I have just finished reading Joseph Stiglitz’s book on the euro, having a few months ago read Mervyn King’s book on the banking crisis. Although both these works by highly experienced economists with considerable real world knowledge offer fascinating analyses, both left me feeling strangely dissatisfied.

In the case of Lord King’s book, he talks at great length about the regulatory and economic environment that provided the catalyst for the banking meltdown. He also talks about steps that could be taken to minimise the risk of similar occurrences in the future. However, and I fear that this shortcoming is not unique to this particular economist, it almost totally ignores the behavioural aspects of the disaster. Aside from a brief passing comment on the excessive and badly-constructed remuneration packages that created the wrong incentives (as they still do), he ignores the fact that the many stupid and hubris-fuelled decisions that led to the crisis were made by individuals, not organisations. Admittedly the regulatory and organisational environments enabled these daft decisions to be made, however the failure to address the central point that decisions are made by people who must be held responsible for those decisions seems to me a huge omission.

Tightening up the regulatory environment each time a crisis happens is a classic case of locking the door after the horse has bolted. Whatever the extent of the deposits that banks have to have in place or other regulations with which they have to comply, whilst there remains such an almost total asymmetry between the huge financial rewards earned in the financial services industry and the paltry sanctions that are applied to those who make the idiotic decisions that cost the economy billions and billions of dollars (if they are foolish enough to get caught), the bad behaviour will inevitably continue. In addition, it may be convenient but is completely unfair and misguided to blame regulators for failing to prevent such disasters from occurring. By definition, the regulators will always be one step behind the game. How could the regulators be on top of all the activities that go on in these complex financial organisations when even those who are running them quite clearly do not fully understand and are certainly far from in control of what is going on within their own areas of responsibility?

The Stiglitz book on the euro is a thorough hatchet job on both the euro and everything related to it, including, but not limited to, the European Central Bank. He talks at length about how Germany has never seen the euro bloc as a transfer union and this remains the main reason why the euro can never function effectively. He mentions in passing how Germany has benefited from an undervalued (in German terms) euro, yet he fails to acknowledge that the direct flipside of this benefit is the de facto requirement that Germany has to transfer wealth to underperforming parts of the euro bloc if the euro is to have any chance of working. What is particularly odd about this book is that, having completely butchered everything related to the euro, Stiglitz then describes a few changes that, if deployed, would quite likely make the euro work just fine. What he proposes might help (but it is far from guaranteed that they would offer the panacea that he suggests they might) but the main shortcoming is that they are pie in the sky. It would require a total change in how Germany sees the euro project and this is highly unlikely to come about.

By far the strongest part of Stiglitz’s book is his analysis of the euro and its failings. His suggestions as to how matters might be resolved are fanciful at best. His thought-provoking reasoning is also weakened by the somewhat predictable references to a number of Stiglitz’s old potatoes like wealth distribution and global warming. Of course these are relevant to economic development generally, but they are not strictly relevant to the euro debate and, by suggesting that they are, rather weaken the solidity of his analysis and proposals.

These are both good reads if you are interested in understanding why, in economic terms, Europe, as well as the world more widely, are so messed up.