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Rewriting the rules of the European Union

By Joseph STIGLITZ, Chief Economist and Senior Fellow, Roosevelt Institute (US), Nobel Prize in Economic Science in 2001

Interview by Hughes Belin

Nobel prize winner Joseph Stiglitz has coordinated a book called Rewriting the rules of the European Union. It was commissioned by the Foundation for European Progressive Studies (FEPS), a think tank of the Party of European Socialists, to feed the political debate ahead of the European elections. This book fits well with Prof. Stiglitz’s earlier work with the Roosevelt Institute, a New-York-based progressive think tank: Rewriting the Rules of the American Economy provides a detailed analysis of how rules, institutions and policies have changed in the US over the last few decades, and how, by rewriting those rules, one could restore growth and shared prosperity. The goal of both books is “not to return to an earlier era but to reformulate the rules to address the challenges of a 21st century globalised economy”, Stiglitz explains

According to the new book about Europe, “the real problem is not with inadequate enforcement of Europe’s rules, but with the rules, institutions and structural reforms themselves”. Had the EU more rigorously enforced its own rules, “Europe’s economic performance [over the last few decades] would have been even worse”, Stiglitz and his team say. But “rewriting the rules will not be any easier than creating them”, they warn.

Q: How come American economists are better placed than European ones to judge the rules governing Europe?

A: This effort was mostly by European economists only two of us were from the US. The whole team was really a European team. When writing Rewriting the Rules of the American Economy, we felt very strongly that what was happening in the US was global. There were similar reforms underway in continental Europe. Ideas about what makes for a good market economy are global, although they have to be adapted to particular countries and institutionalised in a particular context.

I always think that having a global mix of scholars is useful I would do the same when looking at the US. Europe is an interesting case, we argue, because you have a lot of [policy] experiments going on.

Q: One difference with the US is the European social model. The US did much better than the EU on the last economic recovery. Is our social model to blame, as some argue?

A: A key factor for the success of Europe and the reason that Europe is not riven with the inequality that characterises the US, is the European social model, the welfare state. If it were not for that, the performance of Europe in the euro crisis would have been far worse. The irony is that several leaders in Europe have blamed the welfare state for the crisis. Yet those countries with the longest-standing welfare states such as in Scandinavia did not have a crisis. The crisis had nothing to do with the welfare state. On the contrary: it actually mitigated the downturn.

The crisis came from neoliberal policies to liberalise the financial sector. People who tried to shift the blame to the welfare state did so for political reasons, not as part of an economic analysis. We call for a strengthening of the welfare state. 2020 is different from 1960 people don’t have the same kind of lifelong jobs, for example so it needs a different kind of welfare state.

Q: Do you realise how difficult it is to change anything institutional in Europe?

A: One of the challenges when writing the book was keeping in mind exactly how difficult it is to change the treaties in Europe. We didn’t just want ‘blue sky’ analysis such as “here is what you should have done”. We set the discussion at two different levels: “here is what you should have done, but given where you are, here is how you can reinterpret the rules you have”.

There are many possible reinterpretations of rules that could free up Europe and create a more dynamic, growth oriented continent. The ‘rules’ we are referring to are those governing institutions and policy-making i.e. all the ingredients that shape the economic infrastructure but that we usually ignore.

Q: Can you give us some examples?

A: Beginning at the macroeconomic level, the Stability and Growth Pact is mis- formulated. There has been no focus on employment. We say it should be a ‘growth, stability and employment’ pact. That’s a change in a European rule: we need to re-interpret it. Another example is the Pact’s 3% deficit, 60% debt mantra: those numbers were pulled out of a hat. There is no economic literature supporting them. And yet they are upheld as sacrosanct. This has consequences. The EU created a macroeconomic framework centred on convergence criteria, or the premise that if you have certain rules it will bring countries closer together. But a single currency can only work if countries are similar enough. The actual rules led to divergence: the countries have been moving apart and they did so not just by an accident but because of the rules.

Q: Perhaps because the ideology of euro is not strictly economic there is also a political dimension to it?

A: The euro was clearly an attempt to bring Europe closer together: it was an ideology where sharing a single currency was a symbol of being all together. But still it has an economic dimension to it: having the euro means you cannot adjust interest rates, you cannot adjust your exchange rate. And that’s my criticism: having committed to that ideology of solidarity, you have to create the institutions to make it work. You’ve taken away key instruments for adjustment and you have to put something in their place.

Q: What has Europe done well?

A: In one area, Europe has been doing fantastically well: competition policy. EU Com- petition Commissioner Margrethe Vestager has become the emblem of good competition policy. It’s like in the US back when we had the first antitrust laws in the 19th century. But in the last 50 years the US has become very lax in enforcing competition policy. Some say one of the reasons for our poor performance in equality is the lack of enforcement of competition laws and bad labour laws.

Q: Are labour laws also a problem in Europe?

A: The decentralization of bargaining has weakened the bargaining power of workers. And in a way, the timing is bad because there were other forces such as globalisation already contributing to weakening wages trade with developing countries has a tendency to lower the wages of unskilled workers in particular. Rather than pushing back against that, changes in labour law in Europe and America have made it worse and have strengthened globalisation, which in turn makes it even worse.

Q: What should Europe’s industrial policy be?

A: We call for industrial policies and active labour market policies as an essential component of a successful European strategy. One aspect that has probably not gotten the attention it deserves is place-based policies. The discontent and anxiety we are seeing in the US, the UK and elsewhere in Europe is often focused on particular places. There is a big divide between urban and rural, and the parts of a country that are being de-industrialised are suffering. The new global ideology takes for granted that people move to where the jobs are at zero cost. It foresees no social capital that is place-based.

Q: Do you address climate change, one of the big themes during the current European election campaign?

A: We haven’t spent as much time on climate change as we could or should have.We were focusing on a broad array of policy issues and climate is ultimately more of a global [than European] issue, but we do talk about the importance of climate change as a fundamental driver of change in the way the economic rules have to be written to push for a greener economy.

Q: Where are we with Brexit?

A: Brexit is in a way a reflection of the failures of Europe. If the EU and the Eurozone had prospered more, there would be a lot more enthusiasm to be part of that club. Everybody in the world has been astounded by the mismanagement of the [Brexit] process [in the UK]. To me one of the most striking things is that the debate about two years ago, ahead of the referendum, paid no attention to what has become one of the key issues: the Irish question. I find it now a compelling reason for a new referendum. The grounds to decide on Brexit were flawed.

Rewriting the rules of the European Union. By Joseph Stiglitz