Eight Leading Economists Sound Off on Europe's Fiscal Woes

As told to R. M. Schneiderman, Robert Verger, Mac Margolis, and Mike Giglio.

JOSEPH STIGLITZ I don’t doubt the commitment of Europe’s leaders to preserve the euro. But there is clearly a lack of understanding of what is required and/or a willingness to do what is required, either for ideological or political reasons. These leaders must know that austerity by itself will restore neither growth nor confidence. They must know that without growth, there will be no confidence, and the debt crisis will almost surely only mount, which is what has been happening. They must know that even if strong fiscal constraints might prevent the next crisis, they don’t solve the current one. And they must know that, as desirable as the structural reforms that are being discussed may be, they are supply-side measures when the problem in many of these countries is inadequate demand, and the time horizon required for their implementation is out of sync with the imperatives of the crisis. In short, the policy framework on which Europe is embarked—unless accompanied by additional measures that mitigate the risk of default and enhance growth—is more likely to fail than to succeed. Markets know this. The rating agencies know this. The question is, when will the political leaders recognize this and take the necessary actions?

Stiglitz won the Nobel Prize in Economics in 2001.

JAGDISH BHAGWATI IT is a tragedy of hubris. It started in Greece, prematurely some days before Dionysia, the traditional festival that is popular for its performance of Greek tragedies. But it caught up rapidly. Greece had a huge stock problem of debt overhang. But its main problem was its gargantuan current deficit. The IMF is the agency that has the unpleasant task of getting nations to tighten their belts while easing the pain by providing temporary adjustment funds. I was among the few who argued that the EU must let the IMF do this unpleasant job. But the EU felt that calling in the IMF was undignified. And so the tragedy began. Germany, rather than the IMF, is now the enemy of the Greek people; contagion has spread to others who are caught up in the rising panic. We used to say that Turkey was the “sick man of Europe.” Then Greece became that. Now Europe is almost the sick man of Europe!

Bhagwati is a professor of economics at Columbia University.

GARY BECKER The euro crisis has obviously been very serious. It’s mainly concentrated in five or so countries—Greece, Italy, etc. If you look at it in comparison, it isn’t that these countries, for the most part, have the highest debt-to-GDP ratios or the highest deficits—although some of them do—but they were all mainly importing a lot more than they export. They were basically not very competitive. And I think that led to borrowing and the debt issues and so on.

Becker won the Nobel Prize in Economics in 1992.

ROBERT E. RUBIN

THE euro zone had an inherently flawed structure, with a common currency and monetary policy but national fiscal systems, that contributed in multiple ways to the crisis. Moreover, the market never appropriately evaluated the relative credit worthiness of the various euro-zone-country bonds, thus failing to provide discipline on national fiscal policies. Euro-zone leaders have been consistently behind the curve and could well have avoided crisis by dealing with Greece when trouble began. More broadly, effective measures could have been taken at every stage of the crisis, but the political will was lacking. Current European Central Bank liquidity measures buy time, but the fundamental problems still remain, including reform to promote growth. The euro zone cannot be partly or fully dissolved without severe effects, though firewalls could limit damage. The euro zone’s growth and stability pact required fiscal discipline but had no effective enforcement mechanism to overcome national sovereignty.

Rubin, former U.S. Treasury secretary, is co-chairman of the Council on Foreign Relations.

GLENN HUBBARD When you have a currency union but you don’t have a fiscal union, you lose your flexibility. You’d better hope the shocks are identical and that all the countries behave, which didn’t happen. Another component: there’s an argument sometimes in Europe that some countries are virtuous and others are not. That’s not the whole story. Germany got a big benefit in competitiveness terms from the euro. Germany got an undervalued exchange rate, and Greece got an overvalued exchange rate. But this created account imbalances. A third component is banking and financial regulation. There were no capital requirements, so you have banks that were heavily invested in this debt, much of which has to be restructured.

Hubbard is dean of Columbia University Business School.

ROBERT MUNDELL It’s not strictly a euro crisis, it’s a crisis of the euro area, fiscal systems, and the lack of fiscal discipline and lack of coordination of fiscal authorities. The Treaty of Maastricht put down some clear-cut conditions, but they were not maintained. Countries were given a pass, countries like Italy and Greece—the requirements were 60 percent of debt to GDP; they had 120 percent or 110 percent when they went in. Perhaps it was OK for them to go in, because that was a political moment, but the problem was that there was no emphasis on getting the debt ratios down over the period. So it was a big flop in carrying through the fiscal discipline. And the growth and stability pact didn’t have any authority behind it, because even the biggest and most stable country was violating the pact, too, back in 2002.

If the euro vanished, it would be terrible for Europe and, I think, very bad for the rest of the world. It would be a terrible calamity for the United States and North America. Some other countries that don’t like the idea of a strong Europe—and the euro has certainly been a factor in making Europe a stronger and more cohesive group—might feel that they’re going to gain from it, but I don’t think they would.

Mundell won the Nobel Prize in Economics in 1999.

JOSEF ACKERMANN We do not have a crisis of the euro as a currency, but a sovereign-debt crisis in some countries of the euro zone. This crisis, however, if not quickly solved, threatens to severely undermine trust in the common currency. We thus need decisive action, such as sustained and reliable budget-consolidation efforts, structural reforms to improve competitiveness on the national level, and institutional reforms on the European level, to prevent a repeat of a similar crisis in the future.

This is a purely hypothetical question, but a breakup of the euro zone would most probably send Europe and—given the fact that Europe is still the largest economic bloc—the global economy into a deep recession and, in addition, jeopardize Europe’s political, economic, and cultural independence and influence in the world.

But the sovereign-debt crisis has made it obvious that the current governance structure of the euro zone is lacking rigor and effectiveness. If the Economic and Monetary Union in Europe is to work, discretionary room for maneuver of national governments and parliaments will have to be constrained going forward, above all in the field of fiscal policy. We have to reinvent the monetary union and provide it with the institutional architecture that we failed to establish at its start.

Ackermann is the chief executive of Deutsche Bank.

DANI RODRIK Europe got caught halfway in its integration process. The monetary union was (or should have been) a stepping stone to a fuller fiscal and political union. The financial crisis that emanated from the U.S. exposed the instability of the euro zone’s prevailing arrangements. The crisis was then made substantially worse by mismanagement, in particular Germany’s insistence on austerity policies and the European Central Bank’s refusal to play a more active role.

I always thought the euro zone was worth it as a gamble, as part of a long-term strategy of fuller integration. The trouble is that no one (myself included) could have foreseen the kind of financial crisis the U.S. got itself entangled in. The euro zone would have been fine for decades if it had not been hit with the aftermath of the U.S. financial crisis.

Rodrik is a professor of international political economy at Harvard University.