Sometimes even a former chief economist of the World Bank and Nobel prize winner can take his eye off the ball.
At the start of October 2010 Joseph Stiglitz, now a professor at Columbia Business School, said that he thought the euro could well fail as the single European currency.
In extracts from his updated book Freefall published in the UK’s Sunday Telegraph, Stiglitz talks of the euro’s “bleak” future and the threat posed to European economic recovery by a “wave of austerity”.
Stiglitz pointed to the desperate situation of Greece, to Spain’s huge budget deficit and high unemployment, and to Ireland and Italy which are also failing economically.
A former adviser to President Bill Clinton, Stiglitz says that governments not just in Europe but around the world are in danger of causing a ‘double dip’ recession if they try to cut their debt too rapidly.
Here’s what he had to say about Spain:
“Under the rules of the game, Spain must now cut its spending, which will […] increase its unemployment rate still further. As its economy slows, the improvement in its fiscal position may be minimal. Spain may be entering the kind of death spiral that afflicted Argentina just a decade ago. It was only when Argentina broke its currency peg with the dollar that it started to grow and its deficit came down. At present, Spain has not been attacked by speculators, but it may be only a matter of time.”
Elsewhere in Europe other governments are also busy trying to reduce their public debt dramatically. Greece in particular faces difficulties in the years ahead as it pushes through labour reforms and slashes public spending.
Though the UK is not in the eurozone and has kept the pound sterling, Britain’s new coalition started devising multi-billion pound public sector cuts in autumn 2010. The goal is to substantially reduce the UK’s record trillion pound debt. The Chancellor of the Exchequer, George Osborne, said that if the vast debt wasn’t cut then interest rates would rise, stifling growth.
If the problem with the weak euro isn’t solved, Stiglitz warns that “the worry is that there is a wave of austerity building throughout Europe and even hitting America’s shores. As so many countries cut back on spending prematurely, global aggregate demand will be lowered and growth will slow – even perhaps leading to a double-dip recession. America may have caused the global recession but Europe is now responding in kind.”
Of the euro, Stiglitz said bluntly that it may collapse altogether as a currency. The underlying problem, revealed by the current European and euro crisis, is that the economies of the eurozone countries are just too different. The tensions between powerful Germany, with its high trade surplus, and countries with dramatic trade deficits such as Ireland, Portugal and Greece, are pulling the single currency apart. Stiglitz suggests that the euro might be saved if Germany dropped out of the eurozone and re-adopted the old German currency, the deutschmark – which the majority of German people would love to do. This would mean the euro could be devalued to boost exports from Germany’s struggling European neighbours.
However – in his calculations Stiglitz seems to have overlooked an important factor which could, perhaps, make financial mincemeat of his fears, predicitons and recommendations. That factor is Chinese intervention.
As the Sunday Telegraph was busy publishing the Stiglitz statements, other media in Europe were busy cheering the Chinese. Chinese Premier Wen Jiabao was toddling around in Athens on a two-day visit offering to prop up the Greek economy. Photographed smiling broadly, Wen pledged China’s financial support to help bail out debt-ridden Greece. He went further, in fact, and pledged to support all the eurozone countries during the global financial crisis.
While US and European politicans have been nervously eyeing speculators and wondering when they’ll go after Spain and other weak eurozone countries, the Chinese have been calmly figuring out how to further their economic and political interests in Europe.
“China” Wen announced, “is holding Greek bonds and will keep buying bonds that Greece issues.”
Music to the ears of Greek Prime minister George Papandreou of course.
And Wen went further:
“I am convinced that with my visit to Greece our bilateral relations and cooperation in all spheres will be further developed.”
Since Greece needs substantial foreign investment to meet the terms of its 95 billion pound rescue package from Europe and the IMF, Papandreou will doubtless be willing to develop the co-operation Wen is looking for.
The Chinese leader then went even further. China, he pledged, “will undertake to support eurozone countries and Greece to overcome the crisis.”
Coming from the Chinese that’s a pretty strong statement. It remains to be seen what terms the Chinese will want to impose in exchange for their ‘support’ to Europe but Wen was already preparing to leave Greece and head to Brussels for an EU-China summit. Once there, he will no doubt set out the price of China’s support.