The End of the Eurozone? - Panel discussion at European Zeitgeist 2011

>>Stephanie Flanders: It's very interesting, though, hearing -- almost all of you are saying
what a lot of people say, which is it is inevitable you will have restructuring and this is just
good money after bad. But what is striking is when you talk to people, that solution
looks better the further you are from the situation. And the closer you get to it dish
suspect if we spoke to George Osborne even privately or if we spoke to the -- I was in
Athens last week. The closer you are to what the implications of that would be on the ground,
for the Greek banks, for Irish banks, the harder that looks. And even if everyone agrees
-- and I don't know many economists who don't think it will eventually happen in the case
of Greece. No one wants it to happen tomorrow or today. And I am wondering whether all of
you -- do you actually all think it should happen tomorrow and get it over with.
>>David McWilliams: We have got to see the world as it is, not as we would like it to
be. For example, Joe mentioned Iceland. All Irish
politicians were saying last year, oh, you wouldn't want to be Iceland. That's a terrible
basket case. You wouldn't want to go near Iceland. So I decided go up and have a look
at what a basket case felt like. And I went up to Reykjavik and it really struck
me, the only people who were really worried in Reykjavik were English bankers in the Hilton
looking for their money back. [ Laughter ]
>>David McWilliams: And I put this to the finance minister and he looked at me and he
says, "But we have no money. It's all gone. We can give them fish if they like.
[ Laughter ] >>David McWilliams: But, you know, he didn't
mean to be funny. What he was saying is this is what we have. The money is gone.
I also asked a taxi driver. He said, "My mortgage is in yens, but Tokyo is very far away."
[ Laughter ] >>David McWilliams: So the point was it's
a mind-set thing. You get your head around the change. The Icelandics have said the money
is gone, so the bankers, you can queue up behind. Like in any situation where the money
is gone you can't magic the money. Unless, of course -- That's what my kids say, "Daddy,
magic that." Unless, of course, the ECB magics the money, right, and prints it.
But then the problem is we are back to this basic idea that countries like Ireland and
Greece and Portugal and Spain, we need to grow quicker than Germany because that's the
objective of the E.U., that we will have a better standard of living. The only way we
can go quicker than Germany is to have the Googles and the Microsofts and the Facebooks
in Ireland, which we have, and that's a fantastic liberation for us. But to do that, we need
to ensure that the average Irish person isn't incredibly burdened with what are odious debts,
debts that we didn't take out. So we are very happy as a nation to pay our
national debt, which paid for our roads and our hospitals and our schools and all that.
But we're not prepared to pay for the gambling debts of Deutsche Bank. That's a simple issue.
And I think the E.U. elite don't seem to realize that, that they can actually go onto the good
side, to the side of the angels almost, by actually just looking at it a different way
and saying, you know what -- The thing about the Deutsche Bank's balance sheet is it can
be made immeasurably easier by the ECB printing money, end of story, which is what the fed
is doing. So the German taxpayer, you don't have to pay. You just have a printer's bill
in Frankfurt at the end. [ Laughter ]
>>David McWilliams: It's true. >>Gabor Steingart: Give me a guarantee for
that. >>David McWilliams: You don't need a guarantee.
Just trust me. >>Gabor Steingart: Yeah, the failure of Greece
is one topic, but morale hazard is not a theory right now. We are talking about a banking
system which tries -- >>Stephanie Flanders: Morale hazard being
the fact that people start being irresponsible --
>>Gabor Steingart: Especially the private banks. And I agree with Mr. Stiglitz, we have
to make them accountable and responsible for what they have done. That means restructuring
of debt. Recently I met Lord Blankfein, which I know
well from my time in the U.S., and we had a discussion about normal -- abnormality in
the banking system. We talked about Mr. Ackerman and his new strategy to match the investment
banking with some retail bankers which he recently bought.
And so I asked Lord, what do you think about that strategy, and he looked at me with blank
eyes and he said, "Gabor, what do you mean by normal? To invest real money for real people
for real investments in real countries? That's too risky for me. Gabor, I want to see my
money back (clapping) every night." That's his way of explaining his business
and his show to make people understand that he sees himself as a risk taker. That's okay,
but then he has to take the risk in this case. These kind of banks have taken too much risk
in the books and now we have to bring them to the table. That would help a lot for the
European idea and for these countries. >>Stephanie Flanders: Just to be devil's advocate
here, this is precisely the argument that was had before Lehman's, and those who are
very scared of a restructuring, which includes most of the politicians in Europe at the moment,
rightly or wrongly are worried that having effectively turned all the private debt we
had in the crisis into sovereign debt, if you start saying, oh, actually the sovereign
debt is not going to be repaid either, these governments aren't going to repay it, you
start taking us back to that brink we were discussing a year ago in the global financial
-- >>Simon Wolfson: The market is already pricing
that into the bonds of Greece and Portugal. >>Stephanie Flanders: That's what they thought
about Lehman's. They thought it was all priced in, and then what happened.
>>Gabor Steingart: The members of Deutsche Bank told me we are prepared. We have it already.
We have to do it in our books, these government bonds from Greece, with a haircut of 30-something
percent. And all the private banks, they have to do it.
>>David McWilliams: What form of capitalism do these people not understand? You lent money
to somebody. As Joe said, the guy who lends should be slightly more aware of the risk
than the guy borrowing. The guy bore ring doesn't have the cash anymore. That's it.
And the more we dress it up and the more we turn it around and the more we say we project
it out another 30 years or 40 years, or whatever, the less we get to the essence of the crisis
which is the ECB -- and there's co-responsibility in all of this. We in Ireland are responsible
for the debts that many of us individually took out.
But equally, the lender is responsible for lending.
I mean, the ECB presided over a financial crack house, you know? The French and German
banks are owed over 900 billion Euros by the Irish, Portuguese, Greek and Spanish banks
together. They are not getting that money back and they know it.
>>Joseph Stiglitz: What I would also emphasize is this is a negative sum, not a zero-sum
game. Because the way they're thinking about it now is going to stymie growth. You emphasized
the importance of growth. The policies right now that are being imposed
on Greece, Ireland, are designed to kill these countries. And the only way that you're going
to get prosperity to get the resources really to get things going is to not have this extreme
austerity, but really to use existing resources. It's really ironic that the way you told a
country, you say pay me back, but by the way, don't grow.
>>> Make your pie smaller. >>Joseph Stiglitz: It's a little bit like
debtor's prisons that you had in the U.K. You say pay me back, but by the way, you have
to stay in prison so you can't earn a living. You can't do that.
>>> We are not allowed to talk about (saying name). We are not talking about prison.
[ Laughter ] >>Stephanie Flanders: I didn't know it was
going to be so easy. So we solved the problem, we all agree, or at least everyone here agrees,
debt restructuring and probably needs to be more political integration in Europe. It.
>>Gabor Steingart: Growth policy. And maybe the third thing in the toolbox is Euro bonds.
The market is not only crying for more money and more growth. Confidence.
So I think we should give this confidence to the smaller countries, to the countries
which are in trouble now. They are also in trouble not because only of overspending.
They are in trouble because there was a severe financial crisis, which pushed them over the
brink. So we have to give confidence to the market.
We tried this with all this European mechanisms, stability mechanisms, all this. It doesn't
work. So I think we have to introduce Euro bonds.
>>Stephanie Flanders: So we do all the things you are talking about: More integration, hopefully
some growth, certainly debt restructuring. >>Simon Wolfson: Sorry, I don't agree about
more integration. Just to make it -- >>Stephanie Flanders: I was going to ask you,
because if you are in this audience, you know, you have heard this. There is this wonderful
family dispute going on, not here but within Europe with all these nice kind of charming
countries like Greece and Ireland that you didn't focus on very much in the past and
you probably won't focus on again. What is the Europe that comes out of that?
If we get a message that government debt is going to be restructured and that Europe is
going to be more integrated, I mean, Simon, are you worried by the Europe that would come
out of this even if the political solution was found and we did all the things being
discussed? >>Simon Wolfson: I'm very worried about it.
I will tell you why I'm worried. And I think Gabor you expressed it brilliantly that, the
economic crisis is used as an excuse for political integration that is wanted by a group of people
who sit on the top of Europe but isn't wanted by the people of any European nation.
And my view is that prosperity doesn't come from enforced political integration. Prosperity
comes from freedom, free trade, people being able to move as they wish. But the idea that
we need the same political master and that somehow we need some superstructure that governs
the people of Europe is one that is not only bad for our political freedom but also ultimately
will be bad for our economy. Because what the people sitting in this lair don't understand
is economics doesn't dance to the tune of a political band master. It never has done.
You can't force economies to do what you want just because you have the political will.
And that has been the enormous mistake of the whole European -- the whole European project
has been built on that foundation and it's simply wrong.
>>Stephanie Flanders: David, Ireland is being pressured as part of this closer family and
the bailout, or whatever you would call it, to raise its corporation tax, so what message
does that send? >>David McWilliams: This is the Sarkozy approach;
okay? Which is that in some way, in his head, there is a relationship between a banking
crisis and the Irish corporate tax rate. Now, there ain't no relationship. And even if we
put our corporate tax rate up to 100 percent, it still wouldn't make the banks any better.
Think about it. So what you have then, then what you have
in the case of Ireland is, you know, a small country being bullied by a rather large country
which sets up a straw man argument, okay, which we then have to devote resources to
try defeating, and what would make Ireland immeasurably weaker is if our corporation
tax rate was raised. So what the French are arguing is we will
make you -- not only will we impose austerity on you, we will actually make you weaker commercially,
and in so doing you will be able to pay the money.
>>Stephanie Flanders: Gabor, just your response to that. Is there any defense for Germany
and France using this opportunity to get Ireland to jack up its corporation tax rate?
>>Gabor Steingart: I think Ireland has to learn it that there is no shortcut to paradise
and to be a tax-safe haven for a corporation is not enough as a growth model for a whole
country, even if it's a small country. Hard work is needed, not only investing in this
kind of tricky politics. I think to be a safe haven has proven wrong.
It could be part of a solution if you have to work through a different period, which
you obviously have done. But it's part of the toolbox. It could not be the main argument
for a country that you have low corporate taxes. I call you a sinner state. You are
punished by the markets. Not the Germans. You are punished by the markets for that.
>>Joseph Stiglitz: I think the point Simon made that you don't need political integration
for economic integration has to be qualified. The fact is -- The question is what is fair
competition. And if you have one country engaging in unfair tax competition, unfair -- deteriorating
health standards, environmental standards, not having global warming, doing anything
about global warming, polluting, the rest, that's not a -- you might say -- you could
have free trade, but it will be a race to the bottom, and one which really undermines
our standards of living. So there has to be certain, I think, common
standards that you have to take on board. And the question is, where do those common
standards have to be? You don't want to have everything regulated, and I think that's what
you are worried about, that they have gone too far.
On the other hand, I have some sympathy with the view that tax poaching is an unfair way
of competing to say that we're going to try to attract companies by getting lower and
lower corporation taxes. What you want to do is attract people by having high education,
good infrastructure, you know, all the kinds of things that improve standards of living.
And the Irish approach has been one which, overall, has not been constructive for, I
think, globalization. We have had -- United States -- as an example,
one American drug company does its research in the United States, but all the patents
are held in Ireland. And they try to claim that all their profits were coming -- for
a few people working in Ireland generated all the profits of this major --
>>David McWilliams: No, no. We agree with this. We agree the -- for example, you know,
as an Irish citizen, we pay very high income tax to work in corporations that pay no tax.
So that actually annoys us as well. But the point is, do you overnight raise the
Irish tax rate, in so doing possibly prompt capital flight which makes the country weaker,
or do you say, "Over the next five or six years we're going to get our act together?"
But on the big European issue of integration or none, what is interesting if you look at
the last four referenda on European integration -- one in Netherlands, one in France, two
in Ireland -- they've all been defeated. The people of Europe do not want further integration,
when asked. And the European elite, the insiders at the
top, have got to figure out a way of getting around that because ultimately the way the
European Union, which is a deeply democratic institution -- not the ECB; the EU -- they're
going to have to go via plebiscite, via referenda, and every time you ask the citizens, whether
they're German, whether they're French or Dutch or Irish, they say "We don't" --
>>Gabor Steingart: Oh, the government never asks.
>>David McWilliams: You're correct. -- "we don't want it."
>>Gabor Steingart: Too dangerous. >>Stephanie Flanders: I knew the problem with
this session was not going to be getting everyone to talk, but to get you all to shut up in
time to have some Q&A, and I know that there will be people who want to ask questions.
If you go up to the mics, we've just got -- we've got about 10 minutes.
>>Colin Gottlieb: Since I work for an American --
Sorry. Colin Gottlieb, Omnicom Media Group. Since I work for an American company, I'll
use Stephanie's classic line of "some people may say."
Isn't the debate kind of academic, as far as the European experiment, in that with the
United States sort of delivering something like $4 billion of debt each day, sitting
on about $13 trillion of debt, and from QE653 deliberately creating a lot of inflation,
and therefore debasing the dollar, allegedly, and with China on the other hand a huge market,
growing at something like 10% a year, isn't Europe and especially Germany and the market
that I look after, the markets I look after, just going to get squashed, and therefore,
effectively this debate between the United States and China, that there will be default
in Europe? So the question is: With America driving high
inflation and debasing the dollar, allegedly, and China on the other hand with the rampant
growth of 10%, isn't the conversation kind of academic?
>>Stephanie Flanders: Joe, what do you think? Does Europe then shrink into insignificance
as a -- >>Joseph Stiglitz: Yeah. I think one has to
go back to: What are the real assets? The real assets have nothing to do with these
liabilities, these debts. The real assets are the people, the capital goods, the technology.
And the real assets before you had the Euro crisis are the same as you had before -- you
know, after the Euro crisis are the same as before. And that's really what the issue is.
It's restructuring the debt so you get past this thing that has strangled you. Because
the irony is that the credit, these liabilities, are just something that has come in the way
of using the resources efficiently, and if you could just figure out how to restructure
it, you could go back to using these resources efficiently.
From the political point of view, if I look at the problems in the United States -- you
know, maybe we all are most pessimistic about what we see all the time -- I see the problems
of the United States, the gridlock there, as equally serious, of a different form, than
in Europe. So the good news for Europe is that these
problems are universal. [Laughter]
>>Stephanie Flanders: You want to go up to the mic?
We might actually take a couple -- you want to go? Yeah. We'll take these two, if you
say who you are. >>Jose Manuel Vargas: Yeah. Hello. Good morning.
My name is Jose Manuel Vargas. I come from Vocento, Spain, a potential sinner, and I
have two questions. The first question is: I think Spain shows
that what you are talking about, the bailout of the financial system, is very clear because
Spain is got a debt/GDP ratio of just 70%, right?
But it's under the pressure of the markets because the Spanish financial system has a
lot of debt with the international financial system because they have financed all the
housing growth of the country, right? The first question is: I think that the problem
with Spain is that the world has decided, after the Lehman Brothers crisis, that no
state can leave their financial -- its financial system, right?
So would we have any alternative of solving the problems without bailing out our financial
system, and accordingly, not having our public debt under pressure because we have a low
GDP/debt ratio, right? The second question is: I think that what
you are talking about is a global problem. It's not a European Union problem, right?
It happened the same in the United States, but the United States and the U.K. decided
to solve this through inflation, through (inaudible) -- right? -- during the last years, while
in Europe because of the traditional fear of Germany to inflation who have decided to
solve it through real terms devaluation, right? Do you think that we can avoid inflation through
that? Because what we have seen is in raw materials,
inflation is appearing and it's transferring that to all countries in Europe. So despite
the effort we have made and we are making in avoiding inflation, we are suffering inflation
in every country in Europe and we are starting to suffer.
So at the end of the day, is it possible to maintain two different types of solutions
for a global crisis such as we are seeing with the U.S. and Germany?
Thank you. >>Stephanie Flanders: And Lionel as well.
>>Lionel Barber: Yes. Lionel Barber, the editor of the Financial Times.
I had a specific question for Gabor. You've invoked Helmut Kohl's vision of the
bloody birth, difficult birth, of the United States of Europe, but I wonder whether you've
seriously addressed the genuine German dilemma, which is this: The natural monetary union
was the hard core built around France and Germany and articulated 15 years ago by the
current -- now-current German finance minister, Wolfgang Schäuble, but you ended up with
a monetary union in which there were several sinners or would-be future sinners. So your
dilemma is either you go back to the natural monetary union, the hard core that can live
with a highly competitive Germany, or you suck it up and you realize that you actually
are going to end up with a transfer union, in which German taxpayers are going to have
to support their weaker brethren or sinners. >>Stephanie Flanders: Gabor, you want to respond
to that and then we'll go back to the other question?
>>Gabor Steingart: I think no way. The Germans will cling to their stability culture, and
if you push them too hard to leave this tradition, they would skip every government. So we have
to live with that, and there is no 100% solution. I think we have already started to live in
a transfer union. What do we see? All these kind of helping
programs. Right now they are discussing a new package for Portugal and for Greece, and
we are talking about double-digit amounts of money.
And so we are already part of this transfer union, and the Germans, even if they don't
feel that comfortable, they don't want to step out of this union. Always we have one
track, but two speeds. Mr. Schäuble and Mr. Kohl, they were always
talking about the European community of a two-speed society, and we are in this, and
I think it's nothing bad about that. We need different speeds.
Europeanism is not communism. We are not all equal, and we can live with some sinners,
if they are not in the majority, and we have to -- in quotes, to educate them now.
The EZB and Mr. Draghi, we have a lot of key people on key positions to educate these governments,
these budget planners, to make it in a serious way that Europe will not be destroyed by too
much fantasy and too much vision, and we can't afford this.
We need down-to-earth politics right now, and then I think we can make it.
>>Stephanie Flanders: Can we -- I know you want to respond to that, but also to respond
to the Spanish question. Do you want to --
>>Joseph Stiglitz: Yeah. Let me try to link the two.
First, Spain made it so clear that the framework for thinking about what is good and stable
that prevailed before the crisis, the Maastricht Convention, was totally wrong.
They said that if you had surpluses, if you met the debt/GDP ratios, you would be safe.
Spain did that, and they weren't. They made a fundamental mistake. The mistake was, they
listened to the neoliberal ideas that say you could get away with bank deregulation
and those kinds of things. But in terms of the macroeconomics, they did
everything right. So you can't criticize them. So the kinds of frameworks that are being
pushed by Germany and others are not going to be the answer. They're actually contributing
to the problem. In my mind, inflation is one way of dealing
with it because it restructures the debt, it brings it down, but it's not likely to
be acceptable in the current framework. So the only alternative is restructuring,
and restructuring is a way of not shifting it onto the government's books.
In the U.S., we didn't need to shift all the debt onto the government's books. We could
have put it more on the bondholders and the shareholders of the banks, and it was a -- you
might say a deliberate decision done by the bankers, what you described as a coup d'etat.
They did it and we now wound up with a lot bigger burden, but it was basically a political
act, a result of the influence of the bankers on -- at that critical period in the crisis.
>>Stephanie Flanders: we've run out of time. Simon, just a quick response on the --
>>Simon Wolfson: Well, I think the second question answered the first question. You
know, is there an alternative? Well, the answer is a transfer union where the richer countries
keep bailing out the poorer countries. The question really about that is, at what
point do they stop bailing them out. Because if the poorer countries say, "Actually, we
don't want to play by your rules" -- you know, because the only way you're going to actually
have a transfer union is by having rules imposed on the poorer countries, which are essentially
austerity measures, and what happens when you get the Greeks rioting, and the Greek
police and the Greek army saying, "We're not going to fire on our own people. What are
you going to do about it, Germany?" And you then end up with a real political crisis.
>>David McWilliams: I mean, it's interesting, the Spanish. And it's funny you start with
morality and sinners. You know, an English friend of mine said to me, "Look, it's just
you and the Irish and the Portuguese and the Spanish, it's all the Catholics screwing up."
[Laughter] >>David McWilliams: And I think, you know,
you can look at this in a Catholic way or a Protestant way, okay? The Catholic way is
confession, "Bless me father I have sinned," and we'll do the right thing and it's all
good -- [Laughter]
>>David McWilliams: -- and the Protestant way is "There's a moral obligation on you
to right your ways." So I believe that you can -- but I think all these things, all these
things are not just economic. They are deeply, deeply cultural. Deeply cultural.
And Joe is right. If we don't get inflation, which you guys don't want -- okay? -- fair
enough. You've got to do something else. Because the alternative is do nothing, and we get
back to the top: Is it the end the E.U.?" That becomes plausible. So we've got to do
something. >>Stephanie Flanders: I'm struck. We have
to wind up now, but I'm struck by I have a very strong feeling that a year ago I was
sitting on this platform and we were talking about going back from the brink in the global
financial system, and I started with this old line about, you know, capitalism without
default is like Christianity without hell. And we've sort of ended up in the same place,
that all this morality, all these questions of sinners and default and Catholicism -- not
really where I expected to end up but, you know, I'll go with it.
But thank you very much to everyone for what was a very lively discussion and I hope it
was interesting to everyone here.