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Italian voters reject austerity policies that do not work
By Joseph E. Stiglitz |
March 8, 2013, Friday
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Print Edition
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THE outcome of the Italian elections should send a clear message to Europe's leaders: the austerity policies that they have pursued are being rejected by voters.
The European project was a top-down endeavor. But it is another matter altogether to encourage technocrats to run countries, seemingly circumventing democratic processes, and foist upon them policies that lead to public misery.
While Europe's leaders shy away from the word, the reality is that much of the European Union is in depression. The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930s. Greece's youth unemployment rate now exceeds 60 percent, and Spain's is above 50 percent.
The economy's doctors say that the patient must stay the course. Political leaders who suggest otherwise are labeled as populists. The reality, though, is that the cure is not working, and there is no hope that it will. Indeed, it will take a decade or more to recover the losses incurred in this austerity process.
In short, it is neither populism nor shortsightedness that has led citizens to reject the policies that have been imposed on them.
It is an understanding that these policies are deeply misguided.
Wrong prescriptions
Europe's talents and resources are the same today as they were before the crisis began. The problem is that the prescriptions being imposed are leading to massive underutilization of these resources. Whatever Europe's problem, a response that entails waste on this scale cannot be the solution.
The simplistic diagnosis of Europes woes - that the crisis countries were living beyond their means - is partly wrong. Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. If Greece were the only problem, Europe could have handled it easily.
An alternative set of policies could work.
Europe needs greater fiscal federalism, not just centralized oversight of national budgets. To be sure, Europe may not need the two-to-one ratio of federal to state spending found in the United States; but it needs more European-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates).
A banking union, too, is needed. But it needs to be a real union, with common deposit insurance and common resolution procedures, as well as common supervision. There will also have to be Eurobonds, or an equivalent instrument.
European leaders recognize that, without growth, debt burdens will continue to grow, and that austerity by itself is an anti-growth strategy.
Yet years have gone by, and no growth strategy is on the table, though its components are well known: policies that address Europe's internal imbalances and Germany's huge external surplus. Concretely, that means wage increases in Germany and industrial policies that promote exports and productivity in Europe's peripheral economies.
Internal devaluation
What will not work, at least for most eurozone countries, is internal devaluation - that is, forcing down wages and prices - as this would increase the debt burden for households, firms, and governments. If internal devaluation were the solution, the gold standard would not have been a problem in the Great Depression. Internal devaluation, combined with austerity and the single-market principle, is a toxic combination.
The European project was, and is, a great political idea. It has the potential to promote both prosperity and peace.
But, rather than enhancing solidarity within Europe, it is sowing seeds of discord within and between countries.
Yes, Europe needs structural reform, as austerity advocates insist. But it is structural reform of the eurozone's institutional arrangements, not reforms within individual countries, that will have the greatest impact. Unless Europe is willing to make those reforms, it may have to let the euro die to save itself.
Joseph E. Stiglitz, a Nobel laureate in economics, is university professor at Columbia University. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
The European project was a top-down endeavor. But it is another matter altogether to encourage technocrats to run countries, seemingly circumventing democratic processes, and foist upon them policies that lead to public misery.
While Europe's leaders shy away from the word, the reality is that much of the European Union is in depression. The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930s. Greece's youth unemployment rate now exceeds 60 percent, and Spain's is above 50 percent.
The economy's doctors say that the patient must stay the course. Political leaders who suggest otherwise are labeled as populists. The reality, though, is that the cure is not working, and there is no hope that it will. Indeed, it will take a decade or more to recover the losses incurred in this austerity process.
In short, it is neither populism nor shortsightedness that has led citizens to reject the policies that have been imposed on them.
It is an understanding that these policies are deeply misguided.
Wrong prescriptions
Europe's talents and resources are the same today as they were before the crisis began. The problem is that the prescriptions being imposed are leading to massive underutilization of these resources. Whatever Europe's problem, a response that entails waste on this scale cannot be the solution.
The simplistic diagnosis of Europes woes - that the crisis countries were living beyond their means - is partly wrong. Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. If Greece were the only problem, Europe could have handled it easily.
An alternative set of policies could work.
Europe needs greater fiscal federalism, not just centralized oversight of national budgets. To be sure, Europe may not need the two-to-one ratio of federal to state spending found in the United States; but it needs more European-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates).
A banking union, too, is needed. But it needs to be a real union, with common deposit insurance and common resolution procedures, as well as common supervision. There will also have to be Eurobonds, or an equivalent instrument.
European leaders recognize that, without growth, debt burdens will continue to grow, and that austerity by itself is an anti-growth strategy.
Yet years have gone by, and no growth strategy is on the table, though its components are well known: policies that address Europe's internal imbalances and Germany's huge external surplus. Concretely, that means wage increases in Germany and industrial policies that promote exports and productivity in Europe's peripheral economies.
Internal devaluation
What will not work, at least for most eurozone countries, is internal devaluation - that is, forcing down wages and prices - as this would increase the debt burden for households, firms, and governments. If internal devaluation were the solution, the gold standard would not have been a problem in the Great Depression. Internal devaluation, combined with austerity and the single-market principle, is a toxic combination.
The European project was, and is, a great political idea. It has the potential to promote both prosperity and peace.
But, rather than enhancing solidarity within Europe, it is sowing seeds of discord within and between countries.
Yes, Europe needs structural reform, as austerity advocates insist. But it is structural reform of the eurozone's institutional arrangements, not reforms within individual countries, that will have the greatest impact. Unless Europe is willing to make those reforms, it may have to let the euro die to save itself.
Joseph E. Stiglitz, a Nobel laureate in economics, is university professor at Columbia University. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
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