By Joseph Stiglitz
Monday, 3 October 2011
Most economists thought that when the euro was put together, it was an incomplete task. They’d taken out too many adjustment mechanisms and had not put anything in its place.
One of the things that makes the American common currency work across the country is we have a common fiscal authority and high migration – we’re willing to allow North Dakota to become empty.
In Europe, there’s no fiscal authority, migration is more difficult and most of the countries are not willing to let themselves become empty. So the framework for allowing for an effective common currency is not there.
Now you might be able to make up for the deficiencies in one part by strengthening another part, for instance by having a stronger fiscal authority. But they don’t have that.
What they did fiscally was tie themselves to the stability and growth pact, which was a pact for recession rather than for growth because limiting deficits when you have a shock is a recipe for recession, which is what is happening in Greece.
So the question was always: when a crisis occurred would they be able to finish the task? And I think the jury is still out.