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[Music]
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[Music]
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welcome everyone to knowledge at Wharton
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for this discussion of the European debt
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crisis with us today we have two Wharton
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professors Franklin Allen professor and
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Maro Gan who is a management Professor
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thanks for joining us this morning happy
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to be here thank you Europe has become a
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financial soap opera every week There's
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a new plan or a plan to have a plan to
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to rescue uh the the economies from what
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is a a very deep debt crisis or
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potential debt crisis and one of the
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questions that seems obvious is how did
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they get to this point but more
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generally marrow how can in such a small
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economy as Greece create such huge
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Global continental and global economic
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problems yes so you alluded to the issue
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of governance and of course uh this is a
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big problem in a place where part of the
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world where you have 27 countries
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sitting at the table and uh even very
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tiny countries can actually cause a lot
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of trouble in terms of reaching a
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decision but more directly to your
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question about uh about Greece I guess
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it's all about the interconnections and
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it's all about the fact that uh the
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currency the common currency was
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launched
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um you know a little bit more than uh 10
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years ago and um uh the stakes are very
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high uh because obviously contagion
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could spread to uh you know other parts
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of Europe especially to slightly larger
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economies in the southern periphery like
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uh Spain and and Italy and so it is a
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big deal uh what's going on in Greece
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even though the economy is relatively
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small it's also a big deal because uh it
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has the potential of affecting banks in
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other parts of Europe that's the other
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important issue here which is that uh
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some of the biggest holders of these
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government bonds in Europe Are banks
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domestic Banks and Banks from other
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European countries and so the uh the
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systemic you know um consequences of uh
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not fixing the problems in the really
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the three countries that have gotten
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into trouble so far deep into trouble uh
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Greece Portugal and Ireland can have uh
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very wide uh implications not only for
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Europe but also for the rest of the
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global economy so there there's oh
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please I agree with everything that Mora
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said I I I also think that the the
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policy makers made a fundamental mistake
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back in May of 2010 they should have let
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Greece default at that stage it was a
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manageable problem the banks would have
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had a problem in Germany and France but
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the governments would have been on top
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of it they could have afforded to deal
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with it and they didn't they they made
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the wrong judgment that this was a small
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episode that could be contained and then
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a few years from now when things were
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growing again and everything was fine
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they could deal with with Greece but
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what's in fact happened is it's spread
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and and the real problem is is not so
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much the three that have already gone
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it's now Italy Spain is along the way
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but I I think Spain is a much much more
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hopeful case but it's really it's the
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problems in Italy now that the problem
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so it's interesting that um I people
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understand the interconnectedness idea
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people tend to understand the contagion
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idea um but could you just focus for a
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moment on the idea that I mean Greece is
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a small economy and why couldn't that
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wound be cauterized in some way just
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just fixed up which is I believe what
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you're saying could have happened last
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May that opportunity passed what change
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what events made it so that you couldn't
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contain it to Greece which would for
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people who don't follow it closely would
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see seem like a doable thing it's a
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small economy let's throw some money at
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it and and make this problem go away
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yeah I mean essentially what you have is
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so so so countries in many parts of the
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world but this is Cally the case in
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Europe are um you know governments are
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deeply into debt and of course the
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maturities of the debts are different
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right and so you get to a point in which
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uh you know the markets just don't want
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to give more money for some of these
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countries to roll over their debts at an
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interest rate that is reasonable right
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and this is happening of course also in
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the midst of a recession so so
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everybody's under pressure government's
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Under Pressure tax revenue is down and
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you have all of these problems all at
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once and as Franklin just noted um you
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know you can always bail out countries
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right uh but that of course always has
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many problems in the sense that well you
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have to persuade the uh people who are
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going to put the money on the table that
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that's a a good thing to do and you
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don't want the countries that are bailed
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out to think that they're always going
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to be bailed out right so it has those
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problems theard exactly exactly and then
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on top of that there is the issue as I
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mentioned earlier that Banks are of
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course up to their throats in terms of
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these uh bonds so Franklin I think it's
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correct in saying that um a little bit
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over a year ago we could have said let's
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uh you know offer the Greeks a a deal
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right so you have to return only
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whatever 60 cents on the Euro or 50
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cents on the Euro and some European
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Banks French and German for the most
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part would have a little bit more more
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trouble uh but uh yeah if if if if it
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were circumscribed to just the Greek
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Banks then we could uh the Greek uh debt
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then we could have dealt with that right
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another matter of course is the Greek
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Banks which also own a lot of U Greek
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government debt but we could have done
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that right instead we've gone the other
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route and then of course the travels
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have multiplied along the way right and
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essentially we find ourselves now in a
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situation in which everybody has doubts
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in Europe and outside of Europe as to
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what is the correct course of action but
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our past decisions over the last couple
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of years or so are placing a lot of
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constraints on what can be done and then
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of course the politicians in Europe are
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just you know not agreeing to anything
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the latest Summit
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uh has uh I think demonstrated that once
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again and um the longer of course the
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problem persists the more tensions and
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the more frictions and uh the markets of
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course are deeply unsettled because they
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see that there's no end to the uh to The
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Saga right that you described at the
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beginning of uh Summits that U lead to
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nowhere and no big decision is
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made my the problem is there's now no
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easy solution because each of the
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possible Solutions are ruled out so one
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solution is to print money the ECB could
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go out buy up2 trillion EUR of debt much
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the same way the FED did in the US and
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that would probably contain it because
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of the history of Germany and the 1923
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viar inflation they're dead set against
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that it's it's in the Treaty of Mast
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they can't do it it's built into the ECB
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that they shouldn't do it because they
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think it's going to be inflationary
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which goes back to to the 20s or 30s
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yeah so that their view of Central
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Banking is central banks are there to
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fight inflation if they take any kind of
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unorthodox action then there's a risk of
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something like 1923 or
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maybe not as Extreme as that but
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something like that in that direction
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may occur so that's ruled out another
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version is that they come together as
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one European Zone and they have a joint
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fiscal system and they have a Eurozone
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Bond but the problem for that is that
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most countries are not ready for that
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kind of integration at this stage they
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simply don't have the political
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institutions they need to control that
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and a good example of that is that when
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Germany and France violated the growth
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and stability pack they made sure that
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nobody was penalized the French and the
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Germans themselves so they themselves
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put it to an end the notion that these
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these kinds of mechanisms could work and
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then what they're trying to do is is to
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go between all these different
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Alternatives which don't have enough
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money to them so what's happening at the
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moment is this financial engineering
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which makes what happened in the US in
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the subprime mortgage or or any of those
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events look look tamed by compar
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making it so complicated it seem we
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don't have the final details but the
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leaks seem to make it so complicated
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that's very difficult to see how it's
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going to play out in the next few days
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yeah you're referring to the um uh fund
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that they're putting together yeah the
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EFS and all of the rules right as to how
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to use it right in the future so well
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whether they're going to go the
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insurance route and have these 20%
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guarantees on new issues of Euro Zone
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bonds and and all lots of illegal issues
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like how many of the bonds have negative
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pledge Clauses which means that
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everybody has to get that that's one way
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the French wanted to go the way of
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having a bank create the FSN as a bank
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with that as capital and then they would
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borrow from the ECB which is complicated
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way of printing money but it's basically
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going the printing money route it's
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going around the treaty right it's going
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around around that so that that's the
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problem we've got into such a
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complicated situation because of these
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restrictions
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on on the different sides and the final
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one which is the German Constitution is
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quite clear that they don't want a
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transfer of sovereignty which any of
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these other issues would involve and so
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you know now Angela Merkel has to go
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back to the bundestag they're can have a
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full vote in the bundestag after they've
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come up with the deal and we'll see
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whether they go for that or not so we
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have suddenly gone from Greece having a
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few problems to talk of I mean the
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latest that I see is a one $ 1.4
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trillion facility potentially which
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already people are saying that's still
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not enough which is what what you were
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talking about so just to go back to root
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causes for a moment Greece got into
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trouble because the government overspent
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Andor it was not very good at collecting
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revenues is that right I mean just not
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to oversimplify but how did Greece get
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into
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trouble well they lied basically
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so their statistics Department didn't
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keep track of what the the national debt
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was they cooked the books they cooked
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the books and uh they suddenly when
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they' had a change of government
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realized they had much more debt than
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than they had previously thought and I
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think if anybody had really
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understood on the outside that these
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debt levels were in fact where they were
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we would have seen a very different
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trajectory because people would have
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stopped lending a lot sooner
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how does that happen how does any
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country which is in international
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borrowing markets at some level what is
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that correct I mean they're taking on
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sovereign debt someone's lending that
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money to them through bonds presumably
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people are doing due diligence
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presumably these are smart people
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presumably they can they they they can
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read the books of Greece um but they
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didn't or they couldn't so what how did
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that for me that's one of the um um you
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know great questions about the last 10
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years or so uh and uh I personally can't
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think of any other answer than that the
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uh the lenders were perhaps too willing
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to lend to countries like Greece
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Portugal Ireland remember that the
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Assumption was that the Euro was there
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to stay so there was no currency risk
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right uh and um the uh the yield uh was
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not as high as it is today obviously
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right relative to the German um Bond but
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uh it was above the German Bond right
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there was a little bit of a uh of a
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premium there so you know people you
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know interest rates were very low right
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around the world uh Franklin has uh you
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know studied that very well and uh so
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there was very few places where you
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could get a what they thought was a
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risk-free you know uh investment right
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that paid you know much much better
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right uh than the German Bond right and
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so or the or us treasury bills for that
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matter and so people flock to investors
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flock to um to Greece and to to buy you
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know Greek uh bonds and Irish bonds and
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Portuguese bonds because they were a
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reasonably good investment and the
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Assumption was it was safe and of course
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now we realize that it wasn't as safe as
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people thought right uh do you want to
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add to that I think there's there's a
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very important technical issue which is
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how did the Greek statistics agency have
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so much political interference that
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something like this could happen because
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in most countries if anything like that
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happened many people would have gone to
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jail I don't think that that's happened
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in Greece and I think that this is a big
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part of the difference in the
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institutions between northern and
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southern Europe which is at the heart of
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the
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problem between politically because
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Southern Europeans and I think Spain is
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very different here but particularly in
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Greece and
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Italy there's a social compact of some
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kind that the rich don't pay taxes that
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very very High tax rates but it's okay
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to lie and cheat and have multiple
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systems whereby you know if you go to
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Italy and you go to the doctors there's
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two prices you can pay you can pay the
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price where they pay taxes or they can
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play the back Market in cash and that's
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that is at the heart of the problem as I
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say I think Spain is very different
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after the maybe a little bit but but but
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but it is a general problem and this
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speaks of course Very powerfully to the
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issue of north or to South and economies
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in Europe that continue to be very
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competitive
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right uh globally and you know Germany
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uh the Netherlands Austria and so on and
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then economies on the Mediterranean Rim
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that U you know essentially have lost
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competitiveness and they weren't that
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competitive to begin with and so you're
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a member of the uh Rich club right uh
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but your productivity and your
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competitiveness external competitiveness
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doesn't really qualify you as a member
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of that club so the EUR was built on a
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series of assumptions right was the
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problem with the lack of fiscal Unity
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but it's also this assumption that oh
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everybody's going to uh you know be able
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to move in the same direction becoming
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more competitive more productive and so
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on so forth and this really hasn't
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happened uh so I think there is a an
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increasingly wide you know wide gap
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between the North and the South uh goes
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all the way back to also the quality of
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Institutions absolutely so there was a
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fundamental difference that was going to
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inevitably make it difficult to AB try
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to both these two absolutely regions
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together and a good example of this is
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that the the Greek Finance Minister a
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few weeks ago said they were going to
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publish a list of the people who haven't
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been paying their taxes properly now
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first of all that that's never actually
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come about as far as they know yet but
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but most importantly of all in most
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countries these people would be going to
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jail they wouldn't be having their name
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in the
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newspaper absolutely the other the other
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thing to keep in mind here and there was
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recently in the press a chart on this is
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that uh over the last 10 years since the
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introduction of the Euro uh you know
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Germany which was a little bit scared
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about the consequences of all of these
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and uh remember in the 1990s they had
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trouble uh with their competitiveness
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right they were losing ground because
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they were burdened by the U Union uh
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with East Germany and so on so forth
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they you know it was actually the social
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Democrats it was a left leaning PR labor
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kind of government uh uh Shredder was
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the the chancellor who actually um
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introduced a very important re forms to
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try to keep costs in Germany down so
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that the German manufacturing economy in
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particular would still be competitive
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and you see that over the last 10 years
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manufacturing costs in Germany have been
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pretty much flat right whereas in Greece
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Portugal Spain Ireland they have
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increased by 35 to 40% over um 10
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years uh so it's not only that Germany
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already was more competitive than these
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other countries that has become even
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more so over the last 10 years that's
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the problem right uh longterm I think
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that's a big big problem in addition to
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the shortterm you know Financial issues
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and dead issues that uh that the
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continent is is suffering from so just
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to go back to the fundamentals again for
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a moment we've got Greece cooking the
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books uh with uh various bureaucrats
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being complicit however however they
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pull that off so in effect have a
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country doing liar loans the way we had
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mortgages in the US they were just just
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accepting people with no incomes said
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they had an income and these were
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accepted and and rolled up into
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Securities that were sold um but even
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given that let's say there was rot at at
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the center of the Greek statistical
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bureau there's still it's still hard to
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understand uh if you're not watching
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closely how that could lead to the kinds
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of problems we have today and it seems
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that in order for that to happen one has
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understands that that there's a weakness
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in the European banking system generally
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that allows something like gree's
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problems to spread quickly to all those
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banks in other words it's not just that
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they're interconnected is it is it also
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that they're that they aren't so liquid
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and maybe some of them are even
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insolvent if they were to mark down um
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all of their liabilities to to to Market
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values so so you've got the Greek
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problem but isn't it all also that
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there's a huge weakness throughout many
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European banks that allows this smaller
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problem to spread uh so quickly and
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deeply as Maro was alluding at the
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beginning there are a lot of problems
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this is not just Greece in Ireland they
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had a massive property bubble Spain they
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had a property bubble Portugal they
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didn't but they had a very slow growth
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lack of competitiveness
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problem and then it ity is is the big
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problem that's the one that you can't
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save and they basically have a a
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political problem which is bisone has
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now what three of three major cases
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against him which range from paying an
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underage prostitute to have sex to
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corrupting his lawyer to all these kinds
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of things where they can't remove him so
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that when they have a a problem like
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they're having now which is they need to
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credibly show that when there's a shock
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they can go out and raise taxes and and
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get rid of a deficit so that the debt
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doesn't get out of control and they
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can't do that and so that's their basic
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problem in my view and we see that over
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the weekend with sarosi and Merkel both
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pointedly pressurizing bisone to do
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something and that their political
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system can't respond so I think that
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that's a big part of the problem on the
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banking
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side a large part of the issue is that
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the Basel agreements and all banking
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regulation says the debt of oecd
00:19:36
countries is risk-free and even though
00:19:40
we know that that's not true it they're
00:19:42
just about to default what whatever you
00:19:44
however one puts it in Greece there's
00:19:47
still this fantasy there so they are not
00:19:50
they're not accepting their reality on
00:19:54
the ground and this is you know we had
00:19:57
last year in the summer the European
00:20:01
banking Authority did the stress test
00:20:03
the Irish Banks got wonderful scores
00:20:05
fine no problems few weeks later they
00:20:08
have to put in 32% of Irish GDP into the
00:20:11
banks to recapitalize them you think
00:20:13
that they would learn that it's not a
00:20:15
good idea to fix these tests but we went
00:20:17
through the same thing this year they do
00:20:19
the they do the stress test dexia gets a
00:20:23
wonderful score CU it's got mostly Sor
00:20:25
and Deb bust and it just had to be
00:20:28
failed out and and this is a problem now
00:20:30
they've redone it you know we went from
00:20:32
Christine lagard who was the French
00:20:34
finance minister at the beginning of
00:20:36
July who knew everything about the
00:20:38
French banks I presume she then moves to
00:20:41
the IMF six weeks later she's making a
00:20:44
speech in Jackson Hall that the European
00:20:46
banks are under capitalized all the
00:20:49
European leaders are going no no they're
00:20:51
not then a few weeks later oh yes they
00:20:54
are but we need a 100 the IMF is still
00:20:56
saying 200 billion
00:20:58
but it's this denial so in the current
00:21:00
round of stress tests which they redid
00:21:02
after dexia they just did the sovereign
00:21:05
debt haircuts they didn't look at any
00:21:07
adverse macroeconomic stress so they're
00:21:09
still engaged in this complete game of
00:21:12
denial yeah uh the the did would you
00:21:17
like to add something you were no no no
00:21:18
no I mean the only thing perhaps to add
00:21:20
is that on top of all of that uh as you
00:21:22
know deposit institutions most banking
00:21:24
banks in Europe are deposit institutions
00:21:26
right I mean they may do investment
00:21:27
banking but the deposit institutions and
00:21:29
as such uh you know they need to U hold
00:21:32
reserves in cash or Securities and uh of
00:21:35
course uh you know they would prefer to
00:21:37
hold them insecurities that pay money
00:21:39
and again the Greek debt was paying you
00:21:42
know reasonable interest rate right at
00:21:43
the time when uh other you know safe
00:21:46
Investments were very difficult to uh to
00:21:48
find and uh so so so so again I mean the
00:21:52
banks themselves were also you know
00:21:54
fools in the sense of thinking right
00:21:57
that they could part all of that money
00:21:59
in something that was safe right and of
00:22:00
course The Regulators you know the the
00:22:02
central banks were asking them to hold
00:22:05
that money in things that presumably
00:22:07
were safe and that included uh Greek
00:22:09
bonds right so what I think we're both
00:22:12
trying to say is that uh the whole way
00:22:14
of thinking right uh the mindset right
00:22:18
uh needs to change right uh so there are
00:22:22
practical kinds of things that need to
00:22:23
change but it's also the whole mindset
00:22:25
right that that well like GRE government
00:22:27
bonds is not the same as a German Bond
00:22:29
and still oecd you know and National
00:22:33
Regulators were treating it for the last
00:22:35
10 years as if it were essentially the
00:22:37
same thing right and that uh obviously
00:22:41
is is pure fiction well that's
00:22:43
interesting what would have to change
00:22:45
what what kind of cultural and economic
00:22:49
and financial thinking would have to
00:22:51
change how would it have to change in
00:22:53
order to get to a more sustainable place
00:23:00
Place uh well I think all of the above
00:23:03
right entally all of the things order
00:23:06
but uh I guess the uh the most important
00:23:08
thing is um from my point of view or one
00:23:11
place to begin is you know to recognize
00:23:14
that I
00:23:15
mean because of the the the currency
00:23:18
because of the uh uh Authority that
00:23:20
issues them because of the uh the track
00:23:23
record of that
00:23:25
Authority different asset classes and
00:23:28
different bonds and different uh have
00:23:30
different levels of risk right and I
00:23:32
don't think the system that we have in
00:23:34
place which of course includes all sorts
00:23:36
of participants it includes private
00:23:38
actors it includes governments it
00:23:40
includes uh rating agencies it includes
00:23:42
everybody they've come to a situation in
00:23:45
which they can truly assess that risk
00:23:47
with you know in a way that they can
00:23:50
provide to the markets they can provide
00:23:51
to everybody
00:23:53
information about the uh you know the
00:23:56
the uh the quality of those you know
00:23:58
bonds and Assets in general in a way
00:24:00
that then decision makers can do their
00:24:02
job right I think we're not there uh
00:24:05
that by the way I think it's also a
00:24:06
problem here in the United States but
00:24:07
it's just uh it's too confusing and we
00:24:09
still haven't figured out exactly what
00:24:11
are the consequences from the last three
00:24:13
years or four years as to how you know
00:24:15
we need what we need to change not not
00:24:17
only in terms of Regulation but also in
00:24:18
terms of thinking about you know risk
00:24:21
and how to think about these different
00:24:22
asset classes uh but uh Franklin you you
00:24:25
know far more about this no that's my uh
00:24:27
but that's my take on it right that we
00:24:29
haven't really put our arms around the
00:24:32
issue of how to price risk and how to
00:24:34
think about risk right I think you're
00:24:36
exactly right Mara I think it's a very
00:24:38
complicated risk because with sovereign
00:24:40
debt if you can go out and raise taxes
00:24:43
or cut expenditure when you have a shock
00:24:46
then the sovereign debt is quite safe so
00:24:49
end of the Napoleonic Wars UK had about
00:24:52
250% of GDP in debt having fought Wars
00:24:57
for for many many years against Napoleon
00:25:00
and they were able to deal with that
00:25:03
quite well because people knew that
00:25:04
whenever there would be an issue they
00:25:07
would just simply go out and do what
00:25:09
whatever was needed they would do and
00:25:11
the political classes would come behind
00:25:14
them they wouldn't have a fight and I
00:25:16
think you know one of the interesting
00:25:17
countries in this
00:25:19
whole episode is the UK because they're
00:25:22
really the only country which has sat
00:25:23
down in a serious way and said where are
00:25:26
we what have we got to do to make things
00:25:29
work and they came up with a very auster
00:25:33
plan they rais taxes they've done lots
00:25:36
of things if you compare that with
00:25:38
what's happening in France for example
00:25:41
France is in trouble at the moment
00:25:44
because there's a real issue about
00:25:45
whether if they have a shock they can
00:25:48
actually go out and raise taxes so we we
00:25:51
you know SOS he wanted to put in the
00:25:52
debt break on the Constitution well he
00:25:54
couldn't do that because he lost the
00:25:56
majority in the Senate they wanted to
00:25:58
have tax Rises to
00:26:00
increase the or to reduce the deficit
00:26:03
and increase their
00:26:05
viability one of the things they they
00:26:07
suggested was increasing taxes on theme
00:26:11
parks turns out one of the ministers has
00:26:13
asteris the G theme park in his
00:26:16
constituency so immediately that got
00:26:19
pushed back and within within hours
00:26:21
almost and this is the kind of thing
00:26:23
that you we see the same thing in Italy
00:26:26
the dragy and um and trishe write the
00:26:29
letter making it conditional to buy the
00:26:32
bonds as long as the Italian government
00:26:34
came through
00:26:36
so tronte came up with a fairly sensible
00:26:39
package over the first weekend well by
00:26:41
the time 10 days had passed there had
00:26:43
been so much push back that that had
00:26:45
basically gone down to well we're going
00:26:46
to do do away with tax evasion and then
00:26:49
they had to go through the same thing
00:26:51
the night before with with the Central
00:26:53
Bank calling them up and saying don't do
00:26:55
it and now we're going through it again
00:26:57
with Merkel and sarosi yeah there's one
00:26:59
thing that I would like to add more from
00:27:01
a uh kind of political perspective here
00:27:03
which is that I think there's two other
00:27:05
very important deficits in Europe right
00:27:06
now one is there's a deficit in terms of
00:27:09
the politicians and how they're handling
00:27:11
themselves right so they're not really
00:27:14
exercising the kind of leadership that
00:27:16
one would want right and Franklin just
00:27:18
mentioned three or four examples of how
00:27:20
they propose something and then they
00:27:22
they look at the political costs and
00:27:24
then they they you know they back down
00:27:26
from that then the second one I think is
00:27:28
public opinion uh you see Europe is you
00:27:31
know in spite of all of these troubles
00:27:32
is a part of the world where people live
00:27:34
well right standards of living are
00:27:36
relatively high and of course some
00:27:38
people are suffering especially those
00:27:39
who are unemployed but even those uh
00:27:41
because in Europe the family plays such
00:27:43
an important role in terms of helping
00:27:45
you know when somebody in the in the
00:27:46
family is unemployed and there's a
00:27:48
strong strong social safety net and
00:27:50
there's a strong social safety so the
00:27:52
welfare state and there also the family
00:27:54
networks and so on and so forth so I
00:27:56
think you know in in Europe the
00:27:58
politicians don't feel the uh the urge
00:28:00
to actually take radical action uh or
00:28:03
the kind of radical action that I think
00:28:04
the situation you know would require uh
00:28:07
because there's no pressure really from
00:28:09
public opinion right and public opinion
00:28:11
there's a lot of inertia they don't want
00:28:13
anything radical and at the end of the
00:28:15
day uh the problems at least uh as felt
00:28:19
by people right Ordinary People are not
00:28:22
that big people can still eat and they
00:28:25
can go to the movies and they can enjoy
00:28:27
life uh now of course this could you
00:28:30
know if if the problem persists Europe
00:28:33
could go into a situation in which
00:28:35
there's actually a big problem right
00:28:37
much bigger than what we have now for
00:28:38
example if the banking system in one or
00:28:41
more of these countries collapses and uh
00:28:44
so uh I think you know things are not
00:28:47
good but things are not as catastrophic
00:28:50
as you know they they could be we're
00:28:52
somewhere in between so the politicians
00:28:54
are not very motivated you know to act
00:28:57
and public opinion itself you see there
00:28:59
are no major riots right other than the
00:29:01
occasional one in Greece because they
00:29:03
dislike you know the next round of
00:29:05
measures and then of course the the the
00:29:07
austerity measures get watered down so
00:29:09
it's kind of this uh you know no man's
00:29:11
land somewhere in between where there's
00:29:13
not enough not enough bad things are
00:29:16
happening so that then you know people
00:29:19
feel well we need to really you know uh
00:29:22
tackle the the situation and uh and then
00:29:25
overcome the problems easier to kick the
00:29:27
down the road to
00:29:29
's going on I agree with you exactly Mar
00:29:32
I think it's the politicians don't quite
00:29:35
understand what the downside is so there
00:29:39
are many scenarios for example Greece
00:29:42
decides to leave the Arizone because the
00:29:44
group that is being hurt very badly is
00:29:46
the youth in Greece and they that's a
00:29:49
Lost Generation and at some point they'd
00:29:51
be much better off to go the Argentina
00:29:53
route but as soon as they do that as
00:29:56
soon as they leave this Euro Zone then
00:29:58
people in Italy are suddenly going to
00:29:59
realize that their money can Harve in
00:30:02
value overnight and then there's going
00:30:04
to be massive Capital flight to Northern
00:30:06
Europe and have to put in capital
00:30:08
controls but then we have a real risk of
00:30:11
the banking system in Europe really
00:30:13
coming under pressure and they don't
00:30:16
have the fiscal resources to deal with
00:30:18
it so this is a a catastrophic kind of
00:30:21
event which you know is of 1930s
00:30:25
proportions and
00:30:27
we seem to be moving towards it because
00:30:30
they're not willing to take the the the
00:30:34
measures that they need to to prevent
00:30:36
that and this is what for me is so scary
00:30:39
about the
00:30:40
situation uh so is there a way
00:30:45
for Greece to withdraw say temporarily
00:30:50
from the Euro Zone to get its house in
00:30:52
order um under a plan that would
00:30:55
include them rejoining at some point
00:30:58
later um that could be managed in an
00:31:01
orderly way without the contagion and
00:31:05
panic that you just described well
00:31:07
there's two there's two scenarios which
00:31:08
is what the politicians are calling the
00:31:10
orderly default and then there's the
00:31:12
disorderly default so let me just finish
00:31:16
off on the disorderly default so Friday
00:31:18
night comes the markets close in the US
00:31:21
Greece passes a law late at night that
00:31:24
one Euro equals one drma in all domestic
00:31:27
law contracts now they're going to have
00:31:29
to fight lots of lawsuits and so on but
00:31:31
basically they'll probably win those and
00:31:34
then since 80% or around that of their
00:31:39
sovereign debt is domestic law and I
00:31:41
presume most of their commercial
00:31:43
contracts and the the debt with the
00:31:45
banks is that they'll
00:31:47
effectively lower the debt burden
00:31:51
significantly and they'll start growing
00:31:53
because you can go on holiday to Greece
00:31:56
now for half the price PR to Spain or
00:31:58
Italy or France so they'll be fine but
00:32:01
there'll be this catastrophe in the rest
00:32:03
of Europe the other way is that the EU
00:32:07
the ECB the French the Germans
00:32:10
essentially they're running everything
00:32:12
at the moment would come up with a
00:32:14
negotiated solution about how much the
00:32:18
Greek debt is written down and the
00:32:21
Greeks are are doing a wonderful job of
00:32:24
in my view of
00:32:26
negotiating that they get more of a
00:32:28
write down because they have this option
00:32:29
of going outside and causing Havoc for
00:32:32
the rest of of Europe well everyone
00:32:35
seemed to agree that the write down or
00:32:37
the haircut as they call it would be 21%
00:32:40
back in July there was an agreement it
00:32:41
was signed in Blood and suddenly we're
00:32:43
talking about
00:32:44
60% well first thing is you have to be
00:32:46
very careful about these numbers because
00:32:48
they depend a lot about what the
00:32:50
discount rates are and so on so
00:32:52
Barkley's capital for example came up
00:32:54
with an analysis which shows it was not
00:32:57
21% it was actually
00:32:59
5% and the current
00:33:02
one they keep talking about these
00:33:04
numbers and what they mean I don't think
00:33:07
we understand is the official sector
00:33:10
also going to take that kind of haircut
00:33:12
is the is the EU is the ECB going to
00:33:15
take that or is it just the private
00:33:16
Banks they just put this number if it's
00:33:19
just the private sector 60% is not
00:33:22
enough in my
00:33:24
view so in other words they could offer
00:33:27
I mean they could restructure different
00:33:29
um parts of their debt in different ways
00:33:32
depending on their matties also
00:33:34
depending on who owns them and so on so
00:33:36
forth so all of these needs to be
00:33:38
discussed I mean when you're now whether
00:33:40
the across the board average you know
00:33:42
this can or haircat is 60% or 40% or it
00:33:45
depends on you know a large number of
00:33:48
variables they have this favorite tactic
00:33:50
because it is very complicated but they
00:33:53
their their desire is to make things so
00:33:55
complicated that most people people have
00:33:57
no idea what's actually being said and
00:34:00
it's
00:34:01
working so you have uh these potential
00:34:05
discounts we they call it a
00:34:06
restructuring basically you're breaking
00:34:08
a contract but everyone's agreeing to
00:34:10
break the contract um and not call at
00:34:13
breaking the contract uh is that right
00:34:16
well my
00:34:18
own understanding is
00:34:20
that it seems unlikely to me that that
00:34:23
everybody's going to voluntarily agree
00:34:24
so there was a deadline about four or
00:34:26
five weeks ago where they were supposed
00:34:28
to get 90% agreement so the days leading
00:34:31
up to that Friday then suddenly the
00:34:33
Greek government started say we don't
00:34:35
actually need 90% we need 80% and then
00:34:38
Friday came I was waiting for the news
00:34:40
the next day it never came they never
00:34:42
got the agreement that they needed to to
00:34:45
do that and if you're a a Dutch pension
00:34:47
fund for example my understanding is you
00:34:49
have a fiduciary duty to do the best for
00:34:52
your pensioners not to to give away
00:34:55
money to to the to whoever the Greeks
00:34:58
government does it don't all of these
00:35:01
tactics and change ups and the
00:35:04
complication that you're talking about
00:35:06
at some point backfire for example um
00:35:11
Greece agreed to a 21 or or Greeks
00:35:15
wanted its creditors to agree to a 21%
00:35:18
haircut Greece agreed that if they did
00:35:19
that then then Greece would adhere to
00:35:22
certain things you point out it really
00:35:24
wasn't 21% it may have been as low as 5%
00:35:26
but but whatever nominally it was
00:35:29
21% that's just a couple of months ago
00:35:31
now we're talking about nominally 60% if
00:35:35
I'm an owner of Italian bonds let's say
00:35:39
I'm thinking wait a second they agreed
00:35:41
to 21% what if Italy wants me to agree
00:35:44
to 21% and I agree to 21% is 3 weeks
00:35:47
later 3 months later it's going to be
00:35:50
60% now you're you've already started
00:35:53
the contagion you've already started the
00:35:55
breakdown in confidence and um I think
00:35:59
it was Martin wolf in the financial
00:36:01
times said that the biggest threat right
00:36:03
now is the threat of a self-fulfilling
00:36:06
prophecy so it's it's it's the case of a
00:36:08
bank that is essentially solvent but if
00:36:11
the rumors are spread wide enough that
00:36:13
it's not solvent there's a run on the
00:36:16
bank and now the bank is not solvent
00:36:19
even though um it it was at the start so
00:36:22
isn't there this threat or that or the
00:36:25
risk that that the the very way that
00:36:28
they're handling it breaks down
00:36:30
confidence to the point that you get
00:36:32
exactly the result that you're trying to
00:36:34
avoid absolutely you want to contain the
00:36:37
problem as quickly as possible fix that
00:36:39
problem before this is the way we
00:36:42
started this conversation before it
00:36:44
spreads to other other parts it would
00:36:46
have been better a year and a half ago
00:36:49
to uh address the uh the Greek problem
00:36:52
before uh you know it spread to uh to
00:36:55
other places around uh Europe uh this is
00:36:59
I think something that we can all agree
00:37:00
on right uh it would have been much
00:37:02
better to go that path but um the uh
00:37:05
decision makers in Europe uh were not
00:37:08
ready to uh take that step and they as
00:37:10
frankly noted at the beginning they took
00:37:11
a different path right trying to bail
00:37:14
out Greece as opposed to trying to
00:37:16
address the root of the problem right
00:37:17
there
00:37:19
right so
00:37:22
um what what are the potential paths to
00:37:25
sustainability here
00:37:27
what are the risks what is the
00:37:29
likelihood that one of those paths if
00:37:32
there's more than one will be the one
00:37:34
that gets
00:37:36
taken well my view is they have to be
00:37:39
looking over the edge of the cliff and
00:37:42
seeing that there is a desperate
00:37:44
situation in front of them and once they
00:37:47
do that then leaders have to step up so
00:37:51
you know in Italy Mario Monty would be a
00:37:54
wonderful prime minister in this
00:37:55
situation if he had a govern of national
00:37:57
Unity he could make the kinds of changes
00:38:00
that they
00:38:01
need but the real risk
00:38:04
is they fall over the cliff before they
00:38:07
get to that point and these these crises
00:38:09
move so quickly that there's a real risk
00:38:13
that they're going to be falling over
00:38:14
the cliff but hopefully at some point we
00:38:17
will begin to get some leadership and I
00:38:19
think it's really in Italy you know
00:38:21
Merkel was talking to the president
00:38:23
Napolitano who's very widely respected
00:38:25
person
00:38:27
but the focus of the crisis is really in
00:38:29
Italy they need to have a change of
00:38:31
government that that's that's the one
00:38:33
single thing in my view that gives us a
00:38:36
hope of getting on the sustainable path
00:38:38
because they they can be solvent if they
00:38:41
simply tax and spend in in a in a
00:38:44
reasonable way and start bringing down
00:38:46
their debt the other problems I think
00:38:49
you know there countries like Portugal
00:38:52
are going to have problems but these are
00:38:53
small countries it's the big one that's
00:38:56
the big problem I I think Spain is
00:38:58
manageable too yeah except that the
00:39:00
latest uh uh government deficit figures
00:39:02
are not uh wonderful they have actually
00:39:04
exceeded their targets uh but I agree I
00:39:07
mean it is really the the bigger
00:39:09
economies in the southern periphery that
00:39:11
uh that we should all be concerned about
00:39:14
uh I I would also like to add just a
00:39:15
quick comment about the other side of
00:39:17
the economy so the real economy
00:39:18
obviously if you know for whatever
00:39:20
reason and I don't know exactly how this
00:39:22
could happen in the present context but
00:39:24
GDP figures start to improve in Europe
00:39:28
that's going to give everybody a little
00:39:30
bit more Breathing Room except that of
00:39:32
course you never know whether that
00:39:33
Breathing Room per Franklin's comment is
00:39:36
actually going to tell the politicians
00:39:38
or the policy makers oh we can actually
00:39:41
modle through this pressure off yeah
00:39:43
right so um you know I'm of two minds
00:39:46
when I you know of course I would prefer
00:39:48
for example the real economy figures to
00:39:50
to improve but at the same time if they
00:39:53
improve too quickly right let me put it
00:39:55
that way it may actually reduce the uh
00:39:58
the appetite for for True reform and for
00:40:00
through action on the on the financial
00:40:02
front so it's a kind of a catch 22 right
00:40:05
I mean I don't know what to say kind of
00:40:07
situation in the sense that uh I'm
00:40:09
hoping for the best but uh as Franklin
00:40:12
said I mean they really need to realize
00:40:14
how close most of these economies are to
00:40:16
the cliff right and uh once they come to
00:40:20
that realization then maybe we will
00:40:22
start seeing some some action here and
00:40:25
talking about the real economy or the
00:40:27
real economies uh you've got what seems
00:40:31
to some an inherent contradiction on the
00:40:34
one hand you've got a potential
00:40:36
financial crisis which is exasperated by
00:40:39
poor economic performance and on the
00:40:41
other hand you have government actions
00:40:44
in many of these
00:40:46
countries um where austerity measures
00:40:49
are are being enforced or or or forced
00:40:52
onto countries um how does this idea of
00:40:56
expansionary contraction work I'm a
00:40:59
little bit confused about how you slow
00:41:02
down economic activity in the hopes that
00:41:04
you're going to grow out of your problem
00:41:06
I get that the idea is that you cleanse
00:41:09
the system somehow and you come out of
00:41:10
it stronger but is this the right time
00:41:14
or the wrong time to be trying to
00:41:15
cleanse the system in that
00:41:17
way well it's not a good place to start
00:41:20
out on that program because you're
00:41:22
exactly right you know you have this
00:41:25
contradic which is if you cut government
00:41:28
expenditure it's probably going to slow
00:41:30
down the economy and then it's going to
00:41:32
be much more difficult to grow out of it
00:41:34
but the problem is that if you just go
00:41:37
and keep borrowing money and and hoping
00:41:40
that demand will somehow pick up you run
00:41:43
the real risk of running into a wall and
00:41:46
what I think is was the big mistake was
00:41:48
that governments went to much too high
00:41:51
debt levels I think as soon as you start
00:41:53
getting above you may 40 50% you've got
00:41:56
to start saying now is the time maybe
00:41:59
for us to put our house in order and
00:42:01
make sure because once you get to 70 80%
00:42:05
then you're exactly in this bind and I
00:42:07
think that's one of the big lessons for
00:42:08
governments we need to keep debt much
00:42:11
much lower going forward Maro it may be
00:42:14
that Spain is the poster child here
00:42:16
because
00:42:17
Spain uh they may have even been in
00:42:20
Surplus when when the fiscal when the
00:42:23
financial crisis hit so no one was
00:42:26
running their economy better than Spain
00:42:28
in the sense of of of uh being prudent I
00:42:32
don't think their long-term debt was all
00:42:34
that high I don't know exactly where it
00:42:35
was but compared to places like Greece
00:42:38
and so forth um and now you just
00:42:40
mentioned that uh the deficit they're
00:42:43
not hitting their deficit numbers um so
00:42:45
Spain did everything right they would
00:42:48
have been they would have been the the
00:42:50
picture in the in the foyer of the IMF
00:42:52
if you walked in um and yet they're
00:42:55
they're getting slammed and now they're
00:42:58
taking on this austerity and the results
00:43:00
seem to be that the economy is going
00:43:02
down
00:43:03
so there's there's two different kinds
00:43:05
of countries countries that had
00:43:07
government debt excess but what about
00:43:09
those countries that were actually being
00:43:10
run on the surface you're I think
00:43:12
correct uh that um you know the micro
00:43:15
picture looked like uh you know pretty
00:43:17
good in 2005 2006 just before the uh the
00:43:21
storm hit however uh there were some
00:43:24
underlying weaknesses and uh we uh fully
00:43:27
understood the consequences of that uh
00:43:30
in ' 08 and 09 right and I'm talking
00:43:32
about Spain so you know a lot of the
00:43:34
boom and a lot of the uh extra Revenue
00:43:37
that the government was getting that
00:43:38
enabled it to actually balance the
00:43:40
budget have a mod Surplus and in ' 05
00:43:44
and ' 06 it was actually paying down the
00:43:46
uh the debt right so it was reducing the
00:43:48
stock of debt all of that was built on a
00:43:52
uh Chimera which was that uh real estate
00:43:54
prices would uh you know the real estate
00:43:57
boom will would continue forever and
00:43:59
remember that uh at the time um you know
00:44:03
13 14% of GDP uh had to do with uh new
00:44:08
construction right and the entire
00:44:11
banking system right uh participated in
00:44:14
that boom and now you know the most
00:44:17
important problems in fact have to do
00:44:19
with the uh with the aftermath of the
00:44:21
collapse in the uh in the real estate
00:44:23
sector so on the surface you're
00:44:25
absolutely correct and I think many very
00:44:27
good decisions were made at the time but
00:44:29
at the same time the whole thing was
00:44:30
predicated on the Assumption right that
00:44:33
uh there would be no no problem in the
00:44:35
real estate sector and in the
00:44:37
construction sector and so of course the
00:44:40
Day of Reckoning came and even though
00:44:42
prices haven't collapsed as much as in
00:44:44
other parts of the uh of the world like
00:44:46
in the US or other parts of Europe like
00:44:47
Ireland right most notably it is still
00:44:50
you know the collapse has been big
00:44:52
enough to you know put everything at
00:44:54
risk including the real economy
00:44:56
including unemployment of course which
00:44:58
has gone up uh above 20% again and uh
00:45:02
and so yeah it was a uh it was a uh a
00:45:06
great situation but it was based on Clay
00:45:09
foundations not on solid you know
00:45:12
foundations and uh and the country is
00:45:14
paying a price right now it's
00:45:15
interesting to see how the root causes
00:45:17
differed from country to Country so in
00:45:20
Greece for example it was government
00:45:21
over borrowing and government excess in
00:45:24
Spain it was actually the banks were
00:45:26
over lending it it's actually the the
00:45:28
private sector that overdid the lending
00:45:30
and then when the problems blew up well
00:45:34
they didn't quite blow up in Spain the
00:45:35
way they did in Greece but they're still
00:45:36
very serious now the government's left
00:45:39
to sort of clean up the mess which is
00:45:40
what happened in in other countries also
00:45:44
I think that's what makes it such a
00:45:45
complicated problem because there it's
00:45:47
it's so you know Portugal's another
00:45:49
interesting case because Portugal didn't
00:45:51
have a real estate Boom the real prices
00:45:54
had been pretty flat what happened there
00:45:56
was that young people started going to
00:45:59
Brazil and Angola and other places which
00:46:02
were growing fast and so then Portuguese
00:46:05
firms weren't as competitive because all
00:46:08
the good people were leaving and they
00:46:10
just had very slow growth but they
00:46:12
continue to suck in money to have this
00:46:14
lifestyle and and so that they they have
00:46:17
a difficult problem I would say but it's
00:46:19
very different from Spain and Ireland
00:46:21
yeah so once once size fits all solution
00:46:24
won't work and then you have 27
00:46:26
countries of which maybe 15 are in
00:46:29
trouble right or perhaps more uh of
00:46:31
which five are in deep trouble right one
00:46:34
of them being Italy which is the big uh
00:46:36
elephant in the room right everybody
00:46:37
wants to know what what's going to
00:46:38
happen there and uh it's complex each
00:46:42
country is complicated and then when you
00:46:44
you know sit down at the table and see
00:46:46
well we have to address the problems of
00:46:48
all of these countries
00:46:49
simultaneously and uh the the root
00:46:51
causes and the person uh situation is so
00:46:54
different it is a uh it is a difficult
00:46:57
uh so there's a lot of worry that gets
00:47:00
expressed around the idea of a country
00:47:02
defaulting and um clearly if if Greece
00:47:06
were to default or pull out of the Euro
00:47:10
it would have the catastrophic
00:47:11
consequences potentially that that we
00:47:13
talked about earlier but you mentioned
00:47:15
something interesting which was the case
00:47:17
of Argentina about 10 years ago which
00:47:19
had pegged its currency to the dollar um
00:47:22
and then it got into trouble and uh it
00:47:25
decided it that it wasn't going to pay
00:47:27
back its creditors and everyone talked
00:47:29
about what an entire disaster this would
00:47:31
be for Argentina as it turned
00:47:34
out they after the fault they did have a
00:47:38
very deep but it was a very short
00:47:39
recession relatively speaking and
00:47:41
Argentina has actually grown twice as
00:47:43
fast as Brazil which is the poster child
00:47:46
for emerging markets over the last 10
00:47:48
years um so from Argentina's point of
00:47:51
view it seems to have worked out pretty
00:47:53
well um
00:47:56
whether or not that's an option for a
00:47:58
Greece or some other country is an open
00:48:00
question but but if you're sitting in
00:48:03
Greece and you're in charge of things
00:48:05
don't you at least have to look at
00:48:06
Argentina and say am I willing to am I
00:48:08
willing to put my country through a
00:48:11
devaluation of wages that my view just
00:48:13
to put it simple simple simple terms is
00:48:15
that it would only work if uh the
00:48:18
Chinese suddenly become very fond of
00:48:21
Olives you see the reason why Argentina
00:48:23
has been doing so great is because that
00:48:25
the most important export commodity is
00:48:27
soybeans right and there's this huge
00:48:29
demand of soybeans in Brazil for cattle
00:48:31
feed but primarily in China this has
00:48:34
really helped them uh grow that you know
00:48:37
this fast uh what has also helped them
00:48:39
by the way is that they have this uh
00:48:40
free trade agreement with Brazil and as
00:48:42
Brazilian inflation has gone up
00:48:45
Argentine made Goods have become more
00:48:47
competitive also because the argentines
00:48:48
have a devalue currency whereas the real
00:48:51
has been raising in value so the
00:48:52
argentines have this have had these two
00:48:55
things going their way over the last
00:48:56
five or six years one is exports of uh
00:48:59
raw M of raw materials and agricultural
00:49:02
Commodities to China and secondly um you
00:49:05
know a big booming Market in Brazil at a
00:49:07
time when Brazilian firms uh are being
00:49:11
you know uh hurt by a loss of
00:49:13
competitiveness relative to Argentinian
00:49:15
firms right uh but Greece uh you know
00:49:18
Franklin mentioned tourism uh just a few
00:49:21
minutes ago that could be one way for
00:49:23
them to pursue the Argentine r out right
00:49:26
but you need to be able to sell
00:49:27
something right for which there is high
00:49:29
demand and Rising prices so again the
00:49:32
analogy could be olives I doubt though
00:49:34
that China is going to develop so
00:49:36
quickly a taste for olives and by the
00:49:38
way Greece is not the only producing
00:49:40
country in the world that could hurt
00:49:41
Spain's economy right so so that's one
00:49:43
cute way of putting what the situ I mean
00:49:44
I don't think Argentina should be should
00:49:46
become the example right and there are
00:49:49
good reasons why Argentina has done so
00:49:51
well that have nothing to do with their
00:49:53
economic policies that have more to do
00:49:55
with
00:49:56
a favorable uh Global situation for them
00:50:00
right but so I I would take a slightly
00:50:02
different position I think um Argentina
00:50:06
has done lots of things that are crazy
00:50:08
too so it would be in some ways
00:50:11
difficult to imagine more mismanagement
00:50:13
within within the country in for for the
00:50:16
last 100 years last 100 years but but
00:50:18
particularly under the uh the last 10
00:50:21
years and the counteract or the the
00:50:24
alternative scenario in Greece is
00:50:27
so bad I mean they've going to shrink
00:50:30
now it's down to minus
00:50:32
5.5% this year they shrank last year
00:50:35
they're probably going to shrink next
00:50:37
year and maybe the year after that
00:50:39
they're going to have all these
00:50:40
austerity Cuts kicking in even more
00:50:42
savagely than they have done it's
00:50:44
probably going to be at least a decade
00:50:46
and possibly 15 to 20 years before they
00:50:48
get back to where they were at 2006 I
00:50:52
agree what politician wants to shoulder
00:50:54
that burden it's and there's you know
00:50:57
the social cost is tremendous there's a
00:50:59
whole generation maybe two generations
00:51:02
that will never really have proper
00:51:05
employment Greece is an interesting
00:51:08
country I'd always thought of it as
00:51:09
being very very
00:51:10
poor and lagging behind but actually
00:51:13
today in j a GDP per capita it's it's in
00:51:16
PPP it's about the same as Italy and
00:51:17
Spain so they did grow I think if you
00:51:20
went back 50 60 years ago they were
00:51:23
significantly poorer than Italy for
00:51:24
example and so they have caught up so
00:51:27
they do they do have some productive
00:51:29
advantages they're very good in tourism
00:51:33
that could obviously become very
00:51:35
competitive quickly but they're also one
00:51:37
of the leading shippers in the world I
00:51:39
mean the shipping industry although all
00:51:41
the ships are based in the Marshall
00:51:43
Islands most of the services and things
00:51:45
are arranged in Greece and that they're
00:51:48
very good at that they're also very good
00:51:50
at uh generic drugs apparently a
00:51:52
significant proportion of European gener
00:51:55
generic drugs are produced in in Greece
00:51:58
and so they do have some advantages it's
00:52:00
really the government it's the private
00:52:02
sector is not so bad it's the government
00:52:04
that's terribly right but but in order
00:52:06
to pursue the Argentine route they would
00:52:07
also need to just get out of the Euro
00:52:10
and also get that uh that boost from
00:52:15
comp so you're assuming I'm assuming
00:52:17
that they do that they actually get out
00:52:19
of they get out the door they get rid of
00:52:21
their debt and then you know they get
00:52:23
rid of the the debt bur and do that and
00:52:26
I don't I think agree with marrow won't
00:52:28
be like Argentina but I think it's
00:52:30
probably a lot better than this
00:52:32
alternative scenario so let's talk about
00:52:34
another real life example because a lot
00:52:36
of times in economics you have to talk
00:52:38
in abstracts because you can't conduct
00:52:40
catastrophic experiments with countries
00:52:42
very often but sometimes they happen
00:52:43
anyway Iceland's another example small
00:52:46
country different than Argentina however
00:52:49
um the banks Overland they got in
00:52:51
trouble um and they ended up defaulting
00:52:54
on their deck that the government of
00:52:56
Iceland um basically said we're not
00:53:00
going to assume the debt of the banks
00:53:03
which is the opposite of what Ireland
00:53:05
did uh fast forward to today Iceland is
00:53:10
recovering their employment is up in
00:53:12
other words they suffered much less than
00:53:15
Ireland has which has gone by the book
00:53:17
and has had uh I I think GDP there
00:53:21
dropped by 14% at one point um and um I
00:53:25
I know some some of the numbers in
00:53:26
Ireland look a little bit better more
00:53:28
lately but I've also read that that
00:53:31
that's a temporary blip and and so
00:53:33
there's there's two examples where where
00:53:37
different routs were chosen what's
00:53:39
what's your view did did Iceland do the
00:53:40
right thing did Ireland do the wrong
00:53:42
thing um not that it's so simple but if
00:53:45
you could put those two examples in
00:53:47
context it would be very helpful so I
00:53:49
was in in ruic two weeks ago at a
00:53:51
conference and we had uh car well who
00:53:55
was a professor at um Trinity College
00:53:59
who made this this comparison and did it
00:54:02
very well and you know the the joke at
00:54:05
the beginning was that there was one
00:54:07
letter difference and six months in
00:54:09
terms of timing and the notion was that
00:54:13
Ireland was in such a better position
00:54:16
and now as you as you pointed out in
00:54:18
fact it's completely the opposite
00:54:20
Iceland is doing fine you go there
00:54:23
there's no signs of of
00:54:25
of of a crisis people are are doing fine
00:54:28
they're growing again they basically cut
00:54:31
loose on the banks let the bank's
00:54:33
default and this I think is is a very
00:54:36
good lesson for Europe This bailout
00:54:38
route is actually the one that's
00:54:41
disaster because they took the
00:54:43
government down the Icelandic government
00:54:45
is okay and I think they're going to
00:54:47
come out of it fine yeah do two points
00:54:49
on this I think the bailout
00:54:51
mentality has gone perhaps too far right
00:54:54
and that we need to you know think about
00:54:56
other ways right to to overcome problems
00:54:58
of course the other important issue to
00:55:00
keep in mind just uh uh you know to make
00:55:02
sure that we're on the same page is that
00:55:04
the letter that is different in the two
00:55:05
countries names of course that one of
00:55:07
them belongs into the Euro Zone and the
00:55:10
other one had more which also adds I
00:55:13
think to the so Iceland had more policy
00:55:15
options at it disposal but I totally
00:55:17
agree with Franklin that they did not
00:55:19
make the mistake of thinking that they
00:55:20
could bail out banks that were
00:55:23
absolutely oversized for the for the uh
00:55:25
for the uh uh for what Iceland is that
00:55:28
is to say they have grown way too big
00:55:30
right by making essentially loans and
00:55:32
taking deposits from outside of the
00:55:33
country right over the boom years
00:55:35
actually I want to close that same Loop
00:55:37
the the the idea of the Euro Iceland
00:55:40
didn't have the euro to deal with and
00:55:41
when you talked about the UK doing
00:55:43
better and having made some good choices
00:55:45
it too didn't have the euro to deal with
00:55:47
so it didn't have the straight jacket
00:55:50
that Portugal Spain Greece have in that
00:55:53
they can't devalue which would be of
00:55:55
course the classical way to get yourself
00:55:57
out of a bad situation you can make your
00:55:59
own decisions as opposed to having to
00:56:01
sit at the table yeah uh and also you
00:56:03
don't have to think about what might be
00:56:05
the implications of your decisions for
00:56:07
26 other you know members or well in the
00:56:10
case of the Euro 16 other members right
00:56:12
of the of the common currency uh so that
00:56:14
that that changes a lot of things but
00:56:16
but but I think the fact remains that
00:56:18
they chose not to bail out the banks
00:56:21
right and that was a as as it turns out
00:56:24
was a uh seems to have been a a very
00:56:27
good uh decision and it didn't cause the
00:56:30
catastrophe that people argue they they
00:56:33
defaulted on the bonds which you know in
00:56:36
my view the Irish should have done long
00:56:37
ago but are now being prevented from
00:56:40
doing by the ECB in the EU so and and in
00:56:43
Ireland um which decided to take over
00:56:46
the bad debts of the banks but the size
00:56:48
of those debts correct me if I'm wrong
00:56:51
aren't the size of those debts a couple
00:56:53
times the size of the Irish GDP I mean
00:56:56
they're they're they're huge and they're
00:56:59
the kind of thing that could take
00:57:00
decades to pay off and um well I I it's
00:57:04
a little bit more complicated then
00:57:05
because Ireland had essentially a
00:57:08
sovereign wealth fund which offset that
00:57:10
so they've already basically spent that
00:57:13
money in offsetting some of the debt so
00:57:17
then the issue is how much far a price
00:57:19
is going to fall which the what you were
00:57:21
raising for Spain and in Ireland if it
00:57:25
starts growing
00:57:26
again who knows where where property
00:57:29
prices will go but these situations can
00:57:33
transform so it could be very Bleak but
00:57:35
also Ireland is a competitive country
00:57:38
they have what levels of GDP per capital
00:57:41
was much closer really to the US than to
00:57:43
most European countries I I wouldn't be
00:57:46
surprised if Ireland made it all right
00:57:49
well let's try to wrap things up here
00:57:51
we're we're on the edge of the cliff
00:57:53
we're looking we're looking over uh and
00:57:57
there's sort of a race going on as to
00:57:58
whether the politicians can patch things
00:58:01
up before um there's a self-fulfilling
00:58:05
prophecy of some sort and and things
00:58:06
completely fall apart um probably there
00:58:11
there's no one in Europe that wants to
00:58:12
see that happen probably most people in
00:58:14
Europe want to see the Euro Zone stay
00:58:17
together um but these these pressures
00:58:20
are like tectonic plates something's got
00:58:22
to give what do you think is
00:58:25
most likely to happen um and over what
00:58:28
period not to put you on the spot too
00:58:30
much
00:58:31
but what and you can have alternate
00:58:34
scenarios but I I I'm curious just to
00:58:36
keep it simple I think the European
00:58:38
leaders are going to
00:58:40
persist H you know in their attempt to
00:58:43
um uh you know fix things by Crea you
00:58:47
know by by creating these uh facility
00:58:50
right this fund with a set of rules
00:58:53
there and uh the markets are going to
00:58:56
maybe partially believe that that's
00:58:58
going to work right um if nothing else
00:59:02
gets in the way maybe it will work uh
00:59:05
but some of the underlying problems will
00:59:08
will still be there right and uh as
00:59:12
we've been um I think mentioning
00:59:15
repeatedly a key thing is what happens
00:59:17
in Italy right what happens in Spain
00:59:19
also I think but uh because if things
00:59:22
take a turn for the worst in either one
00:59:24
of those two countries or both that that
00:59:27
would mean well I think immediately that
00:59:29
the the the current plan wouldn't work
00:59:31
wouldn't be sufficient right and um so I
00:59:35
think there's going to be quite a bit of
00:59:36
modling through yeah uh you know that
00:59:38
would be my that's my expectation
00:59:40
there's going to be a lot of muddling
00:59:41
through because again even though
00:59:43
Outsiders looking to Europe see that
00:59:47
several of these countries or the entire
00:59:48
you know Euro zone is very close to the
00:59:50
cliff I don't think that's the
00:59:52
perception by the politicians yet right
00:59:55
that would be my take on on that
00:59:57
continued that question ability to
00:59:59
muddle through somehow some way yeah
01:00:01
okay so I would be a little bit more
01:00:03
pessimistic and I think that they will
01:00:05
continue to try to moddle
01:00:08
through I think as I say if if Italy was
01:00:11
to look over the cliff and get its act
01:00:14
together which it can undoubtedly do has
01:00:16
many many strengths as a wonderful
01:00:19
country in many ways if they could do
01:00:21
that and get rid of these political
01:00:24
problems that that are at the core of
01:00:27
their problems
01:00:30
then then we can move forward and you
01:00:33
know we can hope for more growth but
01:00:37
there is a real risk of some kind of
01:00:40
self-fulfilling contagion or some
01:00:42
problem which happens too quickly for
01:00:44
them to deal with because you know if it
01:00:47
happens over a period of weeks then the
01:00:50
politician can say wow you know we're in
01:00:52
a terrible situation we've got to raise
01:00:54
taxes we got to do all these things we
01:00:56
really need to pull together and come
01:00:59
through this and and then they can do it
01:01:01
but but the real problem is that it may
01:01:03
happen too quickly this is something
01:01:05
that can play out in a few days when
01:01:07
things go bad quickly and I think that
01:01:10
that's the real risk but hopefully
01:01:12
they'll muddle through I mean that's
01:01:13
what they think is going to happen let's
01:01:15
hope they're right and as far as
01:01:17
fundamental causes I mean one underlying
01:01:20
fundamental problem that seems to me is
01:01:22
is this huge trade imbalance between the
01:01:24
North and the South and the north is
01:01:26
running big trade surpluses with the
01:01:29
South which speaks to the the lack of
01:01:33
competitiveness in the South how does
01:01:36
that get redressed how how do you solve
01:01:39
that you've I mean that is other than as
01:01:44
as I think we've alluded to that you you
01:01:46
deflate the southern economies in a way
01:01:49
that means lower wages and and slower
01:01:51
growth for painful austerity measures in
01:01:54
other words is is there some other back
01:01:56
to the straight jacket right I mean the
01:01:58
common currency essentially I mean
01:02:00
that's one comment makes it very
01:02:02
difficult for these countries to uh
01:02:04
right to um
01:02:05
rebalance and uh but secondly of course
01:02:08
um you know the immediate concern for
01:02:11
politicians policy makers is how to
01:02:13
address all of these you know financial
01:02:15
problems right but medium run long run
01:02:18
uh there's more fundamental policies
01:02:20
that need to be uh put in place in order
01:02:22
to increase the competitiveness of the
01:02:24
those of those countries I I mentioned
01:02:26
earlier that over the last 10 years
01:02:27
German manufacturing costs have stayed
01:02:30
flat whereas those in the uh periphery
01:02:33
of Europe have increased by 35 to 40%
01:02:37
over a period of 10 years and uh it's
01:02:40
not that they're improving and they're
01:02:41
not improving fast enough is that
01:02:43
actually they're losing ground relative
01:02:45
to other countries in the world and
01:02:46
Franklin has been mentioned repeatedly
01:02:48
that many of these peripheral countries
01:02:49
have per capita incomes that are very
01:02:51
close right to places like Germany or
01:02:55
well Ireland before the crisis was above
01:02:57
the UK and so on and so forth uh so you
01:03:01
cannot compete right uh you cannot hope
01:03:03
to compete in a world in which you're
01:03:04
already relatively Rich right if you
01:03:07
don't make now Investments and if you
01:03:09
don't uh introduce policy that will help
01:03:11
you improve your productivity and your
01:03:13
competitiveness so it's a very difficult
01:03:15
problem I mean most of the attention now
01:03:17
I would say all of the attention is
01:03:18
focused on the shortterm problem right
01:03:21
but there's a more fundamental you know
01:03:22
longer run and we haven't talked about
01:03:24
the emerging economies here right which
01:03:27
is the other issue when it comes to
01:03:28
competitiveness that is to say that it's
01:03:30
not just keeping a pace with Germany
01:03:32
it's also that other emerging economies
01:03:34
are you know growing and that they're
01:03:37
accumulating skills and uh and they're
01:03:40
investing in R&D and uh unfortunately
01:03:43
southern Europe is I think um Stuck in
01:03:46
the Middle right so they they they're
01:03:49
not as good as Germany and then the
01:03:51
emerging economies are getting so much
01:03:52
better that uh I think it's is going to
01:03:54
be very problematic for them uh you know
01:03:56
in the next 10 to 15 to 20 years to
01:03:59
negotiate that uh that situation there
01:04:02
uh they're caught in the middle
01:04:05
right I think you know we we're spending
01:04:07
a lot on on economic factors because
01:04:09
clearly that's the shortterm issue but
01:04:12
you know I think we've talked a little
01:04:13
bit about this today but there is within
01:04:16
Europe fundamental re differences and
01:04:19
there's a reason why the first half of
01:04:21
the 20th century they killed tens of
01:04:23
millions of people each other and all
01:04:26
over the world and you know we've made
01:04:29
so much progress since then from from
01:04:32
the first world war and the second world
01:04:35
war but there still are huge differences
01:04:38
both you know we've been talking about
01:04:40
them but just the way people think about
01:04:43
the world and the way they think about
01:04:45
the work life balance you know in
01:04:46
northern Europe there's not much to do
01:04:49
except work if you live in Spain or
01:04:51
Italy there's a lot to do and you can go
01:04:53
enjoy family family go to the beach take
01:04:55
the whole of August off you know there's
01:04:57
not much point in doing that if you live
01:04:59
in in the UK for example because it
01:05:01
rains all the time but you know these
01:05:03
are these are fundamental differences
01:05:05
but the institutions are just very
01:05:07
different the social compacts between
01:05:09
the rich and the poor how the societies
01:05:12
run the view of things like whether you
01:05:14
should pay your taxes these are all very
01:05:17
big differences and my own view is that
01:05:20
probably the Euro Zone in its current
01:05:22
form is
01:05:25
a jump too far what Europe needs to do
01:05:28
is just spend another 20 30 years grow
01:05:32
together get a common view of the world
01:05:35
because Europeans focus on their
01:05:38
differences but you know if you compare
01:05:40
their them with the Chinese or they're
01:05:43
so similar we basically use the the same
01:05:46
alphabet in 80% of the continent the
01:05:49
other part it's not that much difference
01:05:51
the languages are not that far apart
01:05:54
the cultures are very similar in many
01:05:57
many ways and the things that they
01:05:59
killed each other over for hundreds of
01:06:01
years like the difference between
01:06:03
Catholics and Protestant these are not
01:06:05
very big in the big scheme of things and
01:06:08
I think they just need to realize that
01:06:09
and grow together and then they can
01:06:12
start having much more integration
01:06:14
you've talked in the past about the idea
01:06:18
I haven't heard much about lately but
01:06:19
the idea of having a two speed Euro
01:06:23
where there there would be a different
01:06:25
level for southern countries uh than
01:06:28
than for Northern countries is that one
01:06:30
way to help to bridge this Gap some one
01:06:33
way or another I think we'll probably
01:06:34
move to that whether that means Greece
01:06:36
and Italy leave the Euro zone or whether
01:06:40
there's some other kind of breakup but
01:06:43
as I say unless we have some changes of
01:06:46
the kind we've talked I I it's difficult
01:06:49
to see the Euro Zone in its current form
01:06:53
lasting that that much longer
01:06:54
something's got to change dramatically
01:06:56
in my view yeah and so far the
01:06:59
politicians are thinking about more
01:07:00
integration but of course they they
01:07:02
cannot agree as to what that would be so
01:07:05
they're trying to
01:07:06
essentially you know escape from the
01:07:08
current situation by you know
01:07:10
intensifying the uh deepening the union
01:07:15
but uh precisely when you attempt to do
01:07:17
that that's when all of the differences
01:07:20
relevant differences reemerge right so
01:07:23
that's very much the German view what
01:07:25
the German view is you all become like
01:07:27
us in Germany and everybody be fine
01:07:29
because nobody run deficits and all
01:07:31
those kinds of things but they don't
01:07:32
think about that in the rest of Europe
01:07:36
so so what would the likely effects be
01:07:41
on the US and the world economy um if we
01:07:46
have something catastrophic happen in
01:07:48
Europe or if there is a muddle through
01:07:53
out
01:07:54
come I'd like to ask each of
01:07:58
you are we talking about
01:08:00
another Global event like 2008 at a
01:08:04
minimum I think at at a minimum it's
01:08:06
that kind of
01:08:07
event
01:08:09
with the situation being such that
01:08:12
governments
01:08:13
can't step in so you know for example
01:08:17
what would happen in the us if we
01:08:19
started having problems in the banking
01:08:21
system I find it very difficult to
01:08:24
believe that Congress would pass any
01:08:26
kind of major funding of buyouts of
01:08:29
banks which would mean the FED would
01:08:32
have to do it but that also they're
01:08:33
coming under political pressure too so
01:08:36
it's a very worrying situation globally
01:08:39
and and this of course is
01:08:41
why the other leaders keep calling the
01:08:44
European lead the Continental European
01:08:47
and saying you've got to do something
01:08:48
about it because otherwise we're all
01:08:50
going to be in trouble and it it is
01:08:53
Extreme
01:08:54
worrying also on the on the side of the
01:08:57
real economy I mean still Europe is a
01:08:59
very large Market it is a very important
01:09:01
market for American firms and keep in
01:09:04
mind that many of them now are actually
01:09:06
um reporting very large profits because
01:09:08
they're making they they're still making
01:09:11
money in Europe and with the Euro being
01:09:13
so strong relative to the dollar you
01:09:15
know they can report in dollar terms
01:09:17
like outside profits especially consumer
01:09:20
goods companies American consumer goods
01:09:21
comp help make their goods competitive
01:09:23
absolutely so uh so if uh if uh Europe
01:09:26
were to implode uh there would be a
01:09:28
financial effect that would you know
01:09:30
reverberate around the world but also
01:09:32
you know again a lot of American firms
01:09:34
right now they're making very good money
01:09:36
in Europe and that could uh you know
01:09:39
disappear isn't it true that China sells
01:09:41
more to Europe than it does to the US so
01:09:43
obviously a huge effect for China yeah
01:09:45
and that's one of the reasons that
01:09:46
they're having a lot of problems at the
01:09:48
moment so that I think they're very
01:09:49
worried about that and uh isn't it the
01:09:53
case that China has been helping a
01:09:54
little bit here and can
01:09:56
we expect that they may out of
01:09:59
self-interest offer additional
01:10:04
help my own view is they may offer a
01:10:07
little but they'll they'll ask for
01:10:09
something in return and I don't think
01:10:12
we've got to that point yet where that
01:10:14
that it's clear what what the trade
01:10:16
would be I mean the Chinese are
01:10:18
certainly at this point not interested
01:10:19
in buying European debt right I mean
01:10:23
they you know who would like to to do
01:10:25
that obviously I think they have a keen
01:10:26
interest in buying other types of assets
01:10:29
especially assets linked to production
01:10:31
or
01:10:32
distribution uh but as you know uh each
01:10:35
time that a major Chinese company wants
01:10:37
to buy something in Europe or United
01:10:39
States all of the alarms could go off
01:10:42
right uh so the Chinese would would be
01:10:44
very much like to uh you know invest
01:10:46
money poor money but I don't think they
01:10:48
would you know go for uh government
01:10:50
securities they they would like to
01:10:51
pursue other other ways of helping
01:10:54
uh but I don't think uh Europe is ready
01:10:56
and for that matter I don't think the US
01:10:58
is ready for that either right now so
01:11:01
let me ask each of you to sum up the
01:11:04
discussion today and what you see
01:11:06
happening going
01:11:07
forward would well the um uh on the
01:11:11
optimistic side of things um you know I
01:11:14
think that uh the uh eventually enough
01:11:17
pressure will build up on European
01:11:20
decision makers uh uh so that they you
01:11:23
know take action uh to uh you know you
01:11:27
know terms of coming up with a with
01:11:29
something that is credible right as to
01:11:31
how to deal with the Greek tragedy right
01:11:33
and how to deal with the other other
01:11:35
issues uh We've also discussed uh you
01:11:38
know bigger problems in bigger economies
01:11:40
that that could have bigger consequences
01:11:42
right for for not just Europe but but
01:11:45
also the rest of the world whatever
01:11:46
happens in Italy today or tomorrow uh
01:11:49
with this potential no confidence vote
01:11:51
on bone or just that his government
01:11:53
collaps ABS due to lack of parliamentary
01:11:55
support I think could be a turning point
01:11:58
uh whether it's a turning point for the
01:12:00
you know for the better for the worst
01:12:02
that remains to be seen in part remains
01:12:04
you know it depends on who is the new
01:12:05
prime minister and what kind of a
01:12:07
coalition he or she he most likely is
01:12:09
able to uh to build and what kind of uh
01:12:12
you know support they get in terms of
01:12:14
pushing austerity measures right so
01:12:16
that's that's really really important
01:12:18
and by way of summary I think it's also
01:12:19
important to keep in mind that that this
01:12:21
is not just the European problem so we
01:12:23
just talked about that uh This truly is
01:12:26
I think a global problem uh you need to
01:12:28
let the Europeans figure it out but I
01:12:31
think any help that other you know
01:12:33
important players in the world can offer
01:12:36
uh in terms of encouraging them to
01:12:37
address the issues is very important
01:12:39
because um if a catastrophe actually
01:12:42
materializes in Europe that's going to
01:12:43
reduce everybody's standards of living
01:12:45
in the short run and it's going to cause
01:12:47
a lot of problems financially around the
01:12:49
world so I think it's very important not
01:12:51
to um you know think that if the
01:12:53
European something happens to Europe oh
01:12:55
that's going to be better for us because
01:12:57
then you know hey we can say that we're
01:12:58
in better shape than them it's going to
01:13:01
come back to haunt us uh very quickly in
01:13:06
fact so I would I would agree with what
01:13:08
Morrow said you know I
01:13:10
think hopefully they'll muddle through
01:13:13
they they've done it a lot now it's
01:13:14
quite likely that'll continue for a
01:13:17
while but there there are these downside
01:13:19
risks I think the real Focus now is on
01:13:22
Italy one of the very encouraging things
01:13:24
over the last few weeks is that whereas
01:13:27
previously there was complete denial
01:13:29
that there was anything of a problem in
01:13:32
Italy that's now really become the
01:13:34
center of attention within Europe and
01:13:37
hopefully they can sort that
01:13:40
out there are many other problems around
01:13:42
the world I think it's very important we
01:13:44
don't forget that our own soap opera is
01:13:47
just about to start up again we're now
01:13:49
what
01:13:51
28 28 days from from the November 23rd
01:13:56
deadline when we're supposed to have
01:13:58
these Cuts in place that doesn't seem to
01:14:00
be going well is my understanding and
01:14:03
then we have um difficult to believe
01:14:05
given how much we see politicians on the
01:14:08
television at the moment but we've got
01:14:10
got another year to the next election
01:14:12
which is going to be full-time politics
01:14:15
and it's in many ways a lot of the same
01:14:17
issues about how much money should we
01:14:20
spend what's the role of the government
01:14:22
how much debt should we have so these
01:14:25
are problems that are big it's not just
01:14:28
Europe it's many places in the world we
01:14:31
shouldn't forget our own
01:14:33
problems thank you very much for this
01:14:36
discussion and maybe we can follow up
01:14:38
and see where things are in a couple
01:14:40
months or so thank
01:14:47
[Music]
01:14:52
you
01:14:55
[Music]
