by Will Martin
August 22, 2016

from  BusinessInsider Website

Spanish version



Europe is heading towards a "cataclysmic event" that could lead to the collapse of the euro and the end of the European project as we know it, according to Nobel prize-winning economist Joseph Stiglitz.


In an interview with Business Insider following the launch of his latest book "The Euro - How A Common Currency Threatens the Future of Europe" - which argues that the European single currency will inevitably cease to be at some point in the future unless drastic changes are made - Stiglitz said that a "disastrous" political event similar to the United Kingdom's decision to leave the European Union could trigger such a collapse.

"I think the most likely thing is something along the lines of a political cataclysmic event like Brexit.


In other words, the eurozone’s member countries are democracies and one sees increasing hostility to the euro, which is unfortunately spilling over to a broader hostility to the broader European project and liberal values," Stiglitz told BI from his office in New York.

Stiglitz continued:

"That’s going to be the end. What’s going to happen is that there will be a definite consensus that Europe is not working. The diagnosis will be to shed the currency and keep the rest, or that Europe is not working and a broader rejection - like in the UK.


"So my worry that this is precisely that kind of political event [something like Brexit] is that is what will be the catalyst for change."

Asked if he believed that the ongoing problems - both politically and economically - in Italy could trigger such an event, Stiglitz agreed, saying:

"That is a big risk. Many people are now trying to work with Matteo Renzi [Italy's prime minister] to have him climb down from his commitment that he will resign if his referendum fails."


Italian Prime Minister Matteo Renzi

has a lot on his plate.




Renzi has frequently reiterated that he will step down as prime minister if he loses the referendum, in a move that would mimic British PM David Cameron's resignation following the EU referendum in June.


As it stands, Stiglitz argued, the referendum is,

"not just a referendum on the constitutional changes, but also on Renzi."

Although Renzi is adamant that he and his government will succeed in their aim of reforming Italy's senate, saying in a recent interview "I will win" - Stiglitz believes that the best option for the future stability of Europe would be for the referendum to be abandoned.

"[There is an argument] to make him even step down from holding the referendum and say that the Brexit has led to a whole change in the debate about the future democracy in Europe, and that we need to re-examine those terms."


"My feeling is that for anybody concerned about avoiding a disastrous outcome, there needs to be a climb-down. Otherwise we’re heading towards another cataclysmic event."

Despite Stiglitz's assertion that the referendum should not go ahead, it seems unlikely that it would be cancelled with just a couple of months until it is due to take part.


The vote has now been formally approved by the Italian high court, and is set to take place on an as yet undetermined date in November this year.

In the run-up to the UK's vote to leave the European Union, Italy's litany of problems had gone largely unnoticed.


However, in recent months, the spotlight has turned toward the southern European state, the Eurozone's third largest economy. Italy not only faces political turmoil but enormous economic strife too.


It has crushingly low productivity, a history of missing growth targets, and has generally underperformed the rest of Europe in recent years.


Earlier in August, economic data out of the country showed that GDP did not grow in the second quarter of 2016, a substantially worse outcome than economists very modest expectations of 0.2% growth.


Here is just one chart showing how drastic things are when it comes to the Italian economy compared to other major economies (you can find more here):



Societe Generale



Not only is Italy in the midst of major political and economic drama, it is also staring down a huge crisis in its financial system.

"One theme which could dictate near term direction for markets and which arguably Brexit has reignited and brought back to the forefront is the ailing and fragile state of the Italian banking sector," Deutsche Bank's Jim Reid noted in his Early Morning Reid note back in July.

The country's financial sector is plagued by an enormous surfeit of bad loans so great that the government was, in April, forced into rallying bank executives, insurers and investors to put €5 billion (£4.2 billion, $5.57 billion) behind a rescue fund for its weakest banks.


The Atalante fund is designed to buy so-called bad loans from lenders and invest in their shares in the hope that the re-energized banks will lend more to businesses and spur growth.

Monte dei Paschi di Siena, the world's oldest bank, is the worst affected, holding bad loans equivalent to almost 50 times its market capitalization.


The bank managed to agree a rescue package involving the likes of,

  • JP Morgan

  • Deutsche Bank

  • HSBC, the end of July.



Monte dei Paschi's shares

have lost more than 99% of their value

in less than 10 years.

Bank of America Merrill Lynch



However, soon afterwards the lender came dead last in the European Banking Association's continent-wide stress tests, and in the last week, it has been revealed that the company's CEO Fabrizio Viola is under investigation for alleged market manipulation.


The problems in Italy's banking system, Stiglitz argues, are endemic of the unnecessary rigidity within the Eurozone's rules.

"It illustrates one of themes of my book, namely that having a single currency that works well given the diversity of Europe is really hard. And you have to have rules and regulations and politicians that are sensitive to this diversity.


The fact is that in most countries the holders of the bonds are sophisticated people who have made returns in excess of the safe rate that represents the risk.


"Italy represents a case where for a variety of historical reasons - and perhaps marketing - among the bondholders there appear to be a lot of ordinary individuals. If that is the case, which it appears to be, when you make them bear the cost you are really going after depositors, like happened in Cyprus, which I think the consensus was was a bad idea.


"A rule that works most of the time, that you ought to let the bondholders bear the cost looks like it may not be the right rule for Italy."


"This is a case where I think the European rigidity may have very high costs both for democracy and for Italy, and for in the end, if there’s a referendum, the future of the Eurozone."

Whatever the "cataclysm" that leads to the eventual collapse of the euro and the European project, right now, it looks like Italy is the most probable culprit.


You can read the first part of Business Insider's interview with Stiglitz, in which he discusses the "death" of the neoliberal economic consensus, here below:










Nobel Prize-winning Economist Stiglitz Tells us Why...

'Neoliberalism is Dead'
by Will Martin
August 19, 2016
from  BusinessInsider Website


Neoliberalism is dead.

Getty/Win McNamee


Joseph Stiglitz, the Nobel Prize-winning economist and former adviser to US President Bill Clinton, says the consensus surrounding neoliberal economic thought has come to an end.

Speaking with Business Insider after the launch of his latest book, "The Euro - How a Common Currency Threatens the Future of Europe" - which argues that the fundamental flaws with the euro and the broader European economy are causing huge problems for the continent and risk leading to its downfall - Stiglitz argued that neoliberalism, the dominant school of economic thinking in the West for the past 30 years or so, is on its last legs.


Since the late 1980s and the so-called Washington Consensus, neoliberalism - essentially the idea that,

  • free trade

  • open markets

  • privatization

  • deregulation

  • reductions in government spending designed to increase the role of the private sector,

...are the best ways to boost growth - has dominated the thinking of the world's biggest economies and international organizations like the International Monetary Fund and the World Bank.


The policies of Ronald Reagan and Bill Clinton in the US and Margaret Thatcher in the UK are often held up as the gold standard of neoliberalism at work, while in recent years in Britain George Osborne and David Cameron's economic policies continued the neoliberal tradition.



Margaret Thatcher and Ronald Reagan,

neoliberalism's two greatest champions.

REUTERS/Larry Rubenstein



Since the 2008 financial crisis, however, there has been a groundswell of opinion in both economic and political circles to suggest that the neoliberal consensus may not be the right way forward for the world. In the past few years, with growth low and inequality rampant, that groundswell has gained traction.


Stiglitz, who won a Nobel Memorial Prize in economics in 2001 for his work on information asymmetry, has been one of neoliberalism's biggest critics in recent years, and he says the "neoliberal euphoria" that has gripped the world since the 1980s is now gone.


Asked by Business Insider whether he thought the economic consensus surrounding neoliberalism was coming to an end, Stiglitz argued:

"I can talk about this from the point of view of academia or even in policy circles. In academia, I think it has pretty well become rejected.


"The young students are not interested in establishing that neoliberalism works - they're trying to understand where markets fail and what to do about it, with an understanding that the failures are pervasive.


That's true of both micro and macroeconomics. I wouldn't say it's everywhere, but I'd say that it's dominant.


"In policymaking circles I think it's the same thing. Of course, there are people, say on the right in the United States who don't recognize this. But even many of the people on the right would say markets don't work very well, but their problem is governments are unable to correct it."

Stiglitz went on to argue that one of the central tenets of the neoliberal ideology - the idea that markets function best when left alone and that an unregulated market is the best way to increase economic growth - has now been pretty much disproved.

"We've gone from a neoliberal euphoria that 'markets work well almost all the time' and all we need to do is keep governments on course, to 'markets don't work' and the debate is now about how we get governments to function in ways that can alleviate this," he said.

In other words, Stiglitz says:

"Neoliberalism is dead in both developing and developed countries."

Stiglitz is not alone in his belief that neoliberalism has its problems, though his argument that the consensus is "dead" is somewhat more forthright than those of many others.


In a blog post in May, three economists from the IMF - long one of the greatest champions of the neoliberal consensus - questioned the efficacy of some aspects of it, particularly when it comes to the creation of inequality.



Joseph Stiglitz with Christine Lagarde,

the International Monetary Fund managing director.

Lagarde is not one of those within the IMF questioning neoliberalism.

Reuters/Philippe Wojaze


"The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting," Jonathan Ostry, Prakash Loungani, and Davide Furceri argued.


"There is now strong evidence that inequality can significantly lower both the level and the durability of growth."


"There are a lot of people thinking the same thing at this point, that basically some aspects of the neoliberal agenda probably need a rethink," Ostry told the Financial Times on the day the blog was published, adding: "The crisis said: 'The way we've been thinking can't be right'."




The decline of neoliberalism


The decline of neoliberalism is also evident in the UK, where austerity has reigned since the accession of the Conservative Party to government in 2010.


Prime Minister David Cameron and Chancellor of the Exchequer George Osborne presided over a period of record fiscal-deficit reduction created through a six-year programme of austerity.


But since Cameron resigned following the UK's vote to leave the European Union, fiscal stimulus in the UK has started to gain traction once again as a viable means of stimulating growth.


It is widely expected that Philip Hammond, the new chancellor under newly installed Prime Minister Theresa May, will announce some form of fiscal easing at the Autumn Statement - which will come at some point before the end of the year (last year's was in late November).


As Business Insider's Oscar Williams-Grut argued in mid-July,

"Britain's age of austerity could be over."

Across the Atlantic, both US presidential nominees, Hillary Clinton and Donald Trump, both favoring expanded government borrowing to fund infrastructure projects.


As Randall W. Forsyth argued in Barron's magazine last week:

"We are all Keynesians now, President Richard Nixon famously declared after his New Economic Plan was unveiled in 1971.


The notion seems to be echoing now, with the two major parties' presidential candidates calling for increased government spending, notably for infrastructure projects."

Neoliberalism may not be completely dead, as Stiglitz argues, but it is certainly being challenged from many angles.