Stiglitz on Seven Reforms to Save the Euro

In his new book on the structural problems undermining the European single currency project, US economist and Nobel prize winner Joseph Stiglitz argues that a number of reforms are needed in order to make the euro a more flexible currency and address persistently slow growth and the risks from debt deflation.

The essence of his severn reforms are as follows:

1. Abandoning the Maastricht Treaty convergence criteria, which require fiscal (budget) deficits to be less than 3% of GDP and national debt to be below 60% of a country's GDP
2. Replacing fiscal austerity with a growth strategy, supported by a solidarity fund for stabilisation - in other words a return to a more Keynesian style of deficit-funded infrastructure spending
3. Dismantling a crisis-prone system whereby countries must borrow in a currency not under their control, and relying instead on Eurobonds or some similar mechanism
4. Better burden-sharing during adjustment, with countries running current-account surpluses (notably Germany) committing to raise real wages and increase fiscal spending, thereby ensuring that their prices increase faster than those in the countries with current-account deficits (note: this would be designed to create expenditure switching effects to help reduce the scale of current account imbalances within the Euro Zone)
5. Changing the mandate of the European Central Bank (ECB), which focuses only on maintaining low inflation, unlike the US Federal Reserve, which takes into account employment, growth, and stability as well. The ECB sets monetary policy interest rates and the size / nature of QE for the Euro Zone as a whole
6. Establishing common deposit insurance, which would prevent money from leaving crisis countries - this seeks to address problems from capital flight within the EU single market as has happened in nations such as Greece and Cyprus
7. Encouraging industrial policies designed to ensure that the eurozone’s laggards can catch up with its leaders - essentially a clarion call for a more active regional / industrial policy especially in countries with lower per capita incomes and slower trend growth rates