Joseph Stiglitz, the Nobel Laureate whose latest book The Roaring Nineties: Seeds Of Destruction was published last week, has issued a stern warning about Britain joining the euro.
He said that the recent “no” vote in the Swedish referendum on whether to join the single European currency “was the right decision” and will “resonate in the UK for some time”.
Stiglitz, professor of finance and economics at Columbia University in New York and a former chief economist at the World Bank, said he believes that the stability pact which underpins the euro will have to be redrafted if the currency is to have a long-term future.
He said the “double standards” highlighted by certain countries abuses of the Stability and Growth Pact (in 2002 France and Germany had budget deficits which either exceeded or reached the 3 per cent of GDP limit to which they were legally bound) “deeply disturbing, especially to small countries as they consider entering the euro”. And he declared: “That double standard cannot survive so the framework of the stability pact will have to change.”
Stiglitz believes that central and eastern European countries which are queuing up to join the euro “may be excessively enthusiastic and not fully aware of some of the problems”.
He said that their enthusiasm arises from the weakness of their own currencies and a belief that “joining the euro could give them more access to funds”. He also said that there are no parallels with Sweden and the UK, both of which have strong currencies that do not deter external investors.
In an interview with the Sunday Herald, Stiglitz, whose previous book Globalization And Its Discontents was a bestseller, said he is no fan of the father of free-market thinking, Kirkcaldy- born Adam Smith. “The pursuit of self-interest does not lead to economic efficiency in the way Adam Smith thought, or that free market people sometimes suggest. Indeed it can lead to the kind of problems that we saw [in the credit bubble years].”
Stiglitz, who served as chairman of President Bill Clinton’s council of economic advisers, added: “Smith was writing 200 years ago in a world where complicated corporate governance [problems] didn’t exist. He’s wrong simply because the world he was dealing with was a different world.”
Stiglitz blames Alan Greenspan, chairman of the Federal Reserve, for helping fuel the stock market bubble in the late 1990s. “There were things he could have done, like increase margin requirements, that he chose not to do. And worse, he helped talk up the bubble.
“Early on he recognised there was a problem and talked about ‘irrational exuberance’ but then he got caught up with that exuberance.”
The Columbia University professor says that Clinton’s decision to cut capital gains tax — against Stiglitz’s advice — “was like feeding the frenzy”. “There has been damage to confidence in the market and there’s been some repair work, but probably not enough.”
Stiglitz highlights the recent furore over the excessive pay of New York Stock Exchange chairman Richard Grasso. “That was a real shocker given what had happened in the previous two years. You would have thought they would have gotten the message. It’s clear we haven’t fully recovered from the ethos of the 1990s.”
Stiglitz is no fan of president George W Bush: “By the time of the election next year we will have, during his administration, a significant net job loss, the first time since Herbert Hoover in the great depression [of the 1920s in America]. What is particularly disturbing is that it was all unnecessary.
“In the last two-and-a-half years 2.7 million jobs have been lost when we should have been creating jobs. There’s a lot of anxiety, which fuelled protectionist sentiment, and that played a role in the breakdown of the trade talks in Cancun. The US could not make the kind of concessions that would have been required to make Cancun work.”
This article was published in the Sunday Herald on 12 October 2003