Stiglitz: The euro may not survive

Stiglitz adds the fragile European economic recovery could be irreparably damaged by a "wave of austerity" sweeping the continent and predicts short-term market speculators could start putting pressure on Spain.

The former adviser to US President Bill Clinton, Stiglitz makes the predictions in an updated edition of his book ‘Freefall', which was extracted in the Sunday Telegraph.

"The worry is that there is a wave of austerity building throughout Europe and even hitting America's shores," Stiglitz says.

"As so many countries cut back on spending prematurely, global aggregate demand will be lowered and growth will slow - even perhaps leading to a double-dip recession.

"America may have caused the global recession, but Europe is now responding in kind."

Similar to Greece, the economist warns Spain is next in the speculators' sights.

"Under the rules of the game, Spain must now cut its spending, which will almost surely increase its unemployment rate still further," Stiglitz says.

"As its economy slows, the improvement in its fiscal position may be minimal. Spain may be entering the kind of death spiral that afflicted Argentina just a decade ago. 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 be only a matter of time."

On the euro, Stiglitz says the single currency could struggle to survive as most of its member nations have vastly differing needs. He believes allowing Germany to leave the eurozone would save the euro, allowing the currency to devalue and help struggling countries with exports.

"Countries that share a currency have a fixed exchange rate with each other and thereby give up an important tool of adjustment," Stiglitz adds. "So long as there were no shocks, the euro would do fine. The test would come when one or more of the countries faced a downturn."

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• Economics / Markets
• euro