STRUCTURAL REFORMS THAT FURTHER COMPOUNDED FAILURE - MISCONCEIVED POLICIES - 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)



The Troika program imposed structural reforms on the crisis countries as a condition for providing assistance. Structural reforms simply refer to changes in the structure of the economy and in the individual markets within—for instance, labor markets and financial markets. All countries are constantly in need of structural reform and transformation as the economic situations that they confront change. After the financial crisis of 2008, there was a broad consensus that there was a need for deep structural reforms in financial markets throughout the advanced countries.

In the crisis countries, the Troika demanded, as a condition for providing assistance, a mélange of reforms, ranging from the trivial to the counterproductive, with little focus on the truly important. The most demanding reforms were those imposed on Greece, and they were remarkably ineffective, sometimes even destructive.

There is an old adage about Nero fiddling while Rome burned. Greece was in a depression. Its people were starving. Surely, there should have been a sense of urgency. Doctors triage at the hospital, first looking to the death-threatening problems; later attending to less important matters. But not only did the Troika fail to prioritize, many of the most important changes that should have been on the reform list were not.


The Troika has argued that the crisis is, in no small measure, the consequence of structural problems, and as such they had to be attended to right away. But structural problems don’t suddenly arise. There were no changes in the structure of the afflicted countries that could account for their going from near full employment precrisis to massive unemployment after 2010.1 As we noted in chapter 3, some of the crisis countries had, before the crisis, even grown faster than the average for Europe as a whole. Without any of these structural reforms, Greece grew at a faster rate (3.9 percent) than the EU (2.6 percent) from 1995 to 2007, until the global crisis, and so did Spain (3.8 percent).2

The Troika might claim that, even if the structural problems didn’t cause the crises, reforms would help the economies recover. It is not, however, “structural impediments” that are holding the crisis countries back—it is, as we have seen, the eurozone itself. Because structural problems thus cannot be (and are not) the cause of the crisis, structural reforms within the individual countries cannot and will not be the cure.

The eurozone’s leaders disingenuously pretended such reforms would make the citizens of the crisis countries better off.3 It is now obvious that they did not do that—and it should have been obvious at the time that the Troika imposed these demands that they would not.

Some of the reforms seemed intended at increasing the likelihood that creditors would be repaid, by reducing the current account deficit—what countries had to borrow—and converting the deficit into a surplus so that the country had the euros to repay. In the absence of flexible exchange rates, as we noted in chapter 4, the only way to correct current account deficits is to have a real exchange adjustment—that is, to lower the prices of the goods that the country sells abroad. But as we shall see, some of the reforms seem as motivated by advancing the business interests within the dominant countries in the eurozone as anything else. And, ironically, the reforms as a whole—the combination of structural and macro-economic reforms—turned out to be counterproductive, in particular, weakening Greece to the point where it could not pay back what was owed.


As we have noted, the structural reforms were a grab bag, ranging from the trivial to the counterproductive.


While some of the reforms might be justified as helping correct the unsustainable trade deficit of the individual crisis countries, many could not be. To correct the trade deficit, it should have been obvious that the Troika should have focused on “tradable” goods—exports and imports. Too often, however, the Troika did not do so; it did not even focus on nontraded inputs into the traded sector. Instead, much of its attention was centered on nontraded consumer goods (like taxicabs and bread). Lower prices in the nontraded sector, especially of certain consumer goods, may have affected the living standards of Greeks, though as we shall see even that might not be true, once one includes all the effects, including that on employment; but such changes only have a negligible effect on the current account. In some cases, the “reforms” may have even worsened the trade deficit.4

Trade deficits can be reduced by improving the real exchange rate, by lowering the price of the goods the country exports. There are three ways of doing this: (1) lowering wages, and hoping that the lower wages get translated into lower prices; (2) lowering the cost of other inputs, in particular nontraded intermediate inputs (like electricity), by increasing competition in those sectors; or (3) improving technology and competition in traded goods.


Improving technology is important, but typically cannot be done overnight—and the Troika policies probably set back the agenda. Firms in economies on the verge of collapse are thinking about survival, not about investing in R&D. And government investments in infrastructure, education, job training, or even technology—all of which might have increased productivity—had to be curtailed under the onslaught of austerity. All of these compounded the adverse effects of the eurozone structure itself discussed in chapter 5: The migration out of the crisis countries of some of their most talented young people hurt productivity not only in the short run but also in the long; and the flow of capital out of the crisis countries meant that the cost of capital facing firms in these countries soared—if they could get finance at all—making productivity-enhancing investments even harder. And prohibitions against industrial policies—policies by which lagging countries might hope to catch up to the more advanced partners in the eurozone—made closing the technology gap all the more difficult.


When it came to promoting competition, the Troika mysteriously focused on nontraded consumer goods rather than on traded goods or nontraded that might possibly have had an effect on trade. But even then, their choice of what to focus on was most peculiar. No one has fully articulated how many of the seemingly trivial reforms struck the fancy of the Troika—how they entered the “hit list.”5 Here, I describe a few of the more controversial ones in the Greek program.6

Fresh milk

Somehow, if one believed that the worst problem facing Greece was the definition of fresh milk, Greece would really have been in good shape. Greeks enjoy their fresh milk, produced locally and delivered quickly. But Dutch and other European milk producers would like to increase sales by having their milk, transported over long distances, appear to be as fresh as the local product. In 2014 the Troika forced Greece to drop the label “fresh” on its truly fresh milk and extend allowable shelf life. Under these conditions, large-scale producers elsewhere in Europe seem to believe they can trounce Greece’s small-scale producers. In theory, Greek consumers would benefit from the lower prices, even though the lower prices might mean lower quality. In practice, the new retail market is far from competitive, and early indications are that the lower prices were largely not passed on to consumers.

The size of a loaf of bread

Or consider another seemingly strange debate in the middle of a depression: the Troika demanded that Greece change its regulations concerning the size of bread loaves. In the past, loaves could only be sold in specified sizes: .5 kilo, 1 kilo, 1.5 kilos, and 2 kilos. There is a long-standing literature explaining how such standards actually increase competition, because they facilitate comparison shopping. But the Troika wants stores to be able to sell any size loaf. Somehow they see this as a competitive restriction.7 (I have never heard a good rationale for the Troika’s position on this matter.) But even if one couldn’t defend Greece’s previous regulations, it is preposterous that the Troika held an entire country hostage over things like this.


There are some restrictions on competition that the elimination of which, if done well and sold well, might have been beneficial. But again, the Troika botched it. A major complaint of the Troika concerned restrictions on drugstores (pharmacies). For instance, Greece required that each pharmacy be owned by a pharmacist and did not allow over-the-counter drugs to be sold outside of pharmacies. The Troika claimed that Greek regulations led to high drug prices. Again, it was somewhat mysterious why the Troika would get so exercised over this, when there were so many more profound problems. Allegedly, the drugstore reform was intended to help consumers by increasing competition, thereby lowering prices. But why was the Troika suddenly so concerned about ordinary Greeks—as they pushed policies that led real incomes to fall by a quarter and forced even very poor Greeks out into the streets? The sudden and seemingly isolated concern for the ordinary Greek citizen seemed out of sync with other aspects of what the Troika was doing. Nor would lower prices for over-the-counter drugs do anything for Greece’s balance of payments.

Perhaps doubts about the Troika’s motives fed into resistance to the reform. The widespread perception in Greece is that many of the drugstores are mom-and-pop stores, owned by someone in their neighborhood, eking out a basic living, not living high off monopoly pricing. They saw the large number of pharmacies as evidence of competition, and were befuddled by charges of lack of competition. Many Greeks felt some solidarity with their neighborhood pharmacy; they were willing to pay a slightly higher price and even to support the regulatory system which allowed that. They may have understood that allowing others to sell over-the-counter drugs might have lowered profits, that the reduced profitability of running a pharmacy might lead to fewer pharmacies and thus to even higher prices for prescription drugs and less accessibility to medicines when they were needed.8

For people with this view, the Troika seemed to have another agenda, akin to that in the fresh milk case: opening up Greece to multinational chains and strengthening grocery stores (including chains) that could now sell these products, which might provide lower prices, but at the same time would be destroying the livelihood of thousands of Greeks.

The Troika could have taken steps to reassure the Greek people that the true agenda behind pharmacy reform was simply to lower prices for consumers. The fact that the Troika failed to convince most Greeks of these aims showed the deep popular distrust about their motives. No one gave the Troika the benefit of the doubt.9

Contributing to the distrust was the fact that many of the regulations the Troika was so vehemently demanding that Greece change, such as on closing hours, were similar to those elsewhere in Europe, including Germany. When Germany’s finance minister, Wolfgang Schäuble, was confronted with this fact, his response was, in effect, that Greece was in dire straits—it couldn’t afford these inefficiencies; Germany could. But he never explained how more trading hours would lead to a smaller trade deficit or even a higher GDP. These were regulations affecting a nontraded sector, and so were irrelevant for its exports. Money not spent on Sunday will be spent some other time—there is no evidence that these restrictions have any effect on national savings rates.10

Making Greeks even more suspicious that the Troika had another agenda than just increasing the well-being of the Greek people was the fact that they failed to sustain an even more important reform, one that brought down drug prices even more: the e-government drug-price initiative of Prime Minister George Papandreou (which would have resulted in lower prices by increasing market transparency) went by the wayside once he was forced from office.


The alternative to increasing competitiveness through improved productivity was lowering wages. I suspect that while many were horrified at the increased unemployment in the crisis countries, secretly, many in the Troika thought of this as almost a necessary means to the long-run end of making the euro work: as we noted in chapter 4, higher unemployment would lead to lower wages, lower wages would lead to lower prices, and this process of “internal devaluation” would eventually restore equilibrium to the current account and bring the economy back to full employment. It was a very costly way of achieving what flexible exchange rates would have accomplished.

Not satisfied with the huge decreases in labor costs (in the case of Greece, reductions of about 20 percent) that the market had brought about on its own, just through the high unemployment that the Troika policies had engendered, the Troika demanded reform to labor institutions, in the euphemism of the day, to create more flexible labor markets; in the reality of the day, the reforms would weaken workers’ bargaining power, lower wages still further, and increase profits. The Troika even put into question their commitment to the basic right of collective bargaining, the core labor standards that have been agreed to by almost all of the countries around the world.

The language in which European authorities shrouded their demands was often obscure, but the intention seemed clear, so clear that in 2011 one of Papandreou’s loyalists, a bright and devoted economist, resigned from the government rather than be a party to this abnegation of basic workers’ rights.

Here is what the Troika demanded of the Tsipras government (to which it reluctantly agreed), with the interpretation of Yannis Varoufakis, Greece’s former finance minister, in brackets. The Greek government agreed to

undertake rigorous reviews and modernization of collective bargaining [i.e. to make sure that no collective bargaining is allowed], industrial action [i.e. that must be banned] and, in line with the relevant EU directive and best practice, collective dismissals [i.e. that should be allowed at the employers’ whim], along the timetable and the approach agreed with the Institutions [i.e. the Troika decides.]

On the basis of these reviews, labour market policies should be aligned with international and European best practices, and should not involve a return to past policy settings which are not compatible with the goals of promoting sustainable and inclusive growth [i.e. there should be no mechanisms that wage labour can use to extract better conditions from employers.]11

But there was something strange as the Troika continued to make these demands on “labor market” reform on Greece: By 2015, the current account deficit had largely been eliminated. Indeed, according to the ECB, its competitiveness was above the average for the eurozone. Any further cuts seemed punitive, and as we shall shortly explain, even counterproductive. Almost surely, they would lead to even further decreases in GDP.

The Troika policies highlight general principles: (1) the rules of the game (the terms under which unions can bargain) matter, and they matter a lot; and (2) who sets the rules matters, and can matter a lot. If the finance ministers are setting labor laws—within any country—one will wind up with different labor laws than if labor ministers set the rules. No country should want the finance ministry to set its labor laws; our democracies are designed to make sure that weight is given not just to the interests and perspectives of the financial markets, and thankfully so. And even more so, no country would want its labor laws to be written by the parliament of another country—let alone the finance ministry of another country.

While, as we have noted, the government of the crisis country always accedes to the demands, they do so with effectively a gun at the head: the feared consequences of not doing so are simply too great not to accede.


The Troika sold the reforms on the grounds that they would help the economy grow. Greece showed dramatically that they had the opposite effect. Some of the structural reforms, including those we discussed earlier in this chapter, had an even worse outcome: local firms would be displaced by large European multinationals, in which case the “reform” would increase the profits of the multinational, lowering the income of those within the country. While consumers still benefited from the lower prices, this time there was another adverse effect: the transfer of profits from within the country to outside meant that spending on nontraded goods decreased, with a multiplier on national income and jobs—that is, income in the crisis country went down by a multiple of the profits that were effectively transferred abroad.12 Consumers who had jobs benefited slightly from the lower prices, but if, as to be expected, tax revenues fell alongside GDP, they were worse off as a result of the cutback in government services and systems of social protection.13 On net, many, especially in the lower rungs of society, were worse off, some much worse off. Of course, those individuals who lost their jobs suffered enormously—twice over, both from the loss of their job and the decrease in public services.

Many of the structural reforms demanded by the Troika could, especially in the aggregate, have an adverse effect even narrowly on the current account. If Greeks start buying Dutch milk, imports are increased and the trade balance worsens. And similarly for many other so-called structural reforms.14


In each of the crisis countries, there are reforms that might have led to a stronger economy, both in the short run and the long.


Most advanced countries are in need of a structural transformation of their economy, from the sectors (mostly manufacturing) that were dominant in the past to those that will define the 21st century. Because the pace of productivity increase in manufacturing is greater than that of demand, global manufacturing employment will be decreasing, and because of globalization, the share of this global employment that will be captured by the advanced countries, including those in Europe, will be diminishing. A few countries, like Germany, may be able to maintain a niche, at least for a while, especially if they can manage to have an undervalued currency. Germany has benefited from being wedded to the “weaker” countries of the eurozone, for the net effect is that the euro, the currency today, is weaker than say the German mark would have been. But most of the advanced countries will have to restructure themselves away from manufacturing toward new sectors, like the more dynamic service sectors. And even those that continue to have significant presence within manufacturing will have to restructure: from low-skilled to high-skilled manufacturing.

Markets, on their own, are not very good at restructuring themselves. The move from agriculture to industry in the late 19th and early 20th centuries was often traumatic.15 Those in the older sectors saw their incomes and wealth evaporate, and had little access to capital markets; they couldn’t make the investments required to shift from the old economy to the new. But much the same is true as the economy moves from manufacturing to the service sector, and especially as it moves toward an innovation and knowledge economy. Creating a learning economy is not easy, and the government needs to play a central role.16 At the center of America’s knowledge economy are its first-rate higher educational institutions, many of which were established more than a hundred years ago, some hundreds of years ago. And even they achieved much of their greatness as a result of migration from Europe around World War II, and with massive government support in the war and afterward for research. So, too, the culture and “ecology” of Silicon Valley—with its venture capital firms and close nexus between universities and enterprises—was created over a span of decades.

Without a concerted government effort, those countries that are behind will remain behind.17 There is a range of government policies, called industrial policies, discussed briefly in chapter 5, which have proven effective in pushing economic restructuring. In the case of the United States’ move from agriculture to an industrial/manufacturing economy, the war effort itself was the industrial policy. It pulled people out of the rural sector to fight the war, and to urban areas to make armaments required for the war. After the war, the government provided free higher education to all who had fought (which was essentially every young person)—to ensure that they had the skills required for the “new economy.” In the last half-century, the US government has once more played a central role, with its major investments in technology.18 But again as we saw in chapter 5, the kinds of industrial policies that have worked so well around the world19 are largely precluded within the eurozone; and the austerity measures imposed by the Troika have forced a scaling back in public expenditures that might have facilitated such a structural transformation.


Markets, on their own, often produce excessively high levels of inequality—levels that are, or should be, socially unacceptable, and actually undermine economic performance. Sometimes this is because governments do too little to offset the intergenerational transmission of advantage.20 Sometimes this is because governments do too little to offset the agglomerations of political and economic power that can be self-perpetuating: economic inequality leads to political inequality, which leads to writing the rules of the market economy in ways that perpetuate and extend economic inequality in a vicious circle.21 Some of the crisis countries emerged from long periods of fascism, with relatively high levels of inequality, and it would take a concerted effort on the part of the government to create a more inclusive society.

But again, many of the Troika policies lead to more inequality and a less inclusive economy.22 Before the crisis, Spain was one of the success stories in bringing down wage inequality; since the crisis, inequality and poverty have been growing there as they have in the other crisis countries.23

In Greece, the Troika emphasized that the “fiscal adjustment is fairly distributed across the society, and protects the most vulnerable,” and that the “lowest-income and lowest-pension earners, as well as the most vulnerable and those requiring family support, will all be protected and compensated for the adverse impact of the adjustment policies.”24 Yet, as we have seen, well-being indicators have all pointed downward since the adoption of the program that was so confidently predicted to restore growth. By the end of 2014, some 36 percent of Greeks were “at risk of poverty or social exclusion.” The rate is the highest in the eurozone and some 10 percentage points higher than currency union’s average. The proportion of Greeks below the poverty line (50 percent of the median income) has also increased, from 12.2 percent in 2009 to 15.8 percent in 2014. This may not sound so dramatic until you remember that median incomes also decreased significantly; thus, the increase in the poverty rate shows the disproportionate burden of the Troika programs on those at the bottom.25

But the Troika not only did too little to help those at the bottom; they did too little to prevent the concentration of wealth and income at the top. There were alternative policies in which the burden of adjustment would have been more fairly shared, and in which the increase in poverty would have been smaller.26


In Greece and elsewhere, the Troika should have focused on the major concentrations of economic and political power and sources of economic rents, which in turn contribute so much to inequality.27 Instead, the important reforms that would curb the Greek oligarchs were largely left off the agenda. The Troika was quiescent as proposals were put forward to roll back initiatives of the Papandreou government on transparency and e-government, which would have dramatically lowered drug prices, put a damper on nepotism, and curbed the ability of banks to lend to media that they or their friends owned, money that distorted the political process.

So, too, the Troika could have pushed for the progressive property tax aimed at the oligarchs that I discussed in the last chapter, rather than the tax they insisted upon, a nonprogressive one that hurt so many who were already suffering so much.

Such a comprehensive and progressive property tax would, of course, have been resisted by the oligarchs who own so much of Greece’s wealth, and that makes it precisely the kind of issue on which the Troika should have weighed in. But often, as one looked at the details of the Troika programs, one wondered what side the Troika was on: Was it just an accident, a slip, that they opted for a property tax that would have inflicted pain on ordinary Greeks, rather than one that would have hit the oligarchs?

The Troika made token measures to seem as if they were equally tough on the rich, measures that they surely knew would be ineffective: for example, they insisted on the elimination of all preferences for the shipping industry. Greece’s constitution provides favorable treatment for shipping, testimony both to the importance of the industry and to the political influence of the rich shipowners. But there are special problems in taxing shipping, and the Troika’s insistence that shipping be taxed at normal rates seemed insensitive to these complexities; so it was virtually guaranteed to raise little revenue.28 If there were ever an industry that was movable, this was it: shipping can easily relocate to a low-tax jurisdiction. The absence of international cooperation in taxation of corporations that operate across boundaries has, in fact, made tax avoidance a central part of the business model of every multinational.29While the Troika has criticized tax avoidance in Greece, dominant countries in the eurozone have been among those most adamant against changing the international framework for taxation in ways that would reduce tax avoidance, and the head of the European Commission, Jean-Claude Juncker, in his role as premier of Luxembourg, perfected that country’s role as a center for tax avoidance.30

While the tax on shipping that they are demanding—which is unlikely to raise much revenue but is likely to hurt Greece’s GDP, simply because much of it may move out of Greece to other jurisdictions—is being presented as an example of the Troika’s strong anti-oligarchic stance, what they are doing to small businesses in Greece is hard to fathom: they are forcing small businesses, which can’t move, to pay a year’s tax in advance.31


The fourth structural reform that the crisis countries needed was reform of the financial sector—noncrisis countries needed such reforms themselves. The financial sector had failed before the crisis to perform the basic services that it is supposed to provide—allocating capital, providing funds to small and medium-size enterprises, and managing risk. Rather than serving society, it had harmed society. Europe might take pride that such abuses were less than in the United States, that the financial sector hadn’t taken so much from the rest (in the United States, they took close to 8 percent of GDP in the years before the crisis, as opposed to Europe, where the share remained under about 6 percent), and given back so little. But it is not much to crow about.

In Greece, for instance, the banks remained largely in the hands of the Greek oligarchs. These have continued in their practice of “connected” lending, lending to their other business interests and those of their friends and family. Particularly invidious was their lending to the media that they owned—which often lost money but enhanced their political influence. In doing so, they enriched and empowered themselves economically and politically.

As it became clear during the crisis that the Greek banks would have to be recapitalized, it made sense to demand voting shares for the government. This was necessary to ensure that connected lending, including to the oligarchic media, be stopped. But when the Papandreou government proposed this, the Troika resisted. He nonetheless persisted, but when he left office—after the Troika adamantly opposed his initiative to put the program to a referendum—these efforts were undone.32

Rather than a restructuring, though, what happened was a weakening of the financial sector in the crisis countries—as we have noted, an almost inevitable consequence of the structure of the eurozone itself. Had the eurozone recognized this problem, they could have undertaken countervailing measures. They could have created a fund for lending to small and medium-size enterprises, and at various times, there were discussions about establishing such a fund.

But the Troika undertook actions that weakened the banks in the crisis countries even further, as we have noted repeatedly. The shutdown of the Greek banks was the most obvious case of this. And by repeatedly discussing a haircut for depositors, they convinced those depositors to move their money out of the crisis-country banks. In practice, this was not only a counterproductive policy—at least from the perspective of increasing GDP—but it was also an inequalitarian policy, for large corporations could easily heed the warning and move their money out. Small businesses and ordinary individuals that could not easily access banks abroad were left behind.


A fifth structural reform that is needed in the crisis countries, as it is needed everywhere in the world, is responding to the reality of climate change. Especially in the absence of a price for carbon, the market on its own won’t do this. Before the crisis, several European countries had embarked on strategies to move toward renewable energy. Countries like Greece and Spain had the potential to produce solar and wind power that they could export to the rest of Europe.

The private sector, on its own, won’t make these investments, not now, without an adequate carbon price. Europe could have helped countries to restructure their energy sectors to be less dependent on fossil fuels, but that would have required spending that was beyond the budget envelope of these countries. It was investment spending that would have yielded high social, and perhaps even private, returns. Europe could have underwritten these investments. And in making these investments, it would have stimulated economies—the opposite of the ineffective structural reforms on which the Troika focused. These investments also would have improved current accounts by lowering the cost of energy (increasing export competitiveness) and reducing the need for countries to import oil and gas.33


In many ways the programs imposed on Greece and the other crisis countries reminded me of the programs, marked by excessive austerity and a myriad of structural reforms, imposed on Indonesia and other emerging markets in crises in earlier decades. In the case of Indonesia, for instance, there were dozens and dozens of conditions, each with precise timelines. Many seemed, at first blush, strange: Why in the midst of a depression, where the unemployment rate in the main island of Java was reaching 40 percent, was the IMF discussing the clove monopoly; so, too, why in the midst of Greece’s unemployment, with youth unemployment peaking above 60 percent, was the Troika talking about how old milk can still be called fresh, or how bread should be sold?

In both cases, the conditions were, at best, not well explained, and this undermined confidence in the program and the political will to ensure that it was effectively implemented. Sometimes, it turned out that the conditions reflected special interests who had successfully bent the ear of the authorities imposing the conditions. While there has been no disaster on par with the IMF’s unforgivable destruction of Indonesia’s private banking sector, the destruction of the Greek banking system was almost comparable:34 in 2011 alone, 17 percent of the deposits fled, and by the end of 2015 the assets of Greek banks were down nearly 30 percent from their 2010 peak.35 The flight was facilitated, of course, as we noted in chapter 5, by the single-market principle in the absence of a banking union, but it was aggravated by Troika policies.

The eurozone claims Spain is a success, simply because growth has returned, even as youth unemployment remains high. It is not a success if one looks at the country’s balance sheets, its investments in infrastructure and human capital, even its GDP, which in 2015 was still more than 2 percent below what it was in 2007, eight years earlier. It is not a success if one assesses the human suffering. Similar stories can be told about the other crisis countries. Even Ireland, which is held up as proof that the Troika programs can work, and had strong growth in 2015 (7.8 percent), is not a success when measured by these broader gauges. GDP per capita adjusted for inflation in 2015 was only 3.4 percent higher than in 2007. And this for the best-performing country.

Even looking narrowly at the sustainability of their debt, all of the crisis countries have done poorly—and are far worse off than they were before the crisis. From 2007 to 2015, Spain’s (gross) debt-to-GDP ratio has increased from 36 percent to an estimated 99 percent, Greece’s from 103 percent to 178 percent—and is expected to explode to over 200 percent, Cyprus’s debt-to-GDP ratio has increased from 54 percent to 109 percent, and even the star performer Ireland has seen its debt-to-GDP ratio almost quadruple, from 24 percent to 95 percent.

But the eurozone programs have been a success, in the sense that the German and French banks have been repaid—some may have even been saved from an early demise—and current account balance has been achieved, necessary if there is to be a transfer of resources from the crisis countries to those that they owe money. Perhaps the real goals of Germany and the other creditor countries have indeed been achieved.


European leaders have recognized that Europe’s problems will not be solved without growth. But they have failed to explain how growth can be achieved with austerity and with the ill-conceived and often counterproductive structural reform measures they have been pushing. Instead, they argue for restoring confidence, and that the restoration of confidence will bring about a restoration of growth. However, because austerity has destroyed growth and lowered standards of living, it has also destroyed confidence, no matter how many speeches are given about the importance of confidence and growth.

Confidence will only be restored when there are fundamental reforms in the structure of the eurozone itself and in the policies that it has imposed on those partners in the eurozone in crisis. But that, I suspect, will only happen when there is a greater sense of political cohesion and social solidarity than is evident today.

Europe, and especially Germany, which has played a central role in the formulation of these policies, has a quite different take on these policies. Like medieval bloodletters, Germany and its associates in the eurozone argue to stay the course. What is needed, they say, is more austerity and structural reform. This course will only bring a continuation of the current suffering. Things may improve slightly. But by any standard—other than a comparison with the bottom of the downturn—Europe’s performance has been dismal, and there is only more in store. Many in the crisis countries have survived only by drawing on their savings, some by selling the family silver, others by selling the family home. But it is a strategy of mere survival, without hope.

We presented in this and the previous chapter an alternative to what Europe has done, even within the confines of most of its current rules. Even within its strictures, there were policy choices that could have been made; those that were made exacerbated the downturns, making them longer and deeper, with far more suffering. These rules didn’t dictate the speed with which fiscal balance had to be restored. Just as Greece has become the poster child for bad behavior by a eurozone member, the Greek program has become the poster child for the mistakes of the Troika. The eurozone rules didn’t dictate that Greece would be instructed to go from its huge fiscal deficit to an unconscionably high 4.5 percent surplus in very few years. Nor did they dictate the harsh foreclosure policies, pushing an increasing fraction of Greece into poverty. So, too, for the structural reforms. As an alternative to the trivial, distracting, and counterproductive reforms pushed by the Troika, there were meaningful reforms that might have set Greece on the path toward shared prosperity. It would still not be as rich as Germany, but it would not be facing the abject poverty and depression it faces now.

There is nothing in this alternative program that required a Nobel Prize to construct, nothing based on information not already available to the eurozone authorities at the time they designed their programs.

Rereading the successive Memorandum of Agreement between Greece and the Troika, one is bewildered: their forecasts were consistently so wrong, but made with such conviction. In the first and succeeding memorandum, they would write, “the design of the programme makes it robust to a number of unfavourable developments… . The fiscal programme is based on conservative assumptions… . The fiscal adjustment is fairly distributed across the society, and protects the most vulnerable… . The recovery strategy takes into account the need for social justice and fairness, both across and within generations… . The Greek programme rests upon very strong foundations.” Was it irrational optimism, a belief that things would really work out that way? Or bureaucrat hypocrisy—they knew what they were supposed to say, and the incongruence between the world and these words was of little moment. Call it cognitive dissonance run wild, or dishonesty, as you will.

There is something in the last memorandum, signed soon after the Greek voters had rejected essentially the same program by an overwhelming vote of 61 percent, a vote supported by the Greek government, which provides more than a hint that it was sheer hypocrisy: the agreement begins by affirming, “Success requires ownership of the reform agenda programme by the Greek authorities,” and suggesting that there is that ownership.

As I looked at these programs, I saw the same two forces that had constructed the failed IMF programs in so many of the countries around the world that I described in Globalization and Its Discontents—corporate and financial interests in alignment with and supported by ideology; but this time it is playing out within the very borders of Europe.

While the Troika could have crafted a program that worked—or at least one that failed less badly—the structure of the eurozone itself made the tasks difficult at best.

This, then, is the situation facing the eurozone: they have constructed a monetary arrangement characterized by divergence rather than convergence, where crises are likely not to be rare occurrences—not once in a lifetime events to be studied in history courses, but frequent events that have to be constantly dealt with. And the interests and ideology of the dominant powers have propagated policies that are extraordinarily painful for those within the crisis countries. The first crises were fomenting within the euro’s first decade. Even then, there was a mixture of causes, reflecting the eurozone’s diversity, associated with public sector profligacy in only one (Greece), but private sector misdeeds and misallocations in others, and bad luck, with economic fortunes turning against them, in still others. While some in northern Europe like to blame the problems of those in the south, Ireland and Finland are reminders that culture and geography are not the driving forces. Finland, with one of its leading firms, Nokia, facing problems—and with a recession in its neighboring country Russia—is expected to have a GDP per capita in 2017 that is less than 93 percent of that a decade earlier. The eurozone system does not even work for the hardworking, well-educated, highly disciplined Finns.

And since the countries of Europe are all tied together, even the well-performing economies will be dragged down. The double-dip recessions are no surprise. It is not a pretty picture. And of this we can be sure: the reforms made since the beginning of the euro crisis do not suffice; some, in the half-finished state that they are likely to remain for years, may make matters worse.


Even defenders of the eurozone’s austerity and misconceived structural reform policies have to admit that things have not gone as had been anticipated. In the discussions prior to the euro, it was thought there was a trade-off: a single currency would bring higher growth (for instance, by lowering interest rates, because of the reduction of exchange rate risk), but there would be slower adjustment to a disturbance. Chapter 3 showed that for the eurozone as a whole there was no burst of growth after the launch of the euro, but that after the crisis, performance was dismal. The evidence suggests that the benefits were nil, but the costs—as the crisis was managed—were palpable.

Still, some ask: Wouldn’t things have been even worse for Greece and the other crisis countries were it not for the euro and the help that these countries got from their eurozone partners? Economists refer to such matters as counterfactual history: We know what has happened. We can only speculate about what might have been.

Of course, in the years preceding the creation of the euro, not everything had gone smoothly. There was exchange-rate volatility. Some countries faced bouts of high inflation. Post-fascist Spain had had high unemployment. Many were buffeted by the same global forces that led to episodic recessions. Still, none suffered as they have suffered in the euro crisis. Take Greece, the poster child for what has gone wrong. Looking at the IMF database since 1980 (the last 35 years), its deepest downturns prior to the euro were in 1981-1983, when the economy shrank almost 4 percent, and 1987 and 1993, when it shrank by 2.3 and 1.6 percent, respectively. But in the euro crisis, in a single year, the economy shrank by 8.9 percent (2011), and that was followed by year after year of continued contraction. Greece had had bouts of unemployment—it reached 12.1 percent in 1999. But that was less than half of its peak above 27 percent in 2013.

The cost-benefit ratio as the euro has been managed for the crisis countries is clear: slight benefits during the short span of time between the establishment of the euro and the 2008 crisis as they benefited from the flood of money coming in, creating the imbalances from which they would subsequently suffer so much, but far outweighed by the costs in the years after the crisis.

Had they known back in 1992, when they signed up for the euro, what they know now—and had the people of Europe been given a chance to vote on joining the euro—it is hard to see how they could have supported it. But that is a different question from that confronting Europe today. That question is, having created the euro, where do they go from here?

The next four chapters describe what has to be done.