In an apparent swipe at Anglo-Saxon-style capitalism, former French president Nicolas Sarkozy managed in 2007 to get the goal of free and undistorted competition demoted in the EU’s Lisbon treaty. The French victory was largely symbolic, but it was emblematic of the decades-long battles within Europe between a markets-centred vision and one prioritising greater state protections and control.
In his new book, the American economist Joseph Stiglitz argues that fight is now being won by the wrong side. Free-market ideologues, he suggests, hold excessive sway over the continent. Too many European elites, he says in Rewriting the Rules of the European Economy, have propagated a myth that unfettered markets promote societal wellbeing.
A “markets-will-save-us” mentality has seeped into a wide range of policy areas. The EU has “abandoned” the idea that government spending cushions downturns, and the European Central Bank has been focused myopically on inflation control. The continent, he writes, needs to do far more to champion its traditional social model.
Mr Stiglitz, a Nobel Prize winner, is a longstanding critic of the euro, as well as a leading progressive voice in the US. This book follows a similar volume attacking America’s wafer-thin social protections and endemic inequality. Yet his new book ends up exaggerating the hold that market fundamentalism has taken on Europe.
In the early chapters, Mr Stiglitz lashes the EU’s fiscal regime and its “ugly offspring” — austerity. What it needs, he argues, is an employment, stability and growth pact that tackles joblessness and prevents a repetition of the harsh economic crackdowns imposed on states including Greece and Ireland during the crisis.
His demand for reform of the fiscal rules is undoubtedly justified: the stability and growth pact is singularly bad at encouraging states to deploy budget policy to battle recessions.
© WW Norton
But this does not mean it deserves the prominence Mr Stiglitz gives it. The European Commission has, after all, repeatedly bent its budget rules, rather than imposed fines.
A swath of EU states have run up public debt levels far exceeding official limits — among them France, Spain, Belgium, Italy and Greece, all of which have burdens close to or exceeding 100 per cent of gross domestic product.
And while Mr Stiglitz bemoans crisis-era austerity, he spends no time asking what part countries such as Greece played in their own downfall.
Many of the reforms he advocates are sensible. The continent needs to do far more to prioritise public investment — especially in nations such as Germany with strong public finances. Repair of the banking sector, coupled with the completion of its banking union project, would help to address the failings of its weak financial sector. Ending the race to the bottom on corporate tax pursued by some states would be a boost to the single market. The ECB needs at least to adopt a fully symmetrical inflation target.
Important though EU-level policies are, much of the action will have to be at the state level, however — and here the devil is in the detail. Mr Stiglitz argues, for instance, that all EU countries should introduce a minimum wage. The commission is indeed preparing such a policy — but it is discovering that the impact on individual states can be highly varied. Nordic nations, which boast the kind of collective bargaining mechanisms that Mr Stiglitz espouses, warn that their systems could be inadvertently undermined by a one-size-fits-all proposal.
Ultimately, Mr Stiglitz seems to fear that Europe is going down a similar path to the US. Yet while he argues that income inequality is now a “fundamental characteristic” of most European societies, research by Zsolt Darvas at Bruegel shows inequality in the EU in 2016 was at its lowest since 1989.
Europe’s low-growth challenge is a real one, as is the threat posed by populist rightwing parties seeking to capitalise on economic discontent. But Mr Stiglitz’s conclusions show a lack of sensitivity to the multi-faceted realities in individual states. That is a pity, given the urgency of the problems the continent faces.
The reviewer is the FT’s Brussels bureau chief
Rewriting the Rules of the European Economy. An Agenda for Growth and Shared Prosperity by Joseph Stiglitz, WW Norton, $30/£22.99, 400pp
