Stiglitz: Leaving the euro painful but staying in more painful

22/2/2014

Question: I want to probe you a bit on that small mistake of the euro. UYou seem to suggest there is nothing that cannot be solved with more European solidarity and I agree with that intellectually. But if you are politically realistic, I don't think it is going to be forthcoming. I don't see large checks being written by German politicians to subsidize for example, the Spanish or Greek unemployed. So if you think about that perspective, and put yourself in the shoes of a 30-year old Spaniard or Greek head of household who has no prospect of employment, would it not be better is countries left the eurozone altogether?

Stiglitz: As I said in my talk the reality is, if the reforms I described were made, Germany would not have to write large checks. It more likely to pay a high cost for not making these reforms.  ... But I think your description of the reality of the way the dialog is going in Germany is absolutely correct. And that is one of the reasons I am a little depressed about the future of Europe. It's going to be a hard row to persuade Germany to make these reforms even if they would cost less. And that leaves Spain and Greece with an important debate, a policy question, what should they do if the reality is there won't be these reforms. To me the real risk is the following: Europe is going to dangle out just enough hope that Spain and Greece and the other periphery countries will say, they are going to come to our assistance. .... But they are going to dangle enough hope that people won't want to leave the euro, but in fact, there will be so little reform there will be literally no time soon the countries will emerge from depression. SAo my advice would be along the lines of what you are hinting at: They should probably face the reality that there is not going to be political reform that will make the euro viable for the periphery ... that internal devaluation won't work, that leaving the euro will be painful, but staying in the euro will be more painful.

Among economists, there is an easier solution, that many people have argued, that Germany should leave. If Germany leaves, the value of the euro will go down, the competitiveness of the southern
countries would become substantially enhanced. They can design a set of economic policies that work for a large group of countries, and owing money in euros they will be able to repay money in euros. Germany is in a better position to absorb the consequences of a breakup in that fashion.

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