Stiglitz tells Europolitics: «Austerity will surely fail»
By Pierre Lemoine in Rome | Thursday 03 May 2012
Because he is American and a Nobel laureate in economics, his discourse – disturbing, iconoclastic and in total opposition with European Council conclusions in recent months – stands a better chance of attracting attention. Joseph Stiglitz urges Europe to reverse the tough austerity measures being imposed on it by Germany and the budget pact signed by 25 of the 27 member states. «There has never been a successful austerity programme in any large country,» he said in an interview with
Europolitics. «There is not a single example anywhere in the world showing that it is possible to cure an ailing state by cutting salaries, pensions and social benefits.»
Reiterating his message in addresses he is giving in Europe for the moment, particularly at a seminar in Rome, hosted, on 2-3 May, by the Foundation for European Progressive Studies (FEPS), Initiative for Policy Dialogue and Fondazione Italianieuropei, the former World Bank chief economist hammered home his point: «Lower growth provokes deficits, and not vice versa. Choosing austerity will only make deficits worse and will lead to high unemployment that will be economically, socially and politically untenable. This approach reminds me of medical practice in the Middle Ages: when the patient died, the conclusion was that the doctor stopped the blood-letting too soon. The chance of solving the problem only by more blood-letting is close to zero,» he continued.
The Nobel Prize winner for economics sees the need to work on both over-indebtedness and growth, because «without growth prospects, Europe is under threat of a second wave of recession». He noted in passing that the crisis in Ireland is not due to excessive public spending but to a «huge mistake,» which was «to try to save failing banks with taxpayers’ money». «However big it may be, no bank is worth such a sacrifice by citizens. It’s no surprise that citizens have lost confidence in finance and politics. In both the United States and Europe, we need a more transparent, more equitable and more moral financial system.»
The solutions? For Stiglitz, «trade surpluses in Germany, which represent costs for others, should be compensated for by public investments, which are necessarily more profitable than the apparent costs. All states should invest in infrastructure and education. They can do this without increasing deficits, by raising taxes in a fair manner, in particular by introducing a financial transaction tax.»
His main recommendation? «It is urgent to lay out a growth programme, a holistic growth programme. Europe needs to adapt. Austerity by itself will surely fail. This growth programme can be made consistent with the constraints facing countries like Spain and Italy. In this programme, which has many elements, the key is investment.
I say that Europe as a whole is stronger and larger than other parts of the world and that it is obviously in the interests of the entire world for Europe to return to growth. There are different ways it can do this. But first it needs an economic strategy and a different involvement by the ECB. Europeans have to pool their debt, or substantial parts of the debt, and encourage investment.»
How much time does Europe have to react? «It has to act quickly because in the meantime austerity will impose enormous costs on the European economies and make unemployment worse. One out of two young people is already unemployed in countries like Italy. I would like to emphasise that what is going on now is the destruction of capital, of human capital, the most important resource. The consequences of delay will be huge and long-lasting.»
A special message for countries like Italy? «Rather than focusing on reducing expenditure, there should be more focus on raising revenues, because there is more to lose economically by cutting spending than by raising tax revenues. This can be done in a progressive way. The redistribution that results will also stimulate the economy. Because inequality was one of the causes of the crisis, inequality is one of the reasons the economy remains weak.»
A final question to Stiglitz: Would you encourage the idea of implementing the golden rule in public accounts? «Yes,» he answered unhesitatingly. «I would include both the golden rules, taking out investment, and a review of the structure of surpluses, of what they would be in a situation of full employment. Because it is unemployment that causes deficits. Deficits don’t cause unemployment. So if you can get unemployment under control, you will have a lower deficit.»
“Unemployment causes deficits, and not the other way round”