Euro-area austerity policies to tackle the region’s debt crisis have been a “dismal failure” as economic growth grinds to a halt, Nobel laureate Joseph Stiglitz said.
The Columbia University professor, speaking on the sidelines of a conference in the southern German city of Lindau, said that high unemployment and sluggish growth underscore the shortcomings of the response to the turbulence that swept the currency bloc.
“Now we see the enormous price that Europe is paying,” Stiglitz said in an interview with Bloomberg Television. “Hopefully the reality of this failed policy will strike.”
German Chancellor Angela Merkel, who led the focus on cutting budgets and overhauling labor regulations, said at the Lindau conference that the euro area must work on the flaws in its construction. The economies of Germany, France and Italy -- the largest in the 18-member union -- failed to grow in the second quarter, threatening the fragile recovery and raising pressure on the European Central Bank to expand stimulus.
Euro-area inflation slowed to 0.4 percent in July, the weakest pace in almost five years, compared with the ECB’s goal of just under 2 percent. Unemployment was 11.5 percent in June, near the record 12 percent set last year as the region exited its longest-ever recession.
Stiglitz criticized the pace of construction of a European banking union as “too slow” and called for the mutualization of euro-area debt. That’s a position that Germany and other nations have rejected.
“You need more of what you’d call a fiscal union,” Stiglitz said. “If Europe could borrow as a whole, it could borrow at interest rates at the likes of the U.S.”
While the ECB announced an unprecedented package of stimulus measures in June, including a negative deposit rate for the first time, “monetary policy can’t really be a substitute” for fiscal union, Stiglitz said.
Merkel said in a speech later at the event that euro-area debt-crisis measures haven’t gone far enough to overcome the turmoil. The region lacks political coordination on economic policy and the banking system is still too opaque, she said.
“One can say we’re bearing the first fruits, but we also have to ask whether this is enough,” Merkel said.
Data last week showed Germany’s economy shrank 0.2 percent in the second quarter, more than economists forecast. France scrapped its 2014 deficit target after gross domestic product stagnated for a second straight quarter. Italy unexpectedly slid into recession, and the euro area as a whole stalled.
The weakness of the recovery leaves the region more exposed to external shocks. ECB President Mario Draghi warned on Aug. 7 of “heightened” political risks such as the intensifying conflict between Russia and Ukraine.