, if it is not the right kind and if the government has not set in motion the right policies, may have an adverse effect on the unemployment rate. There is a positive supply-side effect, which in the presence of a deficiency of aggregate demand in the future will lead to an increase in unemployment. This effect will be especially large if the investments replace labor, for instance, self-checkout machines in groceries and drugstores replacing unskilled labor.

20 Other actions by the Troika contributed to tax evasion. One of the important ways to reduce the scope for tax evasion is to ensure that transactions go through the banking system. Cash transactions are hard to tax in any economy. But the closure of the banks in Greece for an extended period surrounding the referendum in the summer of 2015 and the proposal to force even small depositors to take a haircut in the Cyprus crisis (even though that provision was not adopted) encouraged individuals not to rely on banks.

21 See, for instance, Tariq Ali, “Diary,” London Review of Books 37, no. 15 (July 30, 2015): 38-39. While Hochtief, the German company in question that built the airport, owned only 45 percent of the shares of the airport, it had full management rights. A Greek court ruled that Hochtief owed substantial amounts in value-added taxes on the services it had provided (which, according to some news reports, it collected but didn’t turn over and which amounted to €0.5 billion). Other outstanding payments, such as to social security funds, could bring the amount owed to €1 billion. Some news reports also suggest no value-added taxes were paid on the construction of the airport. The case is mired in controversy; indeed, even what the court ruled is a matter of contention. What is clear is that the court ruled against Hochtief. Hochtief evidently argues that the company owning the airport pay only €167 million in fines and taxes, not the higher amounts reported in the media, and that the judicial process is not over. Hochtief also evidently claims that it didn’t have to make tax payments until it made a profit, but others say that it cooked the books by deducting the full cost of the investment in the first year, rather than following the conventional procedure of depreciating the investment over time—a long-term investment, lasting, say, 50 years, would entail only 2 percent of the costs of the construction being deducted. Subsequently, Hochtief was taken over by a Spanish company, and that company sold its interests to others. Where this leaves Greece in getting the taxes that courts have ruled it is owed is not clear.

22 Almost surely, there are tax and possibly other legal disputes between the Hellenic government and some foreigners refusing to pay taxes; and the bargaining power of each party depends on who holds the money. In the United States, for instance, when there are very large tax disputes, typically, the taxpayer has to pay the tax that has been imposed, and then he sues in the Federal Court to get back the money that he believes is owed back to him.

23 See chapter 5. If there was any doubt about the risk of having money in the banking system, it was resolved when the ECB stopped acting as a lender of last resort to Greek banks, leading to paralysis in the Greek banking system, with small limits on the amounts that could be withdrawn every day. As we have also previously noted, the proposed “bail-in” of depositors in Cyprus had a similar effect.

24 In this respect, it may not even matter whether the perceptions are accurate. For instance, see the discussion of the German-owned company responsible for the running of the Athens airport, which allegedly owed hundreds of millions of euros in taxes, as we discussed in an earlier note. Although the details of the case are controversial, the story has struck such a chord that it has circulated on the Internet and gained the weight of indisputable fact. The fact that the airport had the reputation of not being among one of the better-run airports around the world (even within the limited domain of southern Europe, it ranks fourth in the Skytrax World Airport Awards) may have made matters worse. (As we noted earlier, the airport and the company, of course, deny the allegations.) So, too, for the Troika demands that there not be withholding on taxes on foreign corporations—a demand that was never adequately explained.

25 See Henry George, Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth (San Francisco, W. M. Hinton & Company, printers, 1879).

26 Some taxes can actually stimulate the economy. A high tax on inheritance can induce those about to die to spend more. Unfortunately, within the EU, easy mobility may constrain the ability to impose an inheritance tax that is much different from that imposed elsewhere. So, too, a tax on carbon can induce the private sector to invest in carbon-friendly technologies—replacing old carbon-intensive technologies.

27 The balance sheet looks at the assets and the liabilities. The difference is the net worth. A privatization entails the sale of an asset for cash. Thus, a privatization at a fair market value has no effect on the balance sheet. It simply shifts the composition of assets, from “real assets” to “cash.” But, as I explain below, the Troika’s demands for a fast privatization risked a sale at below true (long-run) market value in a fire sale, in which case the balance sheet would be worsened.

28 As chief economist of the World Bank, I repeatedly saw the adverse effects of privatizations done poorly: Mexico’s privatization of Telmex led to high telecom prices; such high prices impose significant barriers to countries moving into the digital age. (See Organization for Economic Co-operation and Development, OECD Review of Telecommunications Policy and Regulation in Mexico, 2011, available at

In my book Globalization and Its Discontents, I pointed out that these problems with privatization were evidenced repeatedly. Even by 2015, the Troika had not yet absorbed these lessons.

29 Matters can be even worse when the foreign purchaser is protected by a bilateral investment agreement, which gives private parties the right to sue governments whenever there is a disadvantageous change in regulations, even if the change is desirable from the perspective of health and safety and implemented in a nondiscriminatory manner. This is relevant for the privatizations that are part of the eurozone program, because the winning bidder may be a foreign enterprise, incorporated in a jurisdiction with which there is a bilateral investment agreement. So far, however, this has not been a problem in any of the eurozone privatizations.

30 See Niki Kitsantonis, “14 Airports in Greece to Be Privatized in $1.3 Billion Deal,” New York Times, December 14, 2015. There are ample opportunities to abuse the monopoly power associated with the control of a regional airport. The worry is that attempts to regulate, to prevent such abuses, will now become a cross-border dispute, with the German government (and therefore the Troika) taking the side of the oligarch/German partnership against the public interest.

31 In the case of Greece, the historically tense relationship with Turkey makes cutbacks in military spending especially difficult, even though when Georges Papandreou was foreign minister, there was a serious rapprochement.

32 See John Henley, “ ‘Making Us Poorer Won’t Save Greece’: How Pension Crisis is Hurting Its People,” Guardian, June 17, 2015.

33 Matthew Dalton, “Greece’s Pension System Isn’t That Generous After All,” Wall Street Journal, February 27, 2015.

34 Whether part of the formal or implied contract is of secondary concern.

35 There is an exception: when pensions have been gratuitously increased after the work has been done. In that case, the worker has been given a “gift,” which was not part of the contract. Reducing, or even eliminating, the gift, in the presence of extreme budgetary stringency, may then make sense.

36 In February 2014.

37 There are other anomalous aspects of the demands for pension reform. Part of the problem that the pension system finds itself in is because it held Greek government bonds, which experienced significant write-downs as part of debt restructuring. Had the restructuring been done earlier (in 2010) and had the Troika not imposed such contractionary policies, the size of the write-downs would have been markedly less. Thus, the Troika itself is partly to blame for the problems in the pension system.

38 As we noted earlier in the book, part of what was going on was a hidden recapitalization of the banking system.

39 According to OECD data on long-term interest rates (rates for government bonds with 10-year maturity).

40 Whether the ECB would be willing and able to do whatever it takes when put to the test has been put into question by the constant haggling with its German board members—for example, over whether buying the bonds of a country in crisis is desirable, or even permissible.

41 Moreover, the bailout provides an opportunity for the short-term private creditors to take out their funds, leaving an even greater burden on the rest.

42 There are a few exceptions, which are worth noting. Brazil in 1998 faced a crisis. It seemed that it was possible that there were two equilibria—a high interest-rate, high-default scenario and another low interest-rate, low-default scenario—and the IMF program provided the confidence that enabled it to move to the “good” equilibrium.

43 According to data from the IMF, Institute for Fiscal Studies, Federal Reserve Bank of St. Louis, and US Bureau of Fiscal Services (Bureau of Public Debt).

44 And in most of the European countries, the financial sector is even more concentrated than it is in the United States.

45 In other words, when the government recapitalizes a bank and does it properly, taking full value of shares corresponding to the money it is providing, there is no real expenditure. It is an asset transaction. Troika (and IMF) accounting treats these capital/investment expenditures much the same way they would a consumption binge; but from an economic perspective, they are totally different. No household (not even the proverbial Swabian housewife), let alone any firm, would treat an investment in the same way that it would other forms of spending. Accounting matters. Wrong accounting frameworks lead to wrong policies. In this case, the crisis countries are forced to engage in excessive austerity.

By the same token, the revenue from the sale of a national asset in a privatization should not be treated in the same way that tax revenues are. Again, with the flawed Troika accounting, they are. During my tenure as chief economist of the World Bank, this was a matter of repeated contention with the IMF.

46 Of course, one might argue that the interest rate only reflected a reasonable risk premium. But the charade that Germany and others in the Troika were playing said that with the program, Greece would recover and would repay the loan. So under the program, Germany claimed to be making a large profit off of its poorer neighbor.

47 See Phillip Inman, “Where Did the Greek Bailout Money Go?,” Guardian, June 29, 2015. What happened is similar to what occurs in American predatory lending; the pattern is familiar: a poor individual borrows $100, but within a few years, he has paid thousands of dollars to the bank and still owes well in excess of $100. All the money that he has paid (and borrowed) simply goes to pay the bank’s interest and fees.

48 That is, in paying interest and making its principal payments.

49 When the money was owed to private creditors, the creditors put enormous pressure on their governments to force the debtor countries to assume the private debts and to make sure that the creditors will be fully repaid, whoever owed them money.

50 There is some evidence that, on average, they are more than compensated for such risks.

51 Luis María Drago, Argentine’s foreign minister at the time of Venezuela’s debt crisis at the beginning of the last century, said (in what has come to be called the Drago Doctrine) that lenders to sovereigns should know that they are at risk of not being repaid. He argued, moreover, that “the public debt cannot bring about a military intervention or give merit to the material occupation of the soil of the American nations by a European power.” See my book Making Globalization Work for a discussion.

52 Another reflection of the highly political actions of the Troika was the attempt of European authorities to suppress the release of the IMF findings concerning the unsustainability of Greece’s debt until after the referendum on whether to accept the Troika program. Evidently, they didn’t want voters to know about the true state of Greece’s situation as they went to the polls. And they even tried to keep their actions to delay the release of the IMF findings secret. See “Exclusive: Greece Needs Debt Relief Far Beyond EU Plans: Secret IMF Report,” Reuters, July 14, 2015, available at

53 Debt structuring often entails extensive litigation, as Argentina’s experience illustrates. On net, even taking into account these litigation costs, few would doubt that Argentina benefited from its debt restructuring. Moreover, there may be ways of going about debt restructuring that lower the risks of litigation. We discuss some of these in later chapters.

54 Some argue that in fact, debt restructuring is by far the most important, especially for Greece, because the increase in exports and decreases in imports from a change in exchange rates is limited. Such assertions remain controversial and are partially based on failing to take account that Greece’s main foreign exchange earner is tourism, and tourism is price sensitive.

55 “Fiscal Consolidation Targets, Plans and Measures in OECD Countries,” OECD, 2012, available at

56 See Alberto Alesina and Roberto Perotti, “Fiscal Expansions and Fiscal Adjustments in OECD Countries,” NBER Working Paper No. 5214, 1995; and Alberto Alesina and Silvia Ardagna “Large Changes in Fiscal Policy: Taxes versus Spending,” in Tax Policy and the Economy, vol. 24, ed. J. R. Brown (Chicago: University of Chicago Press, 2010), pp. 35-68.

57 See, for example, Dean Baker, “The Myth of Expansionary Fiscal Austerity,” Center for Economic and Policy Research, October 2010, available at; and Arjun Jayadev and Mike Konczal, “The Boom Not The Slump: The Right Time For Austerity,” Roosevelt Institute, 2010, available at

58 See, for example, International Monetary Fund, “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation,” chapter 3 in 2010 World Economic Outlook.

59 Eurostat figures for the eurozone for March 2016.

60 See, for example, International Monetary Fund, “Will It Hurt?”

62 Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” American Economic Review 100, no. 2 (May 2010): 573-78.

62 By now, there is a large literature on the subject. See, for example, Thomas Herndon, Michael Ash, and Robert Pollin, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” Cambridge Journal of Economics 38, no. 2 (2014): 257-79; Ugo Panizza and Andrea F. Presbitero, “Public Debt and Economic Growth: Is There a Causal Effect?,” Journal of Macroeconomics 41 (2014):21-41; and Andrea Pescatori, Damiano Sandri, and John Simon, “Debt and Growth: Is There a Magic Threshold?,” International Monetary Fund Working Paper No. 14/34, February 2014, available at

63 Subsequently, a large literature has developed explaining why the standard models did so badly. See Joseph E. Stiglitz, “Rethinking Macroeconomics: What Failed and How to Repair It,” Journal of the European Economic Association 9, no. 4 (2011): 591-645; and Joseph E. Stiglitz, “Rethinking Macroeconomics: What Went Wrong and How to Fix It,” Journal of Global Policy 2, no. 2(2011): 165-75. See also Blanchard et al., eds., In the Wake of the Crisis.

64 As we noted in the preface, this view was forcefully articulated by Nobel economist Robert Lucas.

65 See our earlier discussions (chapter 6 and elsewhere) for the multiple reasons that this is so.

Chapter 8. Structural Reforms That Further Compounded Failure

1 There can, however, be characteristics of an economy that impede adjustment to a changed situation. We will consider that possibility below.

2 Chapter 5 highlighted the role that the irrational exuberance brought on by the euro had played. European solidarity funds also contributed to this growth. Still, the earlier high growth rates showed that these could grow strongly, so long as there was enough demand. Indeed, these statistics put to the lie the argument that it was widespread corruption that prevented Greece from growing. There is no evidence that corruption increased after 2008; if anything, the government of George Papandreou had, in some ways, circumscribed it.

3 Some may have taken their own rhetoric so seriously that they may actually have come to believe it, in spite of all the evidence to the contrary. In a sense, though, the eurozone leaders had no choice: One can imagine the response of these countries if they were told that their standards of living were being sacrificed so that this poorly designed monetary arrangement could be saved and that their citizens—including the poorest—had to suffer so that the German and French banks could get repaid.

4 Indeed, the lower prices in these sectors, if the demand elasticity is relatively low, could actually lead to an increase in expenditure on imported goods, worsening the current account balance.

The reforms attempting to increase competition had complex distributive effects. In some cases, some of the local monopolists were (at least in the case of Greece) “oligarchs,” but in others, the beneficiaries of protection were ordinary individuals—taxicab drivers who owned their own cars or mom-and-pop owners of the local pharmacy. If the reforms “worked,” these individuals would be hurt, while their customers might be better off. (In the case of the pharmacy reforms, even that turned out to be questionable.)

5 The Troika drew many of its demands from a massive 2013 OECD “Competition Assessment Review” on supposedly problematic areas of Greek regulation. See OECD Competition Assessment Reviews: Greece, OECD Publishing, 2014, available at The Euro Summit Statement of July 12, 2015, makes reference to this report and specifically calls for adoption of “OECD toolkit I recommendations, including Sunday trade, sales periods, pharmacy ownership, milk and bakeries, except over-the-counter pharmaceutical products, which will be implemented in a next step, as well as for the opening of macro-critical closed professions (e.g. ferry transportation.)” among many other demands. The full details of the existing regulations and the changes demanded can be found in the OECD report.

6 See my New York Times op-ed “Greece, the Sacrificial Lamb,” July 25, 2015, for more details of some of these reforms, especially that on fresh milk. After publishing the article, I had expected to hear a detailed explanation from the Troika of what they were up to. I did not.

7 Of course, it is important that the kilo loaf actually weighs a kilo, and in all countries, in the absence of government inspections, there is a tendency to cheat.

8 When one needs a prescription quickly, having a nearby pharmacy may have a particularly high social value. The Troika seems not to have considered such benefits in its calculus.

9 Greek law contained a variety of other restrictions. Some of the restrictions were outdated, some plainly devices to restrict competition in an unhealthy way. See OECD Competition Assessment Reviews: Greece. A Greek who read up on the issue could be justified in concluding that the welfare the Troika really cared about was that of big companies, including the multinationals—not Greek consumers, and certainly not the local pharmacists. The OECD report that underpinned the pharmacy reform specifically called for removing restrictions on pharmacy chains.

10 Harriet Torry, “Germany Yet to Swallow Some Economic Medicine Prescribed for Greece: Overhauls Demanded by Greece’s Creditors Go Beyond Those Enacted Earlier in Germany,” Wall Street Journal, updated July 14, 2015.

11 “The Euro-Summit ‘Agreement’ on Greece—annotated by Yanis Varoufakis,” July 15, 2015, posted on his blog at

12 And when the profits went to a European country already at full employment, the net effect for Europe as a whole could be significantly negative: while Greece would contract, Germany, already at full employment, could not expand.

13 This is especially likely to be the case under Greece’s new program, where when government revenues fall, taxes must be raised or other expenditure must be cut back.

14 There were other aspects of the reform agenda that were also counterproductive, as we noted in the last chapter. The demand that even small businesses pay their taxes a year ahead of time not only encourages noncompliance, but it also has an adverse supply-side effect: it creates a large barrier to entry. Only someone with enough capital to pay their taxes a year ahead of time can enter, or stay, in business. While seemingly neutral toward small and large businesses, it actually is strongly biased against small businesses, which make up more than 80 percent of the Greek economy—for big businesses typically have easy access to funds; they can borrow. (Very large businesses can borrow in the international market, and so aren’t even bothered by the weaknesses in Greek banks.) We noted other examples in the last chapter: the demand that even remote islands pay a high value-added tax.

15 See my article “The Book of Jobs” in Vanity Fair, January 2012.

16 Indeed, in a knowledge and learning economy Adam Smith’s presumption that markets are efficient is reversed: in general, markets are not efficient; there will be an underinvestment in knowledge. I elaborated on these themes in my book with Bruce C. Greenwald, Creating a Learning Society.

17 Contrary to the neoclassical model, there is no natural convergence. See Stig-litz, “Leaders and Followers.”

18 See Maria Mazzucato, The Entrepreneurial State (London: Anthem Press, 2014). More recently, ideological perspectives of the right have argued for the curtailment of these policies in the United States, to the point where today as a percentage of GDP, the proportion of the federal government’s budget allocated for research and development is more than 70 percent lower than it was 50 years ago (according to data from SSTI and the American Association for the Advancement of Science).

19 For a sample of the large literature that has developed on the subject in recent years, see Ha-Joon Chang, Kicking Away the Ladder (London: Anthem Press, 2002); Justin Yifu Lin, New Structural Economics (Washington, DC: World Bank, 2012); Stiglitz and Lin, eds., The Industrial Policy Revolution I.

20 See Joseph E. Stiglitz, “The Origins of Inequality, and Policies to Contain It,” National Tax Journal 68, no. 2 (2015): 425-48.

21 See Stiglitz et al., Rewriting the Rules of the American Economy; Stiglitz, Price of Inequality; Jacob S. Hacker and Paul Pierson, “Winner Take All Politics: Public Policy, Political Organization, and the Precipitous Rise of Top Incomes in the United States,” Politics and Society 38, no. 2 (2010): 152-204.

22 As we have discussed, the structure of the eurozone and the EU itself has put impediments in the ability of European countries to deal with this; for any country that imposed too progressive of a tax system would see the very rich leave, even as they continued to have their firms conduct business in the country—as France discovered to its chagrin.

23 See the September 2015 Oxfam report “A Europe for the Many, Not the Few,” available at; and OECD, “Crisis Squeezes Income and Puts Pressure on Inequality and Poverty,” 2013, available at

24 See European Commission, “The Economic Adjustment Programme for Greece,” Occasional Paper No. 61, May 2010, p. 28, available at

25 The source for this data is Eurostat. Interestingly, news reports highlighted a study from a Greek labor union in 2014 that, using different methodology, found a far more dramatic increase in poverty. According to the report, the poverty rate doubled from 2009 to 2012—to the point that four in ten Greeks were living below the poverty line. For some category of Greeks—like the increasingly large number who could only find part-time employment—the poverty rate exceeded 50 percent. Even for full-time employees, wages had fallen so much that almost a fifth were in poverty—a threefold increase from 7.6 percent in 2009 to 19.7 percent in 2012. Ioanna Zikakou, “Four in Ten Greeks Live in Poverty,” Greek Reporter, July 29, 2015, available at

26 See 2015 Oxfam report “A Europe for the Many, Not the Few”; Anthony B. Atkinson, Inequality: What Can Be Done? (Cambridge, MA: Harvard University Press, 2015); and references cited above in notes 20 and 21.

27 See Joseph E. Stiglitz, “New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals: Part I. The Wealth Residual,” NBER Working Paper No. 21189, May 2015; and Stiglitz, Price of Inequality, and the references cited there.

28 There were evidently problems arising from some oligarchs attempting to take advantage of the special provision for shipping to shift profits of other sectors to shipping. Such profit shifting is a major problem throughout the corporate sector, with a recent major OECD effort attempting to limit the scope. The Troika could and should have focused its attention on this.

29 Thus Apple, the largest firm by capitalization in the world, has claimed that a very large part of its profits originated in a subsidiary in Ireland. Multinationals can easily claim that their profits are earned in a low-tax jurisdiction. The mechanics by which this is done need not detain us here. In today’s globalized world, production of a final good entails multiple steps, and firms have considerable discretion in determining where, along the production line, true value added occurs. The system is called the “transfer price system,” because companies pretend that they buy and sell partially completed goods from one country to another. The prices are supposed to be arm’s-length prices; the problem is that in the case of most of these partially completed goods, there does not exist a true market to determine the value.

30 An international commission of which I was a member, the Independent Commission for the Reform of International Corporate Taxation, proposed an alternative, and at a major UN conference on Finance for Development meeting in Addis Abba in July 2015, the developing and emerging markets, led by India, virtually unanimously supported beginning a UN process to look at these alternatives. Unfortunately, none of the eurozone countries supported the initiative, and with the strong opposition of the United States, it died.

31 We noted, too, in the last chapter the privatization of the regional airports, to a partnership between a German company (with significant public ownership—in that sense, simply a shift from ownership by the Greek public to the German public) and a Greek oligarch. The Syriza government opposed this privatization, undertaken earlier by the oligarchic-linked New Democracy Party, but the Troika insisted on it going forward. Not only would this strengthen the power of the oligarchs, but it set the stage for conflicts down the line: regional airports are local monopolies, able to exert enormous influence on the development of the surrounding region. How they are run can benefit some at the expense of others. Such “natural” monopolies need to be very strongly regulated, but one can be sure that even if the oligarchic partnership engages in abusive practices enriching its coffers at the expense of others in the region, any attempts to regulate the airport for the public good will be strongly resisted; and one suspects the Troika will then come down on the side of the German-oligarchy partnership.

32 As we noted earlier, his successor, Antonis Samaras, was from the New Democracy Party, itself widely viewed as closely connected to and supported by the oligarchs. When such connected-lending resumed—even to media companies that on strictly commercial terms should not have gotten loans—the Troika turned a blind eye. The Financial Times’s coverage of the election in January 2015 represents this widespread perception. In describing the potential electoral victory of Syriza, after observing that “analysts said politicians have been reluctant to loosen the tycoons’ grip on the economy, since they rely on their handouts to finance election campaigns and pay party workers,” the paper went on to observe: “Among the criticisms of prime minister Antonis Samaras’ handling of the bailout by troika officials has been his reluctance to go after the vested interests of his centre-right New Democracy party.” Indeed, the article notes that even some “in the troika feel that there has been too little burden sharing of Greece’s austerity programme, with the working classes bearing the brunt of spending cuts and tax rises while wealthier citizens and politically connected businesses were shielded by New Democracy.” (Kerin Hope, “Taming Greek Oligarchs Is Priority for Syriza,” Financial Times, January 6, 2015.) George Pleios, head of the Department of Communication and Media Studies at the National and Kapodestrian University of Athens, in an article in AnalyzeGreece! (“The Greek Media, the Oligarchs, and the New Media Law,” February 11, 2016) describes the links between the oligarchic vested interests and the media. Of course, the links between New Democracy and the oligarchs are viewed especially critically by opposition parties. Upon the defeat of New Democracy in the second election of 2015 and the election of Kyriakos Mitsotakis, the 47-year-old son of former New Democracy leader and prime minister Constantine Mitsotakis as head of the party, one of the opposing parties issued a statement saying, “New Democracy will now become a hardline neo-liberal party that will only do the bidding of the oligarchs, losing any connection with the people.” (Quoted in Demetris Nellas, “Reformist Lawmaker Elected Greek Opposition Leader,” Associated Press, January 10, 2016.)

33 There would have been, in addition, obvious benefits to Europe’s security, as a result of less dependence on Russian gas. It would have put Europe in a better position to push for its principles and values, say, in Ukraine.

34 In Indonesia, in the East Asia crisis, the IMF closed down 16 banks, and announced that more would be shut down but that depositors wouldn’t be covered by deposit insurance—instigating a predictable run on the banking system. (For a fuller telling of this story, see my book Globalization and Its Discontents.)

35 Bank of Greece data for credit institutions.

Chapter 9. Creating a Eurozone That Works

1 Because one doesn’t want to risk banks not being able to meet their obligations, banks are shut down or otherwise constrained when their net worth becomes too small. When you go to the ATM to get cash, and it says, “insufficient funds,” it should be because there are insufficient funds in your account, not insufficient funds in the bank itself.

2 Bank regulations require that banks have adequate capital relative to loans outstanding. An increase in losses reduces bank capital. Raising capital in the midst of a downturn is difficult and expensive at best, impossible in some cases; hence, typically, banks respond by contracting lending.

3 Macro-prudential regulations are designed to avoid this pitfall: in good times, banks are required to have much more capital than is needed, recognizing that in bad times, capital will fall. So far, such regulations have not been put into force. Doing so is an important aspect of making the eurozone work.

4 Although, as we noted in chapter 5 recently many in Germany have expressed some misgivings about whether there should be a system of common deposit insurance.

5 The slow pace of reforms has led to other problems: Ireland, one of the first countries to receive assistance, became concerned that later countries would get a better deal.

6 See Stijn Claessens, Ashoka Mody, and Shahin Vallée, “Paths to Eurobonds,” IMF Working Paper No. 12/172, July 2012; Guy Verhofstadt, “Mutualizing Europe’s Debt,” New Perspectives Quarterly 29, no. 3 (2012): 26-28; Jörg Bibow, “Making the Euro Viable,” Levy Economics Institute Working Paper No. 842, July 2015; Paul De Grauwe and Wim Moesen, “Gains for All: A Proposal for a Common Euro Bond,” CEPS Commentary, April 3, 2009, available at; Peter Bofinger et al., “A European Redemption Pact,” Vox, November 2011, available at; Markus Brunnermeier et al., “European Safe Bonds (ESBies),” Working Paper, September 30, 2011, available at; Jacques Delpla and Jakob von Weizsäcker, “The Blue Bond Proposal,” Bruegel Policy Brief, May 2010, available at; European Commission, “Green Paper on the Feasibility of Introducing Stability Bonds,” Green Paper, November 23, 2011, available at; Carlo Ambrogio Favero and Alessandro Missale, “EU Public Debt Management and Eurobonds,” European Parliament, Directorate General for Internal Policies, Note, September 2010, available at; Christian Hellwig, and Thomas Philippon, “Eurobills, not Eurobonds,” Vox, September 2, 2011, available at; and Daniel Gros and Stefano Micossi, “A Bond-Issuing EU Stability Fund Could Rescue Europe,” Europe’s World, February 1, 2009, available at Reform proposals have to deal both with the legacy of past debt as well as future borrowing. There are many details of such proposals, including the maturity of the debt—that is, as Hellwig and Philippon point out, whether the debt should be long-term or short-term (bonds versus bills).

7 Source: European Commission data available at Note that these funds are transfers, unlike the funds provided in the Troika programs, which are just loans. To some, this might suggest that Europe has shown less generosity to its old partners facing a period of distress than to the new entrants.

8 The eurozone has attempted to deal with this problem by ensuring that in normal times, countries have a large enough fiscal surplus (small enough deficit) that when there is an economic downturn, the 3 percent limit will not be breached.

9 Of course, that would not be the case if something has supposedly changed about these economies so that, say, an 18 or 25 percent unemployment rate represents “full employment.” A standard definition of “full employment” is the rate such that when unemployment falls below that rate, price or wage inflation starts to increase. This is the concept of the natural rate introduced earlier, and it corresponds to the notion that economists refer to as “NAIRU”—the nonaccelerating inflation rate of unemployment—or “NAWRU,” the nonaccelerating wage rate of unemployment. That level of unemployment is sometimes called the “structural unemployment rate”: there is something about the structure of the economy that prevents unemployment from going below that level. As nonsensical as that might seem, the European Commission has claimed that Spain has a structural unemployment rate that is of such magnitude. See my earlier discussion in chapter 6.

Also, rather than focusing on the actual deficit, one should focus on the primary deficit—what the deficit would have been in the absence of interest payments—which can be highly volatile. Europe has been doing that in the case of the crisis countries, but the convergence criteria remain focused on the overall deficit.

10 Which replaced the earlier temporary European Financial Stability Facility. See the discussion in chapter 1.

11 As we have noted that the United States provides.

12 Cross-border lending stimulated by the eurozone was supposed to offset this, but it has not worked, and mostly for an obvious reason: the information necessary to make the judgments required to ascertain which small business is a good risk is very local in nature. (See Stiglitz and Greenwald, Towards a New Paradigm in Monetary Economics.)

13 The Solidarity Fund for Stabilization could work with the lending facility to provide loans and partial guarantees targeting the risks generated by the uncertain macroeconomic environment.

14 The ECB lends to banks and buys government bonds. But for the most part, it does not lend to the real sector, to businesses or for the construction of roads, ports, or other infrastructure. According to their website, the EIB focuses on lending for infrastructure, environment, and climate; access to finance for smaller businesses; and innovation and skills, and it attempts to make their lending countercyclical. They describe themselves as “the largest multilateral borrower and lender by volume,” providing “finance and expertise for sound and sustainable investment projects which contribute to furthering EU policy objectives, … projects that make a significant contribution to growth and employment in Europe.” See European Investment Bank, “EIB at a Glance,” available at

15 To fulfill this expanded mission, it would need further recapitalization.

16 My book with Bruce C. Greenwald, Towards a New Paradigm in Monetary Economics, emphasized the importance of these tools, which have macroeconomic consequences, though traditionally regulators have focused solely on the safety and soundness of individual institutions. The implementation of these regulatory standards, with appropriate care and flexibility, should be conducted jointly between European and national authorities. I explained earlier how a system of a single European-wide regulatory/supervisory authority, without adequate flexibility and without common deposit insurance, could actually make matters worse.

17 In the United States, the Federal Reserve was given some of these tools in 1994 (the ability to regulate the mortgage market), but it studiously refused to use them, even as one of the members of its board warned of the consequences. See, for example, my book Freefall (New York: W. W. Norton, 2010).

18 Robert J. Gordon, The Rise and Fall of American Growth (Princeton, NJ: Princeton University Press, 2016).

19 And this is especially so because much of this public investment is complementary with private investment—that is, it raises its productivity, thus inducing more private investment. The noted economic historian Alexander Field shows how in the earlier era of the Great Depression, government infrastructure investments had precisely these effects. See Alexander J. Field, The Great Leap Forward (New Haven, CT: Yale University Press, 2011).

20 Central bank authorities in the United States have been perhaps the most articulate in espousing the neoliberal ideology: one can’t tell a bubble until after it breaks, and it would be far cheaper to clean up any mess created by the bubble than to interfere in the wonders of the market, in its efficient allocation of resources. While the IMF, which plays such a central role in managing the global financial market, seems to have taken onboard the lessons of the crisis, even after the crisis I heard Ben Bernanke and US Treasury officials espouse views that seemed remarkably little altered. See, for example, Joseph E. Stiglitz, “Macroeconomics, Monetary Policy, and the Crisis,” in In the Wake of the Crisis, ed. Blanchard et al., pp. 31-42; Joseph E. Stiglitz, “The Lessons of the North Atlantic Crisis for Economic Theory and Policy,” in What Have We Learned?: Macroeconomic Policy after the Crisis, ed. George Akerlof, Olivier Blanchard, David Romer, and Joseph E. Stiglitz (Cambridge, MA: MIT Press, 2014), pp. 335-47.

21 Three other parts of the convergence strategy have already been discussed in the first three items of the reform agenda.

22 Though as we noted in chapter 4, sometimes, in an era of exuberance, the weakness in aggregate demand is offset by unsustainable investment.

23 It meant, too, that shocks from the outside would affect each differently.

24 It is thus natural to ask: Is it a coincidence that there is such a similarity between the harsh policies imposed on Africa and East Asia by Western creditors and those being imposed on Greece, in spite of a supposed deep underlying solidarity relationship in the latter that was not present in the former cases? Or are the policies really being driven by the same underlying ideologies and interests, including the interests of a creditor? I wrote about these extensively in Globalization and Its Discontents.

25 The logic of such a tax follows naturally from the logic of the current fines on violating fiscal rules. Such rules were imposed in the (partially misguided) view that having a deficit imposes costs (externalities) on others. We have shown that it is surpluses, especially of a large country like Germany, that really impose costs on others. A tax discourages such behavior and helps align the narrow interests of the country with the broader interests of the eurozone.

26 And the share of low-wage jobs in the economy (those paying less than €9 an hour) increased substantially. See Fabian Lindner, “Following Germany’s Lead to Economic Disaster,” Social Europe (website), December 16, 2011, available at

27 Of course, more was going on, as we have already noted. The rush of money into some of the periphery countries, based on the euro-euphoria, given the market’s remarkable failure to note the long-standing risks of real estate bubbles and the newly created risks of a European sovereign debt default, had fueled an increase in prices and wages in these countries, especially relative to the declining levels in Germany. But these countries basically had no tools within the euro framework to curb these private sector excesses. Monetary policy was aimed at inflation across the eurozone, not at individual countries, and with the euro, they had given up all control of their own monetary policy. The dictums of the time, the neoliberal policies, proscribed interfering with the real estate bubbles. And in some of the other countries, the fight to maintain full employment, without other tools or assistance from the eurozone as a whole, led to fiscal deficits.

28 There are, as we noted in chapter 4, two ways that real exchange rates can be realigned: internal devaluation for the “overvalued” currencies and inflation for the undervalued currencies. At an abstract level, these two adjustment mechanisms look similar. In practice, they are markedly different. First, internal devaluation represents an increase in leverage, in the real value of the debts in these countries, and thus the hoped-for expansionary benefits may not be realized. By contrast, inflation is a form of deleveraging in the countries with an undervalued currency and thus has an expansionary effect.

Moreover, there is ample evidence of “downward rigidities” in wages and prices, so in practice, engineering an internal devaluation is far harder than managing limited increases in wages and prices.

29 Such policies might, at the same time, address the problems that Germany has been facing at the bottom of its income distribution.

30 There are many ways in which the ECB could accomplish this. It could, for instance, give preferential terms to banks that lend to small and medium-size enterprises. It could give preferential terms to countries where SME lending is constrained—for example, because of weaknesses in their banking systems. In the United States, CRA (Community Reinvestment Act) requirements have encouraged high-quality lending to underserved communities. (Contrary to conservative complaints that such lending was responsible for the financial crisis, repayment rates on such loans were comparable or superior to non-CRA lending and had nothing to do with the financial crisis. See National Commission on the Causes of the Financial and Economic Crisis in the United States, The Financial Crisis Inquiry Report, 2011, available at; and Stiglitz, Freefall.) Still another mechanism that the ECB could use to encourage productive lending is making access to the ECB window (i.e., the ability to borrow from the ECB) conditional on banks making loans for the productive sector, especially to SMEs, and restricting nonproductive lending. What may be required is a combination of carrots and sticks, incentives to behave well (specifically, to lend to SMEs) and punishments for not doing so.

31 Or through its socially destructive practices of predatory lending, market manipulation, or abusing its market power.

32 Many of the problems can be traced to the rules and regulations governing the financial system, others to tax laws that encourage speculation, still others to bankruptcy laws that encourage excessive risk-taking through derivatives and excessive consumer lending, and yet others to deficiencies in corporate governance. For the United States, see Stiglitz et al., Rewriting the Rules of the American Economy; and National Commission on the Causes of the Financial and Economic Crisis in the United States, Financial Crisis Inquiry Report. My book Freefall describes some of the general principles.

33 The Economic Policy Institute (EPI) reports that the average annual CEO compensation of the largest 350 firms in America was $16.3 million in 2014—303 times larger than that of the typical worker (“average compensation of production/nonsupervisory workers in the key industries of the firms included in the sample”). Average inflation-adjusted CEO compensation has grown nearly 997 percent since 1978. See the EPI’s online report “Top CEOs Make 300 Times More than Typical Workers,” June 21, 2015, available at

34 In the United States, provisions of the tax code have provided further encouragement to stock options.

35 See, in particular, Stiglitz et al., Rewriting the Rules of the American Economy. An example of changes in the rules that might encourage long-term thinking on the part of firms includes loyalty shares, which give more voting rights to long-term investors than to short-term investors. See Patrick Bolton and Frédéric Samama, “L-Shares: Rewarding Long-Term Investors,” ECGI—Finance Working Paper No. 342/20132012, January 2012, available at

36 I helped develop this idea when I was at the World Bank in the midst of the East Asia crisis, when some 70 percent of Indonesian firms were in or approaching default, as were nearly 50 percent of firms in Thailand and Korea. See Marcus Miller and Joseph E. Stiglitz, “Bankruptcy Protection against Macroeconomic Shocks: The Case for a ‘Super Chapter 11,’ ” World Bank Conference on Capital Flows, Financial Crises, and Policies, April 15, 1999, available at; and Marcus Miller and Joseph E.Stiglitz, “Leverage and Asset Bubbles: Averting Armageddon with Chapter 11?,” Economic Journal 120, no. 544 (May 2010), pp. 500-518.

37 There is an easy answer for those who worry that this will put European firms at a competitive disadvantage: Europe needs to impose a cross-border tax on goods from countries that do not put a correspondingly high price on carbon. Such a charge would, I believe, be WTO-compliant. See my book Making Globalization Work.

38 It is perhaps obvious: the least skilled are those who are let go first when there is an economic downturn; and the cutbacks in government spending associated with economic downturns are particularly costly to those at the bottom, who depend on government social spending. While many governments say that they will “protect” such social spending, in many cases, the cutbacks are in fact regressive. See, for example, Jason Furman and Joseph E. Stiglitz, “Economic Consequences of Income Inequality,” in Symposium Proceedings—Income Inequality: Issues and Policy Options (Jackson Hole, WY: Federal Reserve Bank of Kansas City, 1998), pp. 221-63; and Stiglitz, Price of Inequality.

39 This was an early insight in the literature in the theory of local public goods, where individuals could move freely from one local community to another. See, for example, Joseph E. Stiglitz, “Theory of Local Public Goods,” in The Economics of Public Services, ed. M. S. Feldstein and R. P. Inman (London: Macmillan, 1977), pp. 274-333. (Paper presented to IEA Conference, Turin, 1974.)

40 One of the central themes of my book Globalization and Its Discontents is that one-size-fits-all policies are doomed to failure.

41 As we noted in chapter 4, there is a persistent view that confidence can be restored if governments cut deficits (spending), and with the restoration of confidence, investment and the economy will grow. No standard econometric model has confirmed these beliefs. On the contrary, the first-order effect of the deficit reduction is a slowdown in the economy, and the slowdown destroys confidence.

42 In chapter 8, in the section entitled “Reforms That Would Have Mattered,” I describe a number of structural reforms in crisis countries, such as Greece, which would have helped restore growth and prosperity.

43 See the data presented in the previous chapter.

44 More recently, with several countries facing the possibility of such crises, and with US courts (who have jurisdiction over bonds issued in the United States) taking peculiar views, essentially making such restructurings impossible, there is a renewed demand for creating a sovereign debt-restructuring framework. The UN General Assembly, with the support of the vast majority of countries, adopted a resolution to begin creating such a framework in September 2014, and a year later, with even more support, they adopted a set of principles to guide the design of the framework. Elsewhere, I have described what such a framework might look like. See Joseph E. Stiglitz, “Sovereign Debt: Notes on Theoretical Frameworks and Policy Analyses,” in Overcoming Developing Country Debt Crises, ed. Barry Herman, Josè Antonio Ocampo, and Shari Spiegel (Oxford, UK: Oxford University Press, 2010), pp. 35-69.

45 Russia regained access to international capital markets less than two years after its 1998 default.

46 For a broader discussion of the role of debt restructurings in dealing with debt crises, see Joseph E. Stiglitz and Daniel Heymann, “Introduction,” in Life After Debt: The Origins and Resolutions of Debt Crisis, ed. Joseph E. Stiglitz and Daniel Heymann (Houndmills, UK, and New York: Palgrave Macmillan, 2014), pp. 1-39; and the other papers in that volume.

47 As we noted in chapter 2, the Erasmus program, where European students study in each other’s countries, is an example.

48 As we noted in the case of the provision of deposit insurance within a banking union.

Chapter 10. Can There Be an Amicable Divorce?

1 Martin Wolf, in his very thoughtful writing about the euro and the euro crisis, has come to much the same conclusions, and has often used the marriage metaphor, suggesting that the breakup of the eurozone, including the exit of Greece, would be a messy divorce. This chapter shows how it might be somewhat less messy—though it may be stretching it to suggest it could ever be truly amicable. See Martin Wolf, The Shifts and Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis (New York: Penguin Press, 2014).

2 I won’t discuss here the optimal groupings but instead will focus on how such a divorce can be managed.

3 Those in finance describe the divorce as providing an in-the-money option.

4 Of course, this logic implies that for countries that have managed to grow reasonably well within the confines of the eurozone, the benefit to leaving would be less than the cost.

5 See, for instance, Matthew Yglesias, “How Greece Leaving the Euro Would Actually Work,” Vox, July 16, 2015, available at; and Jack Ewing, “Weighing the Fallout of a Greek Exit from the Euro,” New York Times, July 9, 2015.

6 Regulators, legislatures, and courts in antitrust actions have finally begun intervening to curtail the high fees and abusive practices, but the fees remain far higher than what they should be.

7 As we noted in chapter 7, among the foolish mistakes of the Troika were its policies that effectively discouraged the use of the banking system and thus almost encouraged tax avoidance.

There are problems of scams in any monetary arrangement, and cyber security is one of the key problems faced in modern electronic payments mechanisms. The advantages of electronic transactions are, nonetheless, overwhelming, which is why even with monopoly pricing, there has been a shift toward this system.

8 The major exception, for the purchase of goods and services from abroad, is discussed later in this chapter.

9 Indeed, European authorities effectively encouraged the creation of such a system when they imposed restrictions on how much money people in Greece and Cyprus could take out of their accounts. This system goes just a little further: rather than limiting the amount that can be taken out of one’s bank account to a very little amount—say, €50 a day—it puts the limit at zero, forcing the economy to move to a cashless electronic economy.

10 In the preface, we noted the role that this issue played in America’s election in 1896.

11 There are several other “slips between the cup and the lips.” Central banks in Europe, the United States, and Japan have increased their own balance sheet, providing more liquidity to their banks; but their banks have simply put much of the money back in deposit at the central bank, not even creating more private credit. When credit is created, in a world of globalization, it doesn’t have to stay within the borders of the country creating it. In the early days of US QE, much of the money went abroad to the booming emerging markets. Finally, even when it stays at home, it can not only be used for buying existing assets but also to provide “margin” for speculative gambles.

12 The evolution of the banking system from the primitive corn economy toward its modern form is interesting and informative. Early banks were really based more on gold deposits than on corn deposits. Those with more gold than they wanted to spend put it in the bank, and the bank lent it out to others. Soon, banks discovered that they could create pieces of paper, claims on gold, that others would accept, and that they could produce more of such pieces of paper than they had gold, in the knowledge that not all holders of these pieces of paper would ask for their money simultaneously. As it gave gold to some who asked for it, it would receive gold from others.

Occasionally, there would be a panic when holders of these pieces of paper worried whether the bank could fulfill its promises, and, of course, when they panicked and all went to the bank to demand their gold, there was not enough to satisfy their demands. The banks would go bankrupt, and the economy could be thrown into a depression.

Deposit insurance was invented to prevent these panics: the government explicitly stood behind the banks’ promises. This gave greater faith that the promises would be honored (so long as there was faith in the government), and this in turn reduced the likelihood of a panic. But if the government was to provide these guarantees, this insurance, it had to make sure that the bank was acting responsibly—for example, lending out money to people who could actually pay it back, and not lending to the owners of the bank and his friends. Gerry Caprio, with whom I worked at the World Bank and who studied government rescues around the world, was fond of saying that there are two kinds of countries—those who have deposit insurance and know it, and those who have deposit insurance and don’t know it. Sweden, before its financial crisis in the 1990s, had no deposit insurance, but it rescued its banks nonetheless. In the 2008 crisis, around the world suddenly deposit insurance was extended to accounts that had not been fully insured before.

One can understand government taking on this new role, partially as a result of the magnitude and frequency of the panics and downturns in the market economy in the 19th and early 20th centuries. Moreover, as advanced countries, like the United States, transformed themselves from agricultural economies to industrial economies, with an increasing fraction of the population dependent on manufacturing and other nonagricultural jobs, these economic fluctuations took a toll. So long as ordinary citizens had little voice in what government did, so what if so many suffered so much? But with the extension of the franchise and increasing democratic engagement, it became increasingly difficult for government to ignore these mega-failures of the market.

13 See, for example, John Kay, Other People’s Money: The Real Business of Finance (New York: Public Affairs, 2015); and Adair Turner, Between Debt and the Devil: Money, Credit, and Fixing Global Finance (Princeton, NJ: Princeton University Press, 2015).

14 More broadly, it has been shown that much of the increase in inequality in the advanced countries in recent decades is related to finance. See, in particular, James K. Galbraith, Inequality and Instability: A Study of the World Economy Just before the Great Crisis (New York: Oxford University Press, 2012); and Stiglitz, Price of Inequality.

15 For a further development of this critique, see my book Freefall.

16 This is especially so, through the privatization of gains and the socialization of losses that has become a regular feature in economies with too-big-to-fail banks. (See Freefall.)

17 The system is symmetric. The central bank may decide that there is too much money in the economic system—that is, the banks are lending too much, using “money” that they receive in repayment. In that case, the government can buy back rights to issue credit: they buy back the money that they have allowed the banks to effectively manage on their behalf. Again, there can be an open auction for those most willing to give up rights to issue credit. This would literally drain money out of the banking system.

18 Entry would presumably occur to the point where the before-tax return to capital (measured over the business cycle) would be slightly in excess of the normal return to capital. Some excess return may be necessary to induce more responsible social behavior on the part of bankers.

19 According to the World Travel & Tourism Council, which also estimates that tourism’s total, secondary contribution to the Greek economy is about 17 percent of GDP. See the group’s report “Travel & Tourism: Economic Income 2015: Greece,” available at

20 Earlier, we argued that an internal devaluation was likely to have limited benefits and significant costs, because it would simultaneously hurt the nontraded sector, even as the traded-goods sector was (slightly) helped. To accomplish a real devaluation required large declines in wages and that these wage decreases would get translated into price decreases for traded goods. A change in the nominal exchange rate immediately translates into an improvement in the real exchange rate. The main risks are (a) that an increase in inflation makes these benefits only temporary, and (b) as with internal devaluation, the increased real leverage when debts are denominated in foreign currency would lead to decreased demand for nontraded goods. Later in the chapter, I describe reforms that mitigate these effects.

21 See Warren Buffet, “America’s Growing Trade Deficit Is Selling the Nation out from Under Us. Here’s a Way to Fix the Problem—And We Need to Do It Now,” Fortune, November 10, 2003.

22 To prevent the buildup of chits—speculators might buy them on the bet that a chit is more valuable some years into the future—the chits should be date-stamped; they would have to be used, for example, within a period of one year. (It’s possible that some international rules, such as those currently stipulated by the WTO, would need to be changed to accommodate the system of chits. At least in the context of a transition of the kind being contemplated here, where a country faces a current account problem, existing rules provide sufficient flexibility that there should be no problem.)

23 Actually, as we have already noted, the current account had already turned into surplus by early 2015, and during 2015, it moved in different months between positive and negative. Given this, even without the system of chits, the magnitude of devaluation might have been limited. The system of chits, by ensuring the market that there would not be large trade deficits, would add further stability to the market.

It should be obvious that we have not had space to describe in detail the full workings of our electronic money/credit/chit system. The basic principles, however, should be clear. For instance, when a Greek firm exports olives to the United States, it would deposit the dollars it receives into the electronic banking system, receiving a credit to its Greek-euro account of an amount equal to the Greek-euro value of those dollars. (It would also receive a corresponding number of chits, which it could freely sell to others.) The amount of “money” in the banking system would increase as a result of the deposit. The central bank would take this into account in deciding on the magnitude of credit to auction off. The system is designed to discourage circumvention—for example, through underinvoicing. Any such underinvoicing (besides being against the law) would result in the exporter not receiving the trade chits that he would otherwise be entitled to. There is no incentive for the creation of a black market.

24 Even now, it has surpassed prior expectations of a small primary deficit up until July 2015 by actually achieving a relatively large surplus, which it has maintained in the first quarter of 2016. See Silvia Merler, “Greek Budget Update—August,” August 17, 2015, blog post on the website of the European think tank Bruegel, available at

25 Indeed, one might argue that the counterproductive conditionality imposed on the crisis countries, which so undermined their economies, provides a moral obligation on the part of the eurozone. But I suspect that many of the eurozone members would not recognize this moral obligation and place the onus on the failure of the programs on the crisis countries themselves. In the absence of a grant, the eurozone could provide loans, with senior creditor status. (In effect, “lending in arrears.” See the discussion below.)

26 That is, the chit rate could be set to generate trade balance, or even, as we noted, a surplus.

27 They got converted at the exchange rate defined in the entry into the euro. Still, the “switch” in currencies had far from trivial consequences, both for credit and debtor, since the risk properties of the two currencies could be quite different. A longer-term bond issued, say, in 1991 in drachmas would have paid an interest rate reflecting the exchange-rate risk. With the conversion into a euro, that risk was markedly reduced, handing the creditor, in effect, a large gift.

28 The government should treat the payment of a foreign debt in euros like an import. The foreign claimant would be given a claim on Greek-euros, which could be used to purchase goods from others inside Greece. However, if the creditor wanted to convert the Greek-euros into ordinary or German euros, he would have to purchase the foreign exchange, using chits.

Alternatively, the country could impose capital controls, paying the creditor in euros but not allowing the euros to leave the country. For instance, it could set up euro-bank accounts within the country, with money being able to move smoothly from one euro-bank account to another but not being able to be converted into currency or euros in a foreign euro account.

Capital controls have been used in the context of crises in Iceland, Greece, and Cyprus. This proposal is, in effect, a more efficient and simplified way of implementing such constraints.

29 We may have underestimated the costs of bankruptcy: with many of the debts contracted under foreign law, as we have noted, redenomination may not be possible. There might be litigation over whether payment in a “constrained euro”—a euro constrained to be spent in Greece, with a fee to take it out (the price of the chit)—is the same as a payment in an unconstrained euro and therefore fulfills the debt contract. If there is not redenomination, there would be adverse effects on balance sheets—but no worse than those associated with internal devaluation. A super-Chapter 11 might enable firms with excessive debts issued in foreign denomination under foreign jurisdiction to have a quick and fresh start. This might be facilitated by laws allowing easy asset restructurings—for example, a family with a foreign-denominated mortgage on its home issued in a foreign jurisdiction could treat its home as if it were a separate incorporated subsidiary, converting the mortgage debt into equity in the home but without forcing the individual into full bankruptcy. Similarly, this could be done for corporations. Given the increasing litigious nature of Western society, all of this is likely to be messy, but it is still less onerous than the current depression.

30 In any debt restructuring/bankruptcy, there is a provision called “lending in arrears,” which allows those who lend to the entity after the restructuring process begins to get paid back in full, before other claimants are paid back in part. This should also be part of any amicable divorce.

31 George Soros forcefully and eloquently put this idea forward in his article “The Tragedy of the European Union and How to Resolve It,” New York Review of Books, September 7, 2012. Indeed, the view that Germany should leave is widely shared among economists. Mervyn King, former head of the Bank of England, commented on CNBC: “That would be the best way forward, and I would hope that many of my American friends would stop pushing the Europeans to throw money at the problem and say we must make the euro successful.” Tom DiChristopher, “Germany Should Leave Euro Zone: Mervyn King,” CNBC, March 21, 2016, available at

Chapter 11. Toward a Flexible Euro

1 At least relative to the hopes, though not perhaps relative to the reality of the situation.

2 These are both ideas discussed at greater length in chapter 9 for creating a eurozone that works. This chapter argues that by adopting some of these ideas, Europe could gradually move toward such a regime.

3 There are, in addition, a host of legal issues: Would it be possible to settle a euro-denominated debt with a payment in a Greek- or German-euro? The functioning of the system would obviously be greatly facilitated if that were the case, as we noted in the previous chapter.

4 The system might not, in fact, be in the interests of all those in Europe: Germany has gained enormously from the current system, which has made it easier for it to run huge trade surpluses, which have contributed to its economic strength, even as they have contributed to instabilities in the global economy. The system of the flexible euro would almost surely lead to a stronger German-euro. As we have noted, Germany might even be unable to sustain its surpluses. It would thus not be a surprise were it to oppose this system.

Chapter 12. The Way Forward

1 See IMF, “Greece: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement,” IMF Country Report No. 13/156, June 2013, available at; and IMF, “Ireland: Ex Post Evaluation of Exceptional Access under the 2010 Stand-By Arrangement,” IMF Country Report No. 15/20, January 2015, available at

2 See Richard Koo, “EU Refuses to Acknowledge Mistakes Made in Greek Bailout,” Nomura Research Institute, July 14, 2015, available at

3 There are many possible reasons for this dominance. One is that many of the other countries in the eurozone, not yet in a crisis, worry that they, too, may need a bailout sometime in the future. They don’t want to get on the bad side of Germany. At home, their leaders talked tough about how they would stand up to Germany. Somehow, the outcome of the meetings reflected their views at most in the margins.

Bailouts typically required the unanimous agreement of all countries, and in the case of Germany, the bailout has to be submitted to the parliament. The strong antibailout sentiment in Germany means that it could exercise effective veto power: if the bailout agreement does not accord sufficiently with what German leaders think and want, the chances of passing the parliament are slim.

The actions of the ECB have on several occasions been brought before German courts on the grounds that they violated the German constitution. The German courts have so far deferred to higher European courts—in January 2015, for example, the European Court of Justice ruled in favor of an ECB government bond-buying scheme, in a suit originally brought to the German Constitutional Court by several German plaintiffs. But the constant threat of a suit casts a pallor over the actions of the ECB.

4 According to a 2012 poll conducted by TNS Emnid. See “Most Germans Oppose Euro, French Also Losing Faith: Polls,” Reuters, September 17, 2012, available at

5 See Seth Mydans, “Crisis Aside, What Pains Indonesia Is the Humiliation,” New York Times, March 10, 1998. The actual photo of the two men is widely available on the Internet: Camdessus standing sternly with folded arms over a stooped Suharto as the latter signs the agreement.

6 See Karl Lamers and Wolfgang Schäuble, “More Integration Is Still the Right Goal for Europe,” Financial Times, August 31, 2014.

7 See Yanis Varoufakis, “Greek Debt Denial: A Modest Debt Restructuring Proposal and Why It Was Ignored,” in Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises, ed. Martin Guzman, José Antonio Ocampo, and Joseph E. Stiglitz (New York: Columbia University Press, 2016).

8 When 62 percent of Portugal’s voters expressed opposition to austerity (a number remarkably similar to that in Greece), Portugal’s conservative president publicly expressed his reluctance to install the antiausterity coalition that had won overwhelmingly. (The pro-austerity Portugal Ahead coalition—an alliance between the the CDS [People’s Party] and the PSD [Social Democratic Party]—had won a plurality of votes, because the antiausterity votes were divided among several parties. But there was no way that it could form a coalition to continue the depression-inducing austerity policies.) It may have been partly that, in an antidemocratic way, he didn’t want the country to change course. But it may have been partly out of genuine concern: What would happen if the government actually tried to implement policies that were consistent with the election promises? Perhaps he feared Europe’s vengeance. For Portugal, the good news was that they were out of their Troika program, so the Troika’s stranglehold over Portugal was much less. But many in Portugal realized the vagaries of the market: even if it did everything right, market sentiments can be very volatile, and if it again got closed out of capital markets, what options would it have?

Interpreting election results is always difficult: they are often influenced not just by policies and political sentiments but by personalities and events of the moment. Thus, in a subsequent election for the presidency of Portugal, the center-right party candidate won with 52 percent of the vote in January 2016. Meanwhile, in February 2016, the Irish, who seemed to have been most accepting of the austerity policies imposed on them, turned out the government that had imposed them, though eventually, after months of haggling, Prime Minister Enda Kenny was able to form a fragile minority government and maintain leadership.

9 Stiglitz et al., Rewriting the Rules of the American Economy.

10 Eurozone leaders often show their compassion by espousing a commitment to a safety net. The question is, though, how low is the safety net? I would argue that a safety net that leaves large fractions of the population and an even larger fraction of children in poverty is an inadequate safety net, and is a far cry from inclusive growth. The safety net provided as part of the Greek program is not an adequate safety net.

11 See “Europe: The Current Situation and the Way Forward,” Leaders in Global Economy Lecture, Columbia University, April 15, 2015, available at In that same lecture, he revealed something about broader social attitudes. As he sought to explain the Great Recession, he repeated a view popular in extremely conservative circles around the world: “US policymakers tried to promote home ownership of poorly skilled workers by having less stringent lending practices.” This view has been forcefully rejected by the bipartisan Financial Crisis Inquiry Commission. Indeed, it has become increasingly clear that not just bad judgments by those in the private sector were to blame, but fraudulent practices. See National Commission on the Causes of the Financial and Economic Crisis in the United States, Financial Crisis Inquiry Report, 2011.

12 As we discussed in chapter 2, what is at stake is not just a matter of views about how the economy works; it is also a matter of values. For instance, elsewhere in this book we have referred to the theory and evidence in support of the thesis that economies with less inequality and more equality of opportunity perform better. They grow faster and their growth is more sustainable. But shared prosperity is also a matter of values. The commitment at the UN to sustainable development goals on September 25, 2015, can be seen as a broad global consensus behind the ideas of inclusive growth. (See “Transforming Our World: The 2030 Agenda for Sustainable Development,” available at

13 Indeed, the life of a peasant in 1700 was little better than it would have been two millennia earlier. See Stiglitz and Greenwald, Creating a Learning Society.

14 Germany labels these migrants as economic migrants, differentiating them from the humanitarian migrants, including those fleeing the war in Syria. But an “economic migrant” who sees as the alternative to migration watching his family starve sees things through a very different lens.

15 In this sense, the monetary union is different from trade integration. There, most economists believe that earlier trade agreements have generated small overall gains, though the distributive effects often overwhelm these gains, so that large proportions of the population are worse off. (As we will note, the newer proposed trade agreements, like the monetary union, may not even generate overall benefits.)

16 The so-called ISDS (investor state dispute settlement) allows corporations to sue governments for the passage of any regulation that lowers their expected profits—no matter the extent to which those profits originate by imposing harms on others. See my column with Adam Hersh, “The Trans-Pacific Free-Trade Charade,” Project Syndicate, October 2, 2015, available at

17 See chapter 8.

18 See the discussion in chapter 1.