The euro’s days are numbered, says Professor Joseph Stiglitz of Columbia University. The problem, says the Nobel Prize-winning economist, is that Europe’s common currency area requires “more co-operation” between the nations that use the euro. The states that make up the US have a common deposit insurance system protecting savers in banks, and there is also a national welfare system.
As a result, “if people in California are unemployed, then the rest of the country will support them”. The lack of similar systems means the eurozone is struggling to cope with high unemployment in the region, leading to the rise of far-right parties. In short, “the eurozone has to finish the project of political integration” or accept a single currency that is killing growth.
The problem is compounded by the fact that the European Central Bank only targets inflation, whereas the Federal Reserve, the US central bank, has to take unemployment into account too. This led the former ECB president, Jean-Claude Trichet, to raise rates in 2011, because he had spotted “a glimmer of inflation”. This helped to turned a recession into a depression, with youth unemployment in some countries running at 50%. Yet a “sea change” in ECB policy is unlikely, because inflation-obsessed Germany is Europe’s dominant power.
To see the damage the single currency has done, you need only look to Britain, notes Stiglitz. The UK has been cushioned from the potential blow of Brexit by a fall of more than 20% in the value of sterling. This is likely to mean that British exports remain competitive, even if the UK fails to agree a post-Brexit deal with the EU and is forced to fall back onto World Trade Organisation rules.