LONDON (Reuters) - The future of the euro is bleak unless Europe does more to help to member countries that experience large adverse economic shocks, Nobel Prize winning economist Joseph Stiglitz said.
In an extract from an afterword to his book “Freefall”, published in the Sunday Telegraph, the former World Bank chief economist also said it could only be a matter of time before Spain is attacked by speculators.
“The euro zone needs better economic cooperation, not just the kind that merely enforces budget rules, but cooperation that also ensures that ... when countries experience large adverse shocks, they get help from others,” he wrote.
“Europe created a solidarity fund to help new entrants into the European Union ... but it failed to create a solidarity fund to help any part of the euro zone that was facing stress. Without some such fund, the future prospects of the euro are bleak.”
Stiglitz said Spain’s required spending cuts will likely worsen unemployment, already at around 20 percent, and slow the economy, leaving little improvement in its fiscal position.
“Spain may be entering the kind of death spiral that afflicted Argentina just a decade ago,” said Stiglitz, winner of the Nobel Prize for Economics in 2001.
“It was only when Argentina broke its currency peg with the dollar that it started to grow and its deficit came down. At present, Spain has not been attacked by speculators, but it may only be a matter of time.”
Stiglitz said the euro lacked the institutional support it needed to make it work, but argued the single currency could be saved by the exit of Germany from the euro zone or the division of the euro zone into two sub-regions.
“If Europe cannot find a way to make these institutional reforms, then it is perhaps better to admit failure and move on than to extract a high price in unemployment and human suffering,” he said.
Writing by Kylie MacLellan; Editing by Jon Loades-Carter