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The Euro: And its Threat to the Future of Europe

By Joseph Stiglitz

As this book goes to press, large parts of Europe face a lost decade, with GDP per capita lower than it was before the global financial crisis.

What has happened? With advances in economic science, aren't we supposed to understand better how to manage the economy?

There is a simple answer to this apparent puzzle: a fatal decision, in 1992, to adopt a single currency, without providing for the institutions that would make it work.

The gold standard is widely blamed for its role in deepening and prolonging the Great Depression. Those countries that abandoned the gold standard early recovered more quickly.

Europe decided to tie itself together with a single currency—creating within Europe the same kind of rigidity that the gold standard had inflicted on the world.

The key reforms that are needed are in the structure of the currency union itself, not in the economies of the individual countries.

In the absence of reform, an amicable divorce would be far preferable to the current approach of muddling through.

The euro, I believe, has taught us a lot. It was conceived with a mixture of flawed economics and ideologies. It was a system that could not work for long.

Today, the world is beset by new initiatives designed to harness globalization for the benefit of the few.

Trade agreements, which reach across the Atlantic and the Pacific, (TTIP and TPP), are once again being * crafted behind closed doors by political leaders, with corporate interests at the table.

Behind the new trade agreements, there is no intent of having harmonized regulatory standards set by a parliamentary body that reflects the citizens of all those in the trade area.

Tthe design of the “single-currency project” was so influenced by ideology and interests that it failed not only in its economic ambition, bringing prosperity, but also in its ambition of bringing countries closer together politically.

Economics and politics cannot be separated—as much as some economists would like them to be.

A key reason that globalization has often failed to produce benefits for large numbers in both the developed and less developed world is that economic globalization outpaced political globalization; and so, too, for the euro.

The neoliberal economic agenda may not have succeeded in increasing average growth rates, but of this we can be sure: it has succeeded in increasing inequality.

The story of the eurozone illustrates how leaders out of touch with their electorates can design systems that do not serve their citizens well. It shows how financial interests can result in economic structures that may benefit a few, but put at risk vast parts of the citizenry.

The current system, even with its recent reforms, is not viable in the long run without imposing huge costs on large numbers of its citizens.

These costs are especially high for Europe’s youth, whose future is being put in jeopardy, whose aspirations are being destroyed.

Europe made a simple and understandable mistake: it thought that the best way toward a more integrated continent was through a monetary union, sharing a single currency. The eurozone and the euro—both the structure and its policies—have to be deeply reformed if the European project is to be saved.


Europe, the source of the Enlightenment, the birthplace of modern science, is in crisis.

This part of the world has been experiencing a long period of near-stagnation. Some countries have been in depression for years.

The unemployment rate in the eurozone reached 10 percent in 2009 as well, and has been stuck in the double digits ever since.

On average, more than one out of five youths in the labor force are unemployed, but in the worst-hit crisis countries, about one out of two looking for work can't find jobs.

These economic facts have, in turn, deep political ramifications. The foundations of post–Cold War Europe are being shaken.

Questions are arising, about the great achievement of post–World War II Europe—the creation of the European Union.

The euro was supposed to bring about closer economic and political integration, the reality has been otherwise.

The economics is intimately intertwined with the politics. Politics make it difficult to create the economic arrangements that would enable the euro to work. And there, in turn, are grave political consequences to this failure.

While there are many factors contributing to Europe’s travails, there is one underlying mistake: the creation of a single currency without creating a set of institutions that enabled a region of Europe’s diversity to function effectively with a single currency.

The point I want to make is that the euro was a political project, and in the case of any political project, politics matters.

This book is about economics and economic ideologies and their interactions with politics: it is a case study of how, when new institutions and policies are created on the basis of oversimplified views of how economies function, the results can be not only disappointing, but even disastrous.

In an arena crucially important to the well-being of individual citizens, power was centralized in the European Central Bank.

The structure of the eurozone itself built in certain ideas about what was required for economic success - for instance, that the central bank should focus on inflation - its rules and regulations were not designed to promote growth, employment, and stability.

The problems with the structure of the eurozone have been compounded by the policies the region has pursued.

Even granting the zone’s flawed structure, there were choices to be made. Europe made the wrong ones. It imposed austerity.

The most urgent reforms needed are in the eurozone structure itself—not in the individual countries.

Without the needed reforms of the structure of the eurozone itself, Europe cannot return to growth.


The founders of the euro were guided by a set of ideas, notions about how economies function, that were fashionable at the time but that were simply wrong.

The failures in the eurozone, both in its structure and policies, can thus in large part be attributed to the combination of a misguided economic ideology that was prevalent at the time of the construction of the euro and a lack of deep political solidarity. The same mindset that led to a flawed structure led to flawed policies.

The story that it was flaws in Greece that had brought on the euro crisis might be convincing if Greece were the only country in the eurozone with difficulties. But it is not. Ireland, Spain, Portugal, Cyprus, and now even Finland, France, and Italy face severe difficulties.

With so many countries facing problems, one cannot help but suspect that the problem lies elsewhere.

Criticism of the euro has focused on the “programs” imposed on the crisis countries that required support.

The dominant powers in the eurozone not only believed (wrongly) that low deficits and debts would prevent crises, they also believed the best way toward restoration to the health of a country in recession was a big dose of austerity.

Austerity has always and everywhere had the contractionary effects observed in Europe: the greater the austerity, the greater the economic contraction. Why the Troika would have thought that this time in Europe it would be different is mystifying.

Countries in crisis couldn't lower their exchange rate, which would boost their trade by making exports cheaper. Thus, in the view of the Troika, to regain “competitivity” they had to lower wages and prices.

Some of the Troika reforms led to lower wages directly (by weakening workers’ bargaining rights) and indirectly (by increasing unemployment). *

There were, of course, alternative ways by which the eurozone could have brought about adjustment. If German wages and prices had risen, the value of the euro would have fallen, and thus the crisis countries would have become globally more competitive.

Austerity and the structural reforms failed to bring the crisis countries back to prosperity.

What is needed is not structural reform of individual countries so much as structural reform of the eurozone.

Given the history of failed austerity programs, one has to ask, why would anyone believe they would work in Europe when they failed elsewhere?

I have already suggested part of the answer: ideology.

But this may not provide a full explanation. Alternatively, there might have been a political agenda—bringing down left-wing governments, teaching electorates in other countries the consequences of electing such governments, and making it more likely that a conservative economic and social agenda would prevail more broadly within Europe.

Finally, many have argued that there is an element of vindictiveness.

It is hard to believe that responsible officials in the eurozone would make an entire nation suffer simply because they disagree with a country’s choice of leaders.

The tone of some of the discussions has left the impression that this in fact may have been the case.

No matter how Europe’s political leaders try to paint a rosy picture on the programs they have imposed on the crisis countries, they are a failure. *

The problem is that Germany has used its economic dominance to impose its own views, and those views are not only rejected by large parts of the eurozone but also by the majority of economists.

The world has paid a high price for this devotion to the religion of market fundamentalism/neoliberalism, and now it’s Europe’s turn.

Beliefs about how economies function matter a great deal, and it should not be a surprise that the outcome of an economic project so influenced by flawed concepts would fall short of expectations.

Around the world, capital has been flowing from poor countries, where capital is scarce, to the rich - exactly the opposite direction predicted by neoliberal theories - with the rich countries in Europe getting richer at the expense of the poor.


There are alternatives to the current structures and policies. The problems were collectively created. The only solution is a collective solution.

The reforms are based on different economic understandings than those that currently underlie the structure of the eurozone.

Another alternative is a carefully designed end to the euro as it exists today, perhaps with the exit of a few countries, perhaps with the breakup of the eurozone into two or more currency areas.

One of the first lessons of economics is that bygones are bygones. One should always ask: Given where we are, what should we do?

In short, Europe should move in one of two directions: there should be “more Europe” or “less Europe.” This means a choice: (a) implementing the reforms that would make the euro work for all of Europe. Or (b) scaling down the currency project.

The current halfway house is unsustainable, and attempts to sustain it by muddling through will lead to untold economic, social, and political costs.

The best way forward requires creating a shared understanding of basic economics that goes beyond the market fundamentalism that has informed the eurozone project to date.

The euro was more divisive than unifying—thus setting back political integration.

Political integration, like economic integration, was not just an end in itself but a means to broader societal objectives—among which was strengthening democracy and democratic ideals throughout Europe.

The construction of the euro has instead increased the perceived democratic deficit in Europe, the gap between what Europe does and * what its citizens want.

The euro was born with great hopes. Reality has proven otherwise.


Greater power for a united Europe would translate into greater well-being for European citizens only if the political system was truly democratic. There are good reasons to be concerned about this, given the current political structure of Europe.

Some observe the absence of war within the core of Europe over the past 70 years and give the European Union credit. That may well be the case, though there are many other changes that have occurred as well—the creation of the UN, nuclear deterrence, and changes in attitudes toward war.

Europe’s integration provides insights for globalization in general.

What is required for globalization to succeed? What happens if globalization does not work well? What are the benefits and costs, and who receives those benefits? Who bears the costs?

The fundamental insight to glean is that economic integration—globalization—will fail if it outpaces political integration.

When countries become more integrated, they become more interdependent.

There is thus greater need for collective action—to ensure that each does more of those things that benefit the other countries in the union and less of those things that hurt others.

With sufficient political integration, some of the gains of the winners can be transferred to the losers, so that all are made better off.

The objection to globalization has been that in some countries most citizens have actually been made worse off.

In focusing on the economic conditions, economists have neglected the far more important issues of the political and social conditions necessary for success.

In the absence of solidarity, it is hard to have political integration, because no one is confident that the system will work for them.

What is required then is not only that they have similar economic structures but also similar belief systems—beliefs about social justice and how the economic system works.

Perhaps the most obvious instance of such differences in conceptions of how the economy functions is “austerity,” the belief that by cutting spending or raising taxes a country in recession could be brought back to health.

One aspect of the neoliberal agenda entails privatization.

Thus, the demand of the Troika for privatization of certain Greek government-owned assets is dictated as much by ideology as by evidence and theory.

Our point here is simple: it is that there are deep divides across Europe about what gives rise to a well-functioning economy.

It is especially troublesome when the policies foisted on the country don't work—for the very reasons that the citizens of the country thought; the costs of the mistake, of course, are borne by the country upon whom they are imposed, not by those imposing them. This is the story of the eurozone.

The policies being imposed on these other countries by the Troika are wrong, based on a flawed understanding of economics.

Different societies have different values, different conceptions about how the economy works, and indeed, even different conceptions about democracy and what constitutes a well-functioning society.

f some countries think minimal access to water or electricity is a basic right, or that workers should have certain basic rights to collective action, then they will be deeply unhappy if contrary policies are imposed on them—and they should be.

A basic liberal value is respect for a diversity of views. There will and should be less tolerance for views that do not respect some of the core values. Far more problematic, though, is the right of one country to impose its values on others. Doing so can undermine another core European value, democracy.

From the very start, the European project was afflicted with a democratic deficit.

One of the reasons is the construction of the EU itself—with the laws and regulations promulgated by a commission that is not directly elected. Not even the head of the European Commission is elected.

If the euro is to be successful, has to strengthen democracy. But the euro has done the opposite.

*** The most powerful institution in the eurozone is the European Central Bank, which was constructed to be independent - another neoliberal idea that was fashionable at the time of the construction of the euro.

Though they would almost surely deny it, the ECB’s decision to shut off funds to the Greek banking system in the summer of 2015 was an intensely political act.

The growing democratic deficit is seen most obviously in the fact that when given the opportunity, the countries of Europe have repeatedly rejected the policies being imposed on them.

In each country, the newly elected government was told in effect that they had no choice: accept the conditions or your banking system will be destroyed.

What does it mean to be a democracy, where the citizens seemingly have no say over the issues about which they care the most, or the way their economy is run?

The democratic deficit that had been apparent at the birth of the eurozone has grown ever larger. The deepest hopes of the euro—that it would bring stronger political integration based on a strengthening of democratic values—are thus just that: still hopes.

On every criterion by which performance is usually measured, the eurozone has been failing. Its performance has been poor relative to the United States, from which the crisis originated, and relative to non-eurozone Europe.

Creating a single currency involved creating a central bank, the European Central Bank, for the entire eurozone.

The ECB determines the interest rates that prevail throughout the area and acts as a lender of last resort.

The central bank sets interest rates and can buy and sell foreign exchange. A higher interest rate leads to a higher demand for euros, and thus a higher exchange rate.

Lowering interest rates leads to a lower exchange rate, making exports more competitive and discouraging imports.

Markets on their own don't ensure full employment or financial and economic stability.

Today, except among a lunatic fringe, the question is not whether there should be government intervention but how and where the government should act.

When two countries (or 19 of them) join together in a singlecurrency union, each cedes control over their interest rate. There is no exchange rate, no way that by adjusting their exchange rate they can make their goods cheaper and more attractive.

Adjustments in interest rates and exchange rates are among the most important ways that economies adjust to maintain full employment. Using a common currency took away the ability to use the exchange rate to adjust exports and imports. There will be enormous problems unless something else is done.

The magnitude of the costs and the nature of that “something else” depends on a number of factors, among which the most important is how similar the countries are.

Robert Mundell received a Nobel Prize for asking and answering the question, what are the conditions in which a group of countries can easily share the same currency?

His analysis made clear that the countries of the euro are too diverse to easily share a common currency.


Governments joining the euro had to limit their deficits and debts in what was called the Growth and Stability Pact.

Somehow, they seemed to believe that, in the absence of excessive government deficits and debts, there would be growth and stability throughout the eurozone. Somehow they believed that trade imbalances would not be a problem so long as there were not government imbalances.

The previous chapter showed that the euro had failed on its promise of European prosperity. This chapter begins the explanation of why

There were two key challenges in making a single-currency area (like the eurozone) work: how to ensure that all of the countries can maintain full employment and that none of the countries has persistent trade imbalances, with imports exceeding exports year after year.

It should be obvious that there are myriad shocks that would have different effects on different countries. These differences are a result of the structure of the economy in each country.

The countries within Europe differed implying that it was virtually impossible for them all to attain full employment and external balance simultaneously, in the absence of other institutional arrangements.

The eurozone failed to put into place these institutional arrangements.

The convergence criteria not only prevented a country from responding to a downturn but created a built-in mechanism for deepening it.

The convergence criteria were intended to help the countries converge, and the austerity imposed was intended to reduce the fiscal deficit, typically, the effects were just the opposite.

Even if the ECB set interest rates in the interests of the eurozone as a whole, the weakest economies would be left facing unacceptable levels of unemployment. Had they not been in the eurozone, these countries could have lowered their interest rates.

The mandate of the ECB is to focus on inflation, not unemployment.

The second problem posed by a single-currency area relates to external imbalances—where imports persistently exceed exports, requiring the country to borrow to finance the difference.

In short, the constraints imposed by the eurozone, combined with irrational markets and neoliberal ideology framework created the overvalued euro exchange rate that in turn led to the crises.

Debt crises typically do not occur in countries that have borrowed in their own currency. They can at least meet the promises they made by printing more of their own money.

The eurozone created a new situation. Countries and firms and households within countries borrowed in euros. But though they were borrowing in the currency they used, it was a currency that they did not control.

Not only did those countries signing up to the eurozone not fully realize the consequences of borrowing in a currency out of one’s control, they also didn't realize the implications for their national sovereignty: a transfer of power had occurred that could be—and was—abused.

Without access to funds, the country would careen toward bankruptcy.

As soon as some of the countries in the eurozone owed money to other member countries, the currency union had changed: rather than a partnership of equals striving to adopt policies that benefit each other, the ECB and eurozone authorities have become credit collection agencies for the lender nations, with Germany particularly influential.

The power to withhold credit becomes the power to force a country to effectively cede its economic sovereignty, and that is precisely what the Troika, including the ECB, have done.

The way Europe has chosen to get rid of trade deficits is to put the economy into depression. When the country is in a depression, it no longer buys goods from abroad. Imports are reduced. The “cure” is as bad as or worse than the disease.

If the exchange rate is set so that Germany has a surplus, that means the rest of the eurozone must have a deficit.

The periphery countries became debtors, with Germany as the great creditor. As we have noted, there is no greater divide than the one between creditors and debtors.

Persistent trade deficits set the scene for crises: the predictable and predicted crises emerged just a decade after the beginning of the euro.

Germany has tried to blame the euro crisis on failures to enforce budgetary discipline. Our analysis has argued otherwise: it is the very structure of the eurozone itself, not even the failings of the individual countries, that is to blame.

Market mechanisms (internal devaluation) are not an adequate substitute for the loss of the ability to adjust interest and exchange rates. The euro created the euro crisis.

The next chapter explains the ways in which the current eurozone structure results in the stronger countries within the eurozone becoming stronger, and the weak weaker. The creditor countries become richer; the debtor countries, poorer. And a hoped-for convergence has transformed into divergence.

The UK has been vigorously defending its system of light regulation. It may have cost its taxpayers hundreds of billions of pounds, yet today policymakers focus on the potential loss of profits, taxes, and jobs from downsizing (or rightsizing) the financial sector.

In the case of Ireland, the European Central Bank forced the government to take on some of the debts of the private banks, to socialize losses, even though earlier profits had been privatized.

The predominant view in neoliberal policy circles at the time the euro was founded—a view since largely discredited—was that market forces would on their own lead to convergence.

If German technology is better than that of Portugal, capital will flow from the capital-scarce country to the capital-rich, and so, too, will skilled labor.

When the exchange rate is set for the eurozone as a whole to have balance, Germany runs a trade surplus and the periphery runs a deficit.

This is perhaps the most disturbing aspect of the eurozone’s divergence: some countries, most notably Germany, have increasingly become creditor countries, some debtors. This creates a divergence in economic interests and perspectives: it makes it all the more difficult for a common currency to work for the benefit of all.

Austerity has exacerbated the outmigration from the poor countries of both capital and labor.

The Troika has shown that, no matter what an individual government says, if it can't figure out a better way of saving the banks, it is willing to take actions that force the temporary shutdown of a country’s banks, encouraging money to move to stronger banks in Germany and elsewhere.

We noted earlier that there was a regulatory race to the bottom, so, too, for taxes. Countries compete to attract firms, capital, and highly skilled workers through lower taxes.

Luxembourg and Ireland provided the worst examples, effectively giving some of the largest multinationals a free pass on taxes—a legal way of avoiding paying the taxes that they should have paid.

The resulting reduction in progressivity in the tax-and-transfer system meant that inequalities of income and wealth within most of the eurozone countries increased.

With the best of intentions, Europe created a more unstable and divergent economic system—one in which the wealthier countries get wealthier and the poorer countries poorer, and in which there is greater inequality within each country.

At the heart of the monetary union is the European Central Bank (ECB), an institution that has proven itself to be the strongest and most effective institution within the eurozone, and perhaps within the broader European Union.

What it does seems often more consonant with the interests and perceptions of bankers than of the citizens of the countries that it is supposed to serve.

The ECB was flawed at birth. Its construction was based on certain ideological propositions that were fashionable at the time.

The deeper problem of the ECB is the absence of democratic accountability.

This belief that the central bank should focus on inflation was based on a simplistic ideology, supported by simplistic macroeconomic models that assumed efficient markets.

Europe has paid a high price for imposing too narrow a mandate on the ECB.

Inequality is viewed as one of the greatest threats to future prosperity. Central banks everywhere, and especially the ECB, have largely ignored their role in creating inequality.

Their excessive focus on inflation has led to higher unemployment, which has increased inequality.

The ECB effectively decides on the life and death of the country’s banking system. No decision could be more political.

The prioritization of banks over citizens was as evident in Europe as it was in the United States during the crisis.

Among the critical decisions any society has to make are those related to governance, who makes the decisions and to whom are those who make decisions accountable?

In the case of the European Central Bank, the problems of governance are especially * severe.

The crisis of 2008 provides perhaps the best test of the hypothesis of the virtues of central bank independence—and those countries without independent central banks performed far better than those with.

Central banks that are not democratically accountable almost always pay more attention to the views of the bondholders and other financiers than to the workers.

There is a political agenda in pretending that setting monetary policy is a technocratic matter best left to experts from the financial sector.

Removing central banking from political accountability effectively transfers decision-making to the financial sector, with its interests and ideology. *

A central thesis of this book is that certain ideas—certain economic models—shaped the construction of the eurozone; these ideas are at best questionable, at worst wrong.

In the brief history of the ECB, we have seen costly misjudgments and the use of its enormous power to obtain outcomes that benefit the banks and the major powers within the European Union at the expense of citizens and the weaker countries. This should be deeply troubling.

There are alternative ways of structuring central banks. It is one of the essential tasks if the eurozone is to be restored to growth and prosperity.

Those outside of Europe—and many in Europe—have been appalled at the unfolding drama in the crisis countries. It wasn't this way before the euro.

Innocent citizens were being asked, forced actually, to bear the consequences of decisions that had been made by politicians.

Astonishingly, even with the avalanche of evidence that the Troika’s programs have failed the people of the countries they were supposed to help, its leaders have been claiming success for their austerity.

It is the macroeconomic policies that have resulted in the downturns, recessions, and depressions plaguing Europe.

Of the total lent to Greece, less than 10 percent ever got to the Greek people. The rest went to pay back creditors, including German and French banks.

The bailouts of Spain, Greece, and the other countries in crisis appeared aimed more at saving the European banks that had lent these countries money than at restoring the crisis countries to health.

The social and political consequences not just in Greece but throughout the eurozone are also almost inevitable—and potentially disastrous.

While the austerity programs have largely been driven by politics and politicians, not surprisingly, academic economists have raised their voices. The vast majority have sided with the views expressed here: austerity has never worked.

Here, we consider how austerity doctrines have sometimes garnered support and why the IMF and the Troika could have repeatedly gotten it so wrong in predicting its effects. A series of papers showed major flaws in their analysis.

The IMF, which had supported austerity-style policies in the past, in fact reversed itself.

The models typically had no banks; this was an especially curious omission, for if there were no banks, there would be no central bank. And how then could we have had the banking crisis of 2008?

The standard models also ignored how increasing inequality affects macroeconomic performance.

Inevitably, unemployment increases inequality both directly and indirectly, as wages fall and as government services, upon which ordinary citizens depend, decrease. Since those at the top spend a smaller percentage of their income than the rest, an increase in inequality lowers aggregate demand, and thus economic performance.

While the IMF had begun to recognize the importance of inequality for economic performance, the IMF was only one member of the Troika. And worse, the Troika seemed reluctant to reconsider their programs, even as evidence mounted that they were not working.

Some of the reforms seem as motivated by advancing the business interests within the dominant countries in the eurozone as anything else.

The Troika sold the reforms on the grounds that they would help the economy grow. Greece showed dramatically that they had the opposite effect.

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.

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.

Without a concerted government effort, those countries that are behind will remain behind. * 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.

Many of the Troika policies lead to more inequality. 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.

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.

Often, as one looked at the details of the Troika programs, one wondered what side the Troika was on. Rather than serving society, it had harmed society.

Perhaps the real goals of Germany and the other creditor countries have indeed been achieved.


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 but frequent events that have to be constantly dealt with.

The eurozone system does not even work for the hardworking, well-educated, highly disciplined Finns.

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.

The next four chapters describe what has to be done.

Six structural changes—changes in the basic rules governing the eurozone and their shared economic frameworks—are essential.

STRUCTURAL REFORM #1: A BANKING UNION - Many European leaders recognize that eventually a single banking framework, with common regulations, deposit insurance, and resolution, will be necessary.

STRUCTURAL REFORM #2: MUTUALIZATION OF DEBT - Some form of mutualization of debt is necessary if there is not to be divergent movements in labor. Place-based debt makes little sense in a world in which individuals are mobile; individuals can simply walk away from debts incurred by their parents or by profligate politicians or by misguided decisions of the ECB.

STRUCTURAL REFORM #3: A COMMON FRAMEWORK FOR STABILITY - If the eurozone is to work—that is, if it is to provide a framework within which countries can prosper and countries can persistently attain full employment—the first necessary reform is a common fiscal framework.

A key reform for creating a viable euro is creating an ECB and European financial regulatory authorities with broader mandates and more instruments, that are more flexibly managed.


STRUCTURAL REFORM #5: A EUROZONE STRUCTURE THAT PROMOTES FULL EMPLOYMENT AND GROWTH FOR ALL OF EUROPE—MACROECONOMICS - The key macroeconomic reform is changing the mandate of the ECB. In the implementation of an expanded mandate to promote full employment, growth, and economic stability, and not just be fixated on inflation, the ECB should have a particular responsibility to make sure that the financial sector is working in the way it should.


Many of these reforms entail moving away from the policy framework of the past third of a century—during which neoliberalism dominated and it was presumed that the freer the market, the better—and recognizing the critical ways in which markets often fail to produce efficient and stable outcomes.

The financial markets have failed in their basic task of recycling the savings, making sure that the savings are used productively.



One of the central problems facing the advanced world today is the increase in inequality.

Inequality affects the performance of the economy in numerous ways. But the eurozone framework limits what can be done to address it.

The only sustainable prosperity is shared prosperity.

Ibelieve that reforms that fall short of this comprehensive agenda will substantially increase the likelihood that the euro fails. And if it survives, it will survive without bringing the benefits that were promised.

These or similar reforms are necessary to prevent the divergence, instability, stagnation, growth in inequality, and increase in unemployment that have marked the euro.

Doctrines and policies that were fashionable a quarter century ago are ill suited for the 21st century.

The creditor/debtor relationship between northern and southern Europe is corrosive.

If there is to be a limited breakup of the eurozone, it makes more sense for Germany to leave, instead of the countries around the periphery.

The financial sector has enriched itself on the back of the government’s credibility, without performing the societal functions that banks were supposed to perform. In doing so, the financial sector has become one of the major sources of the increased inequality in Europe and around the world.

The euro is just a 17-year-old experiment, poorly designed and engineered not to work. There is so much more to the European project, the vision of an integrated Europe, than a monetary arrangement.

The currency was supposed to promote solidarity, to further integration and prosperity. It has done none of these: as constructed, it has become an impediment to the achievement of each of these goals, and if the reforms to the eurozone discussed in the last chapter are beyond the reach of the eurozone today, it is better to abandon the euro to save Europe and the European project.

Though few would admit it, the debate—the struggle—over the euro is as much or more about power and democracy, about competing ideologies, visions of the world and the nature of society, than it is about money and economics.

In much of the world, there is a growing understanding that the ideology of the right has failed, and so, too, its economic doctrines of neoliberalism. *

The results are now in: the bottom 90 percent have seen their incomes stagnate, large proportions have seen their incomes fall; only those at the very top have done well.

The right rewrote the rules of the market economy in ways that benefited the few; that is why there is now a campaign to once again rewrite the rules, but this time to benefit the vast majority.

Austerity is contractionary; inclusive capitalism—the antithesis of what the Troika is creating—is the only way for creating shared and sustainable prosperity.

The neighboring Middle East is in turmoil; the West is attempting to contain a newly aggressive Russia; and China is confronting the West with new economic and strategic realities. This is no time for European disunity and economic weakness.

Europe has been in the forefront of the battle to save the planet; a more united Europe would be better able to wage that battle.

The world is engaged too in a war against ISIS and terrorism more generally. More immediately, the world faces a humanitarian migrant crisis—a crisis that Europe saw so vividly, as it flared in the summer of 2015.

The world needs a united Europe to formulate a humanitarian response to these migrant crisis.

The voice of Europe, with the values that I have described in the previous paragraphs, needs to be heard, and it will be heard more clearly if the European project succeeds. It will not be heard if Europe is in disarray and if there is not shared prosperity.

There should be a single, simple measure of the success of any economic program, and that is the well-being of a country’s citizens, and not just the 1 percent at the top.

An economic system * that fails repeatedly to achieve well-being for large fractions of its people is a failed economic system.

In the most important objective of economic policy, enhancing individual and societal wellbeing, the eurozone has been a disappointment, to say the least.

Three messages emerge clearly from my analysis. A common currency is threatening the future of Europe. Muddling through will not work. And the European project is too important to be sacrificed on the cross of the euro. Europe—the world—deserves better. I have shown that there are alternatives to the current system. Moving from where the eurozone is today to one of these alternatives will not be easy, but it can be done. For the sake of Europe, for the sake of the world, let us hope that Europe sets out to do so.


The refrain of those in the UK who wanted to stay in was “Remain and Reform.” There will have to be reforms if the EU is to survive and prosper—and by prosperity I mean not just an increase in GDP but a shared prosperity, in which democratic values are honored and respected. *

The gap between political and economic integration that seems so obviously at the root of the problems of both the EU and the euro has been widely recognized. *

If there is to be a single set of regulations applying across Europe, there must be confidence that they are being set to reflect the interests of its citizens as a whole, not just corporate interests.

Whether it is politically attainable, given the current politics of Europe, is another matter.

The EU has to wake up to what has been happening in Europe: there is a growing divide, a political elite out of touch, economic stagnation experienced by large portions of the population, and an economic system that has not delivered for many—in some places, even for the majority.

There is anger—understandable anger. But voting in anger—which at least some did in the British referendum, enough to have swung the result—does not solve the problem.

It may lead to politicians in power and a political and economic situation that is even worse for those who have voted in that way. *

In the UK, the establishment parties together were seen as the culprits; among those that have felt betrayed by the politics of the last third of a century, their working together to oppose Brexit may have even reinforced the image of a bi-partisan establishment in London once again pushing establishment policies.

They had seen a project intended to promote solidarity and well-being do just the opposite; it seemed held hostage by corporate interests and neoliberal ideology.

Too many in the UK had lost not just hope but trust. They voted accordingly.

Throughout Europe, there are especially young people who have marched, by the tens of thousands, for a different Europe, one, for instance, in which new trade agreements serve not just corporate interests but broader societal interests.

The Brexit referendum was a shock. My hope is that the shock will set off waves on both sides of the Channel that will lead to this new, reformed European Union.