>>Stephanie Flanders: Now, I said we've sort
of wanted to have you so we could have a global
perspective on the Eurozone crisis, and I
know that partly means what the world is worried
about when it looks at the Eurozone crisis,
but I am hoping also why we shouldn't necessarily
think that the end, the worries in Greece
will affect the whole of the global economy,
maybe because there are other things we should
be worrying about.
Jim, where do you think we stand now? If things
look like we might have another year of not
just malaise in Europe but another sort of
phase of the crisis, how bad does that have
to get for it to start to endanger the global
recovery? Or do you think that, really, the
global recovery is doing okay?
>>Jim O'Neill: Well, we have just -- let me
throw in a couple of statistics here, and
you keep emphasizing the nerdiness so one
can do that here more than in most conferences.
But we have just had a whole slew of countries
queue on GDP data and it's been a whole mishmash.
And I have just come back from a quick dash
around the U.S. and I reflect on it, that
some of the perceived most weakest places
in the world have so far coped rather well,
I'm positively surprised. Russia, I'm always
told, is the one I'm supposed to drop out
the BRIC acronym, 4.9% GD0 growth, and Europe
is relevant for them as well as it is for
the rest of us. And that's quite interesting.
Japan, much divided Japan, which I frequently
spend a lot of time doing as well. 4.1% annualized,
stronger than the U.S. in Q1. Japanese consumer
at the core of it.
And dare I say it at a Google event but your
friendly competitor, in some ways, Apple,
probably the most interesting anecdotal corporate
information I have seen all year. Completely
blew the markets away in Q1. Why? 20% of the
revenues to China. So we do need to keep it
in perspective.
And I'll just throw another thing in about
inside Europe itself. Most interesting thing
for me the past fortnight since the French
and Greek elections is not really the Greek
situation. It's the Germanic policy response
to the French results. You have Finance Minister
Schaeuble talking about deliberately encouraging
higher wages. Weekend just gone, IG Metall,
the biggest public sector wage union, settled
at 4.3%. Major shift.
And through gritted teeth, perhaps, the Bundesbank
acknowledging that German inflation has to
rise.
>>Stephanie Flanders: Given a choice between
there, the two things they care about most,
price stability and European integration,
it does look, optimists would say maybe they
are choosing Europe over price stability,
or at least allowing some inflation.
>>Jim O'Neill: Never let a good crisis go
to waste.
>>Stephanie Flanders: Diana, I know you have
thought about the sort of broader situation,
but obviously since you have just arrived
from the States, I was struck, talking to
some of my former colleagues from the Clinton
Administration who are now in Washington back
again, how earlier in the year, when it looked
like the Eurozone had reached a sort of chronic
phase, it was no longer threatening to really
blow up, it seemed, but could just put Europe
in a rather bad place for a long time. This
was obviously a great relief to American officials,
and you got the sense they felt they didn't
have to play nursemaid to the Europeans any
more. They could sort of disengage. As long
as there was no crisis before the November
election, they could sort of not worry too
much about Europe.
I fear, I suspect the last few weeks they
have had to change that view. Do you think
that there is now a real concern in America
that something could blow up the financial
system before November?
>>Diana Farrell: Yes. I think you're right,
that it's been a bit of a journey where many
of you will recall at the beginning of this
fall-, 2008-2009, when it looked like this
was a U.S. crisis and Europe sat back and
said, "Oh, those American banks and that American
economy," that there was a quick reversal
on that. And I think for a while, exactly
as you say, Stephanie, there was a sense of,
look, the worst has been contained. Somehow
Europe is going to muddle through. We can
get back to what's happening now.
In reality, the situation in the U.S. is positive
but it's precarious. I think what the positive
news has been that post the stimulus, because
basically most of the of the $800 billion
Recovery Act money has been largely spent,
that which will be spent has been spent, we
see growth coming primarily out of the private
sector. And so there was a sense of contain
that. We can focus on what's on here.
I think the real -- the reason that has changed,
and I think it comes with the experience that
both the fed and the treasury had back in
2008-2009, is get very, very close to the
-- a new financial crisis, a new banking crisis,
which is the fear that we all have about Europe
right now, and you realize that has no containment.
There is no containment. And the exposure
that U.S. banks have, that the whole U.S.
capital market system has to Europe is too
great.
So I think that's what's brought it back on
the agenda. I think the view that, whether
it's Greece, ultimately, Spain had a real,
true run on the banks, that has just absolutely
brings us right back to 2009. And that was
a very scary place to be, I can tell you.
>>Stephanie Flanders: I mean, obviously, the
big divide across the Atlantic in many ways
throughout this has been the attitude to austerity
and to just how long you could run these enormous
deficits. There is the irony that Germany
sort of quietly did quite a lot of stimulus
right at the heart of the crisis, more than
many people realized at the time. I think
the Germans feel they have to keep it even
from their own population because German population
is so worried about borrowing that if they
see the government borrowing, they will immediately
stop spending themselves. So it's the opposite
of our countries. But they were very quick
to pull that stimulus back. And it's been
this constant division at the G8 Summit this
week and other places. Jim, do you think -- do
you see any, do you think there has to be
a change in the sort of attitude toward the
fiscal policy in Europe coming out of what's
happening in Greece? Do you see that happening?
Or do you think it's actually America that's
just in
cloud Cuckooland running these deficits as
far as the eye can see?
>>Jim O'Neill: Everybody is in cloud Cuckooland.
Best place to be, particularly Chelsea as
far as this Monday.
I think in the context of looking beyond going
back to what I just joked about, never let
a good crisis go to waste, there are some
signs of things changing significantly.
Niall touched on an aspect of it, which is
one of the real modern day problems, that
one of the consequences of the power of a
Google and the form of technology we have,
everybody wants an instant solution.
You stand back from not just this crisis but
also '08, the fact that Apple has 20% of its
revenues to China, the fact that China's industrial
production has slowed to less than 10% which
is inappropriately scaring people. Chinese
retail sales growing at 14.1%, Chinese current
account surplus probably not more than 2%.
Germany showing evidence of a private sector
domestic demand level recovery after years
of people fantasizing about it, signs of German
real estate prices starting to rise. So I'm
sure virtually nobody will believe this but
I wouldn't be surprised if we look back in
a few years and realize that we're having
parts of the world swapping places with each
other. And you have got China and Germany
starting to consume more, and produce less,
and other places doing the opposite. And that's
what it's all -- that's what it's all about,
really.
In terms of the absolute world struggling
the way that people emotionally talk about
it. The Eurozone, after all, itself in the
first quarter was slightly stronger than people
expected because of Germany.
So, yes, there's very severe pockets of adjustment
going on, but the notion that the world is
falling apart again, it's not, as of yet,
evident to me.
>>Diana Farrell: So you asked where the head
space of America are, and I would offer a
few observations.
>>Stephanie Flanders: So you don't think everything
is going to be all right?
>>Diana Farrell: I'm probably a little less
sanguine than you are, but I share your sense
that if you zoom out of Europe for a moment
it feels much less dire and the U.S. is in
a much better place, but I see it very vulnerable
to Europe.
But I think a couple of perspectives from
the U.S., particularly closer to the eye of
the storm there, is we were guided during
the policy reactions of 2009, in particular,
by the conviction, and I wish Europe had had
this conviction earlier, that the people who
talked the most about moral hazard are the
people who, in the end, write the biggest
checks. And that is just a pattern of observation.
The decision that was made in the U.S. very
early on, before you all recall, the three
pages that Hank Paulson walked into Congress
with, that said we're not really sure how,
what, where but front load this and the hell
with more houses. Yes, it's true this wouldn't
have, shouldn't have, couldn't have, but the
reality is we now have to deal with the situation.
I actually think that that was one of the
best things that has happened. And it's frightening
to see Europe still moralizing on the moral
hazard issue because I think --
>>Stephanie Flanders: There is a sort of thing
at the heart of that which is about getting
the crisis just over with and lancing the
boil.
>>Diana Farrell: Yes, yes.
>>Stephanie Flanders: And I think when people
-- that's the kind of talk that has people
saying, well, Greece should just get out,
and then we'd deal with the consequences.
>>Diana Farrell: Okay. So that gets to my
--
>>Stephanie Flanders: Easy talk.
>>Diana Farrell: Easy talk. But here is the
other dimension we learned, particularly working
through the financial reform wars, which as
many of you know, and so, too, in Europe,
just incredibly politically charged, which
is when people moralize, when they talk about
moral hazard in general, what they want is
a single culprit. They want idiosyncratic
misbehavior by which you say you, Enron, would
be a great example of idiosyncratic misbehavior.
There's clearly a lot of things that that
institution was doing that were fraudulent,
that were illegal, that were whatnot. And
that lends itself very well to moralizing.
Where you say these people, we are going to
punish them, we are going to contain it, get
it over and done with.
I think the reality is whatever you think
about whether an individual institution should
have done what they did, whatever you think
about the mortgage situation and the kinds
of loans that were made to people who probably
shouldn't have been getting those loans, the
reality is we do not have in the U.S. and
Europe does not face an idiosyncratic risk.
It faces a systemic risk of multiple practices
that affects everyone.
So you move from that world view, which is
we want a culprit, we want someone to punish,
we want to get it all over and done with by
containing one area and putting it aside,
and you come to the reality that is our financial
system today, and increasingly the broader
economy, systemic, you have to talk about
a very different set of solutions, which I
think are what Niall and Papandreou were describing
earlier.
>>Stephanie Flanders: But what do you think?
I mean, in a year's time, not ten years' time
where all of these difficult changes have
somehow happened, what do you think, actually,
we will be talking about in a year's time?
Do you think it will have got worse before
it gets better? Will we have had this kind
of a cleansing period?
>>Jim O'Neill: Well, I want to -- What we
have got here is a crisis of the European
monetary system. I strongly agree with virtually
everything Niall said earlier. It's not really
an economic crisis. It's a crisis about the
structure that was put in place of monetary
union being wrong. And you have got this financial
integration but you haven't had the rest of
it.
In an optimal sense, there probably should
only have been six countries that joined,
that really satisfied the true criteria, but
because of Europe's history, you couldn't
have a monetary union without Italy in, and
once that started, floodgates opened for everybody
else. And I frequently find myself thinking,
the past two years, that German policymakers
at times have almost been deliberately using
the markets to get what they always wanted.
And it seems to me we are a lot closer to
that than we were a couple of years ago. And
I wouldn't surprised, especially because this
time next year it's going to be -- what? Four
months before, five months before the German
election. Something else not been mentioned
yet this morning, the North Rhine-Westphalia
election, big thing. The SPD and the Greens
are both in favor of Euro bonds. So you could
have, by this time next year, the three biggest
European governments all in favor of them.
>>Stephanie Flanders: A lot of people don't
understand but the shift of the political
gravity in Germany has actually been in favor
of the more pro-European integration party
in the last year. There's a kind of --
>>Jim O'Neill: Sarkozy --
>>Stephanie Flanders: -- that the Germans
are hating all the bailouts and everything.
>>Jim O'Neill: Sarkozy -- in that sense, even
though in Anglo-Saxon world we might not feel
so comfortable with the new French government,
they're much more pro-European than the outgoing
Sarkozy was, so...
But in a broader sense, again coming back
-- and I want to emphasize this -- this obsession
in the western world with itself, something
that was touched on briefly but I want to
make absolute, the U.N. goal of reducing global
poverty by 2015 has been reached five years
sooner than was set.
How come that doesn't get talked about?
Global poverty is halved way quicker than
what everybody thought was a ridiculously
ambitious goal.
And that's a reflection of what's going on
in China; despite their recent troubles, India;
large parts of Africa; and parts of Russia,
despite the fact we don't like them; and many
of these people are doing really well. And
they're not sitting around freaking about
-- about whether Greece will stay in the E.U.
in another four weeks or not. Maybe they should
a bit more, but...
>>Stephanie Flanders: But if it's accelerated
the changeover in power, the changing of the
global economic guard, that is still bad news
for Europe. It is still -- it's not that there's
any great positive story for Europe coming
out of this, if it's actually increased the
sort of, you know, relative decline or accelerated
the relative decline of Europe.
>>Jim O'Neill: Well, if it results in better
governance of the system they all believed
in so much 10 years ago, maybe it will end
up being about the thing.
There's a long list of things to throw in.
I cannot understand -- and let's go -- I wrote
this the first time I mentioned the phrase
"BRICs." Why on earth are Germany, France,
and Italy participating in G20 and G7 and
G8 meetings on their own? It is ridiculous.
It is absolutely --
You could solve parts of this crisis -- the
Eurobond thing, I completely agree with, but
they could also assuredly announce tonight,
"As of now, no single European member, Euro
area country, is participating in any G meeting
on their own. We're demonstrating our commitment
and solidarity. We're meeting as one." That's
easy.
>>Diana Farrell: So I'm torn, because I sort
of want to let you go on because I think we
all need some good news and I love the reduction
of poverty, U.N. goals, and otherwise.
But I think it's a mistake, honestly, to suggest
that this whole story we have here was just
a misconstruct of the E.U. mechanism or the
Euro mechanism, although I agree with you
that's a big part of this. And, you know,
a year from now, I think we will either have
strengthened the pact and figured it out and
gotten closer to your union or we'll have
a pretty catastrophic breakup, which I think
is kind of unlikely for the reasons that Niall
put forth.
But even if we get that right or had gotten
that right, there were many elements of what
was happening in inter-connectivity, particularly
of capital, and at the same time the wealth
of China, the petro dollars that formed themselves
into large pools of capital, that allowed
very large imbalances all over the world,
and we do have a trigger to a lot of this
crisis within Europe and certainly around
the world was the very high levels of leverage
that were enabled by this system.
And even if we resolve this thing in the short
term, we still have -- the U.S. wasn't even
part of the E.U., for that matter. We still
have this huge challenge of getting ourselves
to a more balanced and less leveraged environment
and I've got to tell you the history of countries
having done that is not very positive.
>>Jim O'Neill: The idea that there's no country
world in the world with a current account
imbalance, that's fantasy.
>>Diana Farrell: I --
>>Stephanie Flanders: Okay. If we get -- why
don't we get back to the broader -- I suspect
-- nerds, though they are, I suspect we lose
them when we start talking about current account
imbalances.
Call me crazy, but I -- I mean, there's a
broader point which you can some -- talk -- I
discovered that you can use this on the news.
You can talk about imbalances without really
talking about them.
But if you have all the things that you're
talking about, Jim -- exciting changes in
the global economy -- I think, by the way,
you are allowed to talk about Apple. It's
Facebook you're not allowed to talk about.
[ Laughter ]
>>Stephanie Flanders: But all these things
that are changing and, you know, history tells
us that those periods of massive change of
global --
>>Jim O'Neill: Martin might, though. He might
talk about them.
>>Stephanie Flanders: -- distribution of economic
power have come with serious political crises,
serious instability. The lesson of the Euro
might actually be bigger than this, and also
the way the G20 is managing this the last
few years, but we don't have remotely the
right kind of institutional tools --
>>Jim O'Neill: Clearly not.
>>Stephanie Flanders: -- to deal with the
changes, positive as well as negative, that
are happening in the global economy. I mean,
isn't that -- we're going to finish up in
a minute, but I mean, do you think that is
one big message, one big takeaway that comes
from this -- the last few years that is quite
worrying, just about the world's ability to
adapt to these changes?
>>Jim O'Neill: Well, I -- if you put 17 countries
in a fixed monetary arrangement, you're going
to get the volatility one way or another.
If you control the currency volatility, it's
just going to come out in some other way.
Unless all 17 of them become exactly the same
places.
By the way, you get -- here's one of the small
bits I disagree with what Niall said. You
get that in the U.K., where, you know, Manchester
is 38 miles from Liverpool. We're not the
same places.
>>Stephanie Flanders: But if 17 countries
--
>>Jim O'Neill: We have an infinitely better
football team than then, even if we didn't
win the Champions League.
>>Stephanie Flanders: It goes to Diana's point,
though. If 17 countries that have basically
been working together for decades can't sort
out the imbalances between them, what does
that say about the global economy?
>>Jim O'Neill: Well, but the imbalances -- this
particular imbalance is being resolved. China
is spending -- you know, get your -- I'll
tell them again. Get Apple people here. 20%
of their revenues in one quarter are from
Chinese consumers. What greater evidence do
you want? Never mind balance of payment of
accounts statistics.
Germany, record unemployment for 20 years
because it's providing what these German consumers
-- primarily automobiles. That imbalance is
now being resolved.
We're going to get other imbalances. That's
life.
The idea that we're going to have some wonderful
harmonious world where there will never be
any imbalances, that's just not realistic.
>>Stephanie Flanders: Diana, the last word
but on this sort of broader point, lessons
of the last few years.
>>Diana Farrell: I guess the big lesson that
I would bring from the U.S. is we run the
risk of doing too little, not too much, and
I think that's the risk that Europe is still
running right now.
>>Stephanie Flanders: And that is the difference
between America and Europe. Europe always
thinks it's going to make a mistake of doing
too much and America would always err on the
side of excess.
Thank you very much to both of you.
[ Applause ]
