Stephanie Flanders: As an economist, you had
always pointed to some of these flaws in the
project, things that might go wrong. Is that
all coming true? And do you see the same lessons
as Gabor in terms of needing to have political
integration to make this --
>>Joseph Stiglitz: That's where you began
with this, the view that the -- there needed
to be more political integration to make the
Euro work. That was very clear.
And many American commentators on the Euro
at the time said, optimistically, this was
an unfinished project, and there will be a
crisis sometime down the line. And the hope
was when that crisis occurred, there would
be an effective response.
I think the general sense is, there hasn't.
One of the reasons that there hasn't is that
there are two very different conceptions of
what went wrong. And I think this discussion
has brought that out very clearly.
And I'll just say my -- I think David's totally
right. And it echoes much of what I saw when
I was the chief economist at the World Bank
and saw the bailouts in East Asia, Argentina,
Latin America, and so forth. And there were
two ways of describing those bailouts. One
of them was they were a bailout of Mexico
or a bailout of Argentina. The other one is,
they were a bailout of Citibank. They were
a bailout of American western banks. And the
true description from an economic point of
view is very clear, and even from a political
point of view. They were a bailout of the
lenders. They were a bailout of the big banks
who had not done their job in lending.
You talked about the word sinners, you used.
But every loan has a lender and a borrower.
And the person who is supposed to be more
informed about the criteria of lending should
be the guy who manages risk, which is the
bank. And these are the guys that consistently
did a bad job.
Now, partly, it's understandable. They were
very politically connected. They were in the
White House. They were in every government.
And so they knew when they lent badly their
friends in the White House would bail them
out. And they were perfectly correct. I was
in the -- at the Council of Economic Advisors
when the first of these began in the Mexican
bailout. I said, "Why are we bailing out American
lenders? Why do we use the name 'Mexican bailout'?
It's not a bailout of Mexico."
So that seems to me, the way you frame this
is absolutely critical. Then you ask the question,
let's go back and think about what are the
economic frameworks that are that are going
to be necessary to make the European project
work, Euro work.
And the basic idea here was very simple. You
have taken away two important instruments
of adjustment: Interest rate and exchange
rate.
And you haven't really put anything in its
place.
As an example, just to give you one of the
ironies here, the crisis, the worst manifestation
of the crisis was Iceland. I don't know if
you remember the joke, what was the difference
between Iceland and Ireland?
>>David McWilliams: Thank you very much.
>>Joseph Stiglitz: Anyway, the point was,
Iceland had a much worse crisis. But now they're
doing pretty well. Not great, but pretty well,
because they had a flexible exchange rate
and they restructured their debt.
What's happened in Europe is they've not allowed
it to restructure the debt. They've bailed
out German banks, in effect. And they've kept
the countries -- put the burden on Ireland
and Greece and the other countries, which
is beyond their ability to pay. It will happen.
I mean, I think it almost inevitably will
happen. Unless there is a real, real commitment
of a European project. And I don't see that
on the way.
Let me explain what I mean by that.
Japan has a 200% -- more than 200% debt/GDP
ratio. It's not a problem, at least right
now. If interest rates are 2% and 1%, a 200%
debt/GDP ratio means you have to pay 2, 3%
of GDP to service debt, and countries can
do that.
So if there were a real commitment to have
the European project succeed, interest rates
would be low, the countries could repay, and
there's no bailout. It's just making sure
they can repay. On the other hand, if you
start trying to make profits off of the members
of the Europe family, which is what most -- the
German and other governments are doing, quite
proud about the fact, we lent money to Greece
at 5% or 6%, and we borrowed at only 1 or
2%. We just -- look, we made several hundred
million dollars out of profits from our, quote,
neighbors. You know, this is a nice family
relationship here. You're making -- So if
you're going to charge 6% and you have a debt/GDP
ratio of 150%, that's 9% of GDP, it will go
down the drain and there will be restructuring,
and they'll have to pick up -- the Germans
will have to pick up the cost of restructuring
the German banks, because there will be that
kind of restructuring. And there should be.
So it's really a political decision which
of these alternatives Europe wants to go.
Does it want to really help -- does it really
believe in European solidarity? Or does it
want to have a restructuring?
