Joseph E. Stiglitz ’64 interviewed by 
Cullen Murphy ’74

Can Europe Be Saved?The euro was flawed from the start. That’s the case Joseph E. Stiglitz ’64 makes in his latest book, The Euro: How a Common Currency Threatens the Future of Europe (W.W. Norton, 2016). Today, amid economic stagnation and debt crises, the future is uncertain for the 19 countries that share the currency, and his book offers a series of plans to rescue the continent from further damage.

Stiglitz is a 2001 Nobel laureate in economics, with a career that has taken him in and out of government, academia and international institutions. Among many other roles, he has served as chief economist of the World Bank and chair of President Clinton’s Council of Economic Advisers. Now a professor at Columbia University, he studies income distribution, asset risk management, corporate governance and international trade. 

Through the lens of the euro, this interview considers the rise of populism, the role of austerity, the competing interests of Germany and Greece, the reasons for Brexit and more. 

The euro’s original sin—or at least the original sin of the European Project—may have been the attempt to create a monetary union without a political union. Why did it happen that way?

Joseph Stiglitz ’64
To think about the euro, you have to go back in time to after World War II. The idea was to have more economic and political integration—something that’s been called the European Project. It began with a modest attempt at a coal and steel community and broadened out from there. In 1992, the critical next step was a common currency. Unfortunately, the politics were not strong enough to create institutions that I think would have been necessary to make the euro a success: for example, they did not have bank deposit insurance, and they did not have mechanisms for sharing the cost of unemployment. This relates to the moment in history at which the euro was created. In 1992, there was an unbridled belief that markets would work as long as governments stayed out of the way. Well, the East Asia crisis a few years later was caused by the private sector. The real problem was an under-regulated private sector.

Was there another way forward? 

The most obvious suggestion would have been a common “defense force.” Countries could have pooled their resources, and there would have been much closer contact between individuals across Europe, which would have promoted solidarity. One of the most successful European projects is the Erasmus Programme, where students in one country travel and study in other countries. That has done enormous amounts to promote European identity. The hope with the euro was that it would bring prosperity—and that prosperity itself would bring solidarity and, therefore, would be a step in the right direction. But Europe didn’t calculate the risk: if the euro were to fail, then the lack of prosperity itself would lead to a weakening of solidarity and make political integration more difficult. It was a highly risky endeavor.

Anyone traveling in Europe knows the convenience of having one currency and does not give two thoughts about it, except for wondering how 20 countries ever agreed on what graphics to put on the bills. 

That advantage that travelers see is one of diminishing importance, because we now travel with debit cards. The bank does all the translation from one currency to another. The more we go to a digital economy, the less important those little pieces of paper with those buildings and faces on them become. It’s not the pieces of paper that are important; it’s the underlying economic system. When a country has a shock—say, a decrease in demand for its products—one of the standard ways that it upsets that shock is to lower the exchange rate. This makes goods less expensive, and exports go up. That fills the gap and helps stabilize the economy—especially for a small country.

Iceland is an example.

Exactly. Iceland is a very small economy, and so very small changes in the exchange rate can make a very big difference. When you have a single currency, you have a single exchange rate for the whole region. You also have a single interest rate. But a country like Greece, facing a weak economy, might like a lower exchange rate and lower interest rates, while a country such as Germany, facing inflationary pressures, might therefore want a higher exchange rate and higher interest rates. The economic policy is going to be determined more by major countries like Germany than by small countries like Greece.

Underneath the common currency are nations with vastly different positions and interests. Germany and Greece represent two worlds in collision. Could you sketch out the situations in those countries?

We were in the Great Recession, and the fact that the government interest rate was at zero was of limited help to Greece, because investors were so skeptical about Greece’s economic viability. If there was a problem, Greece would have to bail out its banks. Everybody knew Greece couldn’t do that. Greece’s banks, therefore, looked highly risky. People started pulling out their money, and that, of course, meant Greece’s banks got weaker and couldn’t lend. Some economic help was absolutely necessary. The question was: What economic policies should Greece pursue? 

Germany has a particular economic philosophy—one not shared by mainstream economists in the rest of the world. They believe, consistent with Herbert Hoover, that if you have a deficit, the way to restore economic health is to cut back spending—this is called austerity—and raise taxes. Well, 75 years ago, Keynes said that was a route to disaster. 

So, Germany imposed its philosophy on Greece. Then it turned out, as history has told us over and over again, that the German philosophy doesn’t work. Greece went into a deep depression—much worse than the Great Depression. Unemployment rose to 25 percent, youth unemployment to 60 percent, GDP went down by 25 percent. And the only reason unemployment is not higher is that so many Greeks, especially the talented young people, left the country.

You’ve written two books on inequality, one focused on the United States, and one internationally. To what degree do you think the euro has widened inequality?

It’s been a disaster. The policies that Germany has imposed on Europe have increased poverty in the extreme. They’ve cut back pensions. They’ve cut back on wages. They’ve made drastic cutbacks to public services that are vital to ordinary citizens—unemployment insurance, welfare payments, public education, public health. There’s particular anger in the fact that, while people in Greece can’t get health care, literally thousands of Greek doctors have moved to Germany. 

The numbers are shocking. Germany, by all accounts, has been the winner from the euro. It has benefited enormously from the single currency, because the single currency enabled the exchange rate in Germany to be lower than it otherwise would have been. That resulted in Germany having an enormous surplus. And that, of course, stimulated the German economy.

Britain did not accept the euro. It’s on its own currency. How does the Brexit vote illuminate issues you’re concerned with?

You might say, “Well, the U.K. wasn’t part of the euro, so you can’t blame Brexit on the euro.” I think that’s simplistic. Voters in the U.K. were trying to make a judgment about the benefits of being in Europe versus not. They looked across the channel and saw an utter disaster—economic stagnation, a democratic deficit. People in Portugal, Spain and Greece voted overwhelmingly for the parties opposed to austerity, a central issue in their elections. Yet Europe said, “Oh, no, you have no choice. You may not have realized it, but you gave up your economic sovereignty.” Then they saw the lack of humanity, the rigidity, the bureaucratic nature of the response to the economic crisis. To me, it would be natural for somebody in the U.K. to say, “Do I want to be a member of that club? Is that a club that is likely to enhance my economic prosperity, my sense of well-being?” I think mismanagement of the euro fed strongly into the Brexit vote.

Can the euro be saved? 

In the United States, we have 50 diverse states sharing a common currency, and we take it for granted that it works. It works partly because we have a set of institutions that enable it to work, such as common deposit insurance for the banking system, common ways of resolving banking problems, common unemployment insurance. Europe doesn’t need to have these to the same degree as in the United States, but they need much, much more than they have at the current time. The system today is a halfway house. As I say in the book, the countries either need more common institutions, or they need to go their separate ways.

Ten years out, what do you think will have happened?

The risk is that when you play brinkmanship, you go over the brink. To me, the most likely outcome is that the politics will begin to fray, that a leader will emerge in Greece and ask, “Why are we giving up our sovereignty to Germany, and letting it dictate the terms on which we run our country?” Clearly, the euro is contributing to the strength of populist leaders in Europe. As I look into the future, through a cloudy crystal ball, I see the very high risk of one or another country leaving, and that, in turn, having a very high risk of cascade, with several other countries leaving. What is the likelihood that the euro, in its current form, is around in a decade? I give it a low probability. If it is around, I put a reasonably high probability that economic stagnation in Europe will have continued. 

Cullen Murphy ’74 is editor at large at Vanity Fair and chair of the College’s board of trustees. This article is adapted from an audio interview for the Amherst Reads book club. Listen to that interview at