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Economist Joseph Stiglitz: Eurozone Needs Fundamental Reform to Survive

By    |   Thursday, 05 December 2013 12:08 PM

The euro crisis is not over. The eurozone needs fundamental reform to survive, warns Nobel laureate economist Joseph Stiglitz.

Some say austerity has worked since the eurozone's double-dip recession has ended. Don't believe it, writes Stiglitz in an article for Project Syndicate. Some European countries have per capita GDP below pre-2008 levels, unemployment rates over 20 percent and youth unemployment over 50 percent.

"At the current pace of 'recovery,' no return to normality can be expected until well into the next decade."

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Stiglitz, a Columbia University professor and former chairman of President Bill Clinton's Council of Economic Advisors, lays out what the eurozone must do.

It must create a real banking union with common supervision, common deposit insurance and common resolution. Without such a banking union, money will continue to flow from the weakest countries to the strongest.

It needs debt mutualization, such as Eurobonds. Since Europe has a debt-to-GDP ratio lower than the U.S., it can borrow at negative real interest rates, freeing money to stimulate the economy.

It must give up constraints against intervening in markets and implement industrial policies to help laggard countries catch up.

The European Central Bank must focus on growth in addition to inflation, and the eurozone must replace austerity with pro-growth policies focusing on investment.

"What is needed, above all, is fundamental reform in the structure of the eurozone," he argues. "Germany and the other northern European countries continue to insist on pursuing current policies. They, together with their southern neighbors, will wind up paying a high price."

Basic concepts in vogue when the euro was formed, the belief in keeping low inflation, low debts and deficits, have all been proven to be wrong, Stiglitz says.

"The crisis caused the deficits and high debt, not the other way around, and the fiscal constraints that Europe has agreed will neither facilitate rapid recovery from this crisis nor prevent the next one."

The eurozone may be pursing the wrong type of austerity, say HSBC economists Karen Ward and Janet Henry.

The U.S. and U.K. tightened budgets as much or more than eurozone countries, but still grew their economies, they say.

"But capital spending by governments has been cut more dramatically in the eurozone periphery than elsewhere. Cutting public investment is quick and more socially acceptable than firing workers, but academic evidence suggests this is the worst type of austerity in terms of the impact on growth."

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The euro crisis is not over. The eurozone needs fundamental reform to survive, warns Nobel laureate economist Joseph Stiglitz.
eurozone,reform,economy,Stiglitz
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2013-08-05
Thursday, 05 December 2013 12:08 PM
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