Europe's Austerity Approach 'Clearly Wrong': Stiglitz

The euro zone's strategy of slashing spending to reduce debt in the wake of the credit crisis is "clearly wrong" and is likely to be counterproductive for the region’s economic growth, Nobel prize-winning economist Joseph Stiglitz, told CNBC Thursday.

Joseph Stiglitz
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Joseph Stiglitz

"What is clearly wrong is the emphasis on austerity," Stiglitz said. "For Europe, the economies are still weak, unemployment is still around 10 percent and the measures being taken so far are likely to be counterproductive."

Spain, one of the euro-zone countries hardest hit by the ongoing debt problems, had a budget surplus before the crisis, Stiglitz pointed out.

"The issue here is not that countries have been profligate. The issue is that the framework is not adequate and does not include the kind of solidarity measures that are necessary to make a kind of cooperative arrangement like the euro succeed," he said.

Governments across Europe have sought to sharply reduce spending in a bid to shrink debt levels, causing widespread public unrest at the loss of jobs and services. Meanwhile, rating agencies have cut the debt ratings of numerous periphery euro-zone nations, making the sale of government bonds more difficult and exacerbating the debt problems.

As an alternative to austerity, Stiglitz suggested a program based on solidarity to stabilize the euro and a program based on the investments that will promote growth. The introduction of a euro-wide bond would be one of the elements needed to create the kind of solidarity necessary for the euro to succeed, he said.

The problems facing the euro zone were seeded at the creation of the monetary union, according to Stiglitz.

"When the euro was created, many of us were aware, economists in general, were aware that it was a project that was not finished," he said. "What had taken away two of the important instruments of adjustment … exchange rate mechanisms and interest rate mechanisms, hadn't put anything in its place."

Stiglitz said that a full recovery in the euro zone is going to take years, but how fast it happens will depend on what governments do.

The poor state of the U.S. economy will also drag on the region, he said. The likelihood that employment in the U.S. will return to anything near normal before the middle of the decade is weak, he added.