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uh Franklin thank you so much for
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joining us today it's my pleasure you
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know one of the other really big
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problems that we see uh is in in in
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Europe right right now uh where with the
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the Greek economy doing as it is doing
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uh there has been some speculation and
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some economists have said that perhaps
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this might lead to a breakup of the Euro
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uh do you think that is likely and um do
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you do you think that the Euro Zone may
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fall apart because of that over the next
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few years and is there any Innovative
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solution that can be implemented to
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solve problems like this I think there
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is a risk of breakup I think if we look
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at the Eurozone countries by and large
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there are two camps so to speak there
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are the Germans with the other Northern
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Europeans which would
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include the
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Netherlands the uh fin Finland Austria
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and those kinds of Estonia these these
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kinds of countries which are very
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fiscally austere and don't have any
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problem in terms of deficits
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and problems like that and then we have
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the southern European countries
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obviously Greece Portugal I think we can
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put Ireland in that category for the
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moment Spain
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Italy and France is somewhere in between
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right my guess is that France if push
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comes to shove will probably go with the
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the southern Eurozone
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but what is currently happening is that
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the official SE wants to deny that there
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is a serious longrun problem
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so on the current trajectory what
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they're forcing Greece to do is to go to
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about 170 or
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180% of GDP in debt and this in my view
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is simply not a viable
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path for their Greeks to dig thems out
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on that path they're going to have to
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put maybe s to 10% of GDP in just paying
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interest and this is not really possible
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given their track record in terms of
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deficits and
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so one of two things in my view is
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likely to happen either it'll persist
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for a couple of years and then the the
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public sector which will be the
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EU in terms of the efsf and if it goes
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along past 2013 the ES M will owe most
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will have most of the debt the private
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sector will effectively been bought out
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that's what's happening at the moment
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and then they're going to have to face a
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problem that people call it a bailout
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but so far it's just loans but it will
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need to become a bailout in the sense
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that there will be need to be a
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significant transfer probably of several
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hundred billion euros from the Surplus
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countries to gree and this is a big
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problem because the Mast treaty
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explicitly rules it out the German
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Constitution explicitly rules it out and
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the political process in many new
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northern European countries is trying to
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rule it out and we see that most
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extremely in Finland and Germany so I I
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think that would be a a way that will be
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very difficult to to go the other
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route I think is that at some point the
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Greeks will simply say we've had enough
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of this and we're leaving and overnight
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they will go ahead and convert their
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debts to the extent their local law Debs
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which is the majority it's about 80 to
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90% of the sovereign debt and presumably
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most of the private debt and the bank
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debt and so on they'll convert from one
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year to one new drma and then the next
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day it'll float and initially probably
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it will go down to about two drma two
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and a half drma to a Euro and what we'll
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see then is Greece will become more
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competitive quite quickly and start
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hopefully growing it will not have
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access to Capital markets for some time
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but experience seems to show that
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surprisingly short and the fact that
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they'll be able to
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essentially lower their debt burden by
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half to 2/3 not only on the sovereign
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debt but also on much of the private
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debt I think will be a big boost so I
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think probably these two outcomes are
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equally likely roughly speaking
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and I I think what we're seeing at the
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moment is is a game it's not really a
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game it's a a struggle it's a basic
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political struggle between various
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factions in
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the EU to see which of these outcomes
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will come about the ECB seems to want
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the first outcome but I don't I think
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they underestimate the political
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resistance in northern Europe to these
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problems and I
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think they are likely to suffer greatly
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if Greece pulls out because there will
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be a big contagion effect from that the
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Irish and the Portuguese will think
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seriously about that they may also go
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into their own currencies they may also
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go into their own currencies
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temporarily and uh this will be you know
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I think the ECB they recapitalized
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recently but it's if all these things
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happen it's quite likely that they'll go
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bankrupt which is is not a problem in
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any real economic sense but politically
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again it's going to look terrible that
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the ECB goes bankrupt I think it's very
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unfortunate that the
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current leadership at the ECB
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is taking the route they are because in
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four month's time we're going to have a
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transfer of power from trishe to dragi
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and many Northern Europeans are
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extremely skeptical
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at a
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level where they don't really know who
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drag is I think if you know who drag is
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he's a very confidence building person
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but for the person in the street
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in Germany or the Netherlands having an
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Italian in control of the central bank
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is a worrying thing and if they see a
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few months after he arrives that it goes
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bankrupt this will not be a good event
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for the ECB and I think this will
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multiply its political problems so I my
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own view is that they would be better
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off to take the hit now let Greece
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default I think they should have done
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that a year ago they didn't want to but
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I think they should let that happen now
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get the decks cleared before dragy comes
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on board and then they can see Greece
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grow and potentially get out of this
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problem what we're seeing at the moment
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is it's not working in Greece the people
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are on the streets in large numbers and
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we've still got two years of austerity
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measures to go so it's going to be
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extremely difficult and they're not you
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know the the IMF plan was that they
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would be able to access markets by next
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year that's not going to happen they
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should have been growing but fairly soon
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that's not going to happen we're seeing
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a 10% drop in
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GDP and unemployment particularly youth
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unemployment going up So the plan is
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simply not working and the sooner we
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recognize that and come up with an
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alternative which as I say I think at
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this stage is either the the northern
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countries primarily but but the EU
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essentially comes up with the money to
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to give to them to write off this debt
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or there's a default or they leave the
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Euro Zone and I think these These are
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more likely to happen than the official
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scenario speaking of the IMF does the
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question of who eventually becomes the
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head are you concerned about how that
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will shape the outcome my own view is
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that the Europeans
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have captured the IMF to a much greater
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degree than should have happened so we
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saw that after Strauss KH step down they
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became a lot tougher in terms of
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enforcing the rule book and I think one
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of the issues has been that there was a
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conflict of interests Strauss khah was
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basically running for president of
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France and the IMF didn't do what it
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would normally have done and I think
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that that's a problem and you know we
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we've seen this that the Europeans are
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arguing we have to have a European head
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because so much of what the IMF has done
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is Europe and what we've seen as many
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people effectively argue I think that no
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one suggested that in 1997 we should
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have an Asian as the head because of the
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Asian crisis or in 1982 we should have a
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Latin American because of the problems
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in in Latin in America at that stage but
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having said that I think it's almost
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certain that Christine lagard will
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become the head next head of the IMF my
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main hope at this stage is that
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President
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Obama realizes that this is a
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terrible system that we have in place
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whereby the Europeans get the head of
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the IMF and the Americans get the number
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two and the head the president of the
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World Bank that system needs to be ended
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now it should have been ended with a
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non-european becoming the head of the
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IMF I don't think that's going to happen
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but let's at least have the number two
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be a non-european and
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caston's may not g get the head of the
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IMF but he should at least get the
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number two in my view and this would at
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least be a compromise of some sort that
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would Salvage what otherwise will I
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think be a terrible event I think
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increasingly what will happen if that
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something like that doesn't happen is
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that the IMF will become more and more
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irrelevant China has much more money
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than the IMF and I think the E the non
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European and the you know the Latin
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Americans the Africans the Asians will
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be much more willing to go to a Chinese
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directly or a chinese-backed entity to
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get loans then they will the IMF and
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essentially the IMF will simply become
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the European monetary fund already the
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last figures I saw about 80% of what
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they do is in eastern central and
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Western Europe now and that you know is
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in my view not a good outcome because
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what we're seeing effectively is many
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poor countries in Africa and Latin
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America giving money which is going to
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some of the richest countries countries
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in the world you know we think of Greece
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and um Portugal as being poor but
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relative to African countries of course
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or India or sou many parts of Southeast
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Asia they're incredibly wealthy and
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Ireland of course is actually one of the
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wealthiest countries in the world it's
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not far below the US it's well ahead of
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Germany the UK and France and for us to
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be taking money from poor countries to
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give to rich countries is something that
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the colonialists in 19th century could
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have dreamed
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about as being better than what they did
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but it's it's terrible it's terrible
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Franklin thank you so much for speaking
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with us today thank you Mel
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[Music]
