Stiglitz offers a new script for Europe, but is anybody listening?

Nobel Prize winner Joseph Stiglitz may be emerging as the Cassandra of modern economics.

His book Rewriting the Rules of the American Economy was published in November 2015. A year later, Donald Trump was in the White House, tearing up whatever rules he could find. Professor Stiglitz appears to have run into the same problem in 2020 as he launches a similarly themed book for the European Union.

The book is coming out a month after British voters decisively rejected the economic manifesto of the Labour Party, one that Stiglitz helped to draft, and which the party’s would-be Chancellor John McDonnell said aimed to “change the economic discourse” of the UK.

While most of the economic establishment has now swung behind Professor Stiglitz’s views on the unfairness of a system that inflicted a decade of austerity on a continent, voters are not convinced.

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Not only did Britain stay Tory, but in 2019, the New Democracy Party won power in Greece on a platform of tax cuts and next month’s election here pits Fine Gael against Fine Fáil, two parties wedded to an economic model of hyperglobalisaton and low corporate taxes.

The new book – subtitled ‘An Agenda for Growth and Shared Prosperity’ – warns that Europeans are still paying the price of the last crisis and that come the next shock, the bloc will be equally ill-prepared.

While some of Stiglitz’s ideas have entered the mainstream among economists, Bank of England Governor Mark Carney recently joined the calls for a more active fiscal policy to combat future downturns, something ex-European Central Bank Chief Mario Draghi and his successor Christine Lagarde have also embraced, action on the ground is thin.

A look at Eurozone governments’ budgets and draft budgets for this year, based on European Commission numbers put the total fiscal stimulus in 2020 at 0.2pc of GDP, which is not even a drop in the bucket. That is consistent with the behaviour that Stiglitz identifies in the crisis. “The EU abandoned government spending as a tool to cushion downturns and institutionalised a central bank that, out of an unfounded fear of even a slight increase in inflation, raised interest rates as Europe neared a deep downturn – the opposite of what was needed to stimulate the economy,” Stiglitz writes.

And it appears to remain true, the continent is wedded to the Stability and Growth Pact that fetishises a 3pc deficit figure and 60pc debt figure. “The 3pc number was conjured out of thin air and not based on theory or evidence,” he says, adding that “evidence shows scant links between debt and growth… (and it was) again conjured from thin air”.

The Columbia University professor is especially scathing about the ECB and its obsessive focus on inflation, which he says hampered the EU’s ability to return to full employment.

“ECB actions did not contribute enough to shortening the crises and making them less deep. They arguably made crises worse in several instances, namely in Ireland and Greece,” he writes. While there has been some progress in redesigning Europe’s institutions, it falls short of what Stiglitz believes is needed.

To be sure, the ECB is looking at its inflation target, but it won’t change its mandate to add in an employment objective. There is a tiny bailout fund that could possibly rescue a small country in distress, but there is no banking union and the bloc is still wrapped in the Gordian knot of the Stability Pact.

It is worth remembering that by the metrics imposed by the Stability Pact, Ireland looked good going into the crisis.

“Ireland began the crisis with a very low debt to GDP ratio, and under the theory behind the pact, should have been well positioned to respond to the shock,” Professor Stiglitz writes.

So did Spain, which had a larger budget surplus than the State, yet both succumbed. So, when the next crisis does come knocking, we have much to fear from those who say they are here to rescue us.

“ECB actions did not contribute enough to shortening the crises and making them less deep. They arguably made crises worse in several instances, namely in Ireland and Greece,” Stiglitz notes.

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