“This path leads to irreversible damage,” says the Nobel Prize for Economics and becomes “inevitable” debt restructuring “.
The output of the Euro deliver Portugal’s austerity and rules” orthodox “of euro zone. After leaving the euro Portugal “will have an opportunity to have a fresh start.” An “alternative that gives at least the prospect of returning to growth.”
Listen to the full interview.
In the new book criticizes the euro construction process as well as the single currency architecture. What are these problems?
One of my main arguments is that the euro was created initially with problems. The structure of the euro is the problem. Yes, we had problems of political choices, but even the best politicians could make the euro work without changing some of the basic rules of the euro, regulations and institutions. For example, one of the basic rules is that countries may not have deficits above 3% of GDP. But when you have accurate economic recession to stimulate the economy and this requires sometimes have deficits above 3% of GDP. So for the euro work, towards a single currency to allow a range of different countries to reach all full employment and economic growth, then we would have to break these basic rules, change them.
the eurozone political institutions also are not helping?
Correct. When created a single currency eliminated two of the most important adjustment mechanisms: interest rate and currency exchange. They not compensated with nothing, with no institution that would allow make this adjustment when, for example, the exchange rate was inadequate. In fact they made even worse because they relied only on the budget poliítica limited, and said the ECB, a central institution, had to settle on inflation, not on jobs and economic growth. Not created, for example, mechanisms to encourage surplus countries to stimulate the economy to grow faster, have not set up a common deposit guarantee for the weaker countries faced banking difficulties, but they themselves had to save the banks instead of having a common responsibility of the eurozone. The result is that overloaded the weaker countries. The result is that despite recognizing the absolute need for convergence between countries, created an economic structure which leads to divergence, rich countries grew more than the poorest. It also leads to greater inequality between and within countries.
I have listed some suggestions for the euro area. How long we have to save?
The way I look at it is that Europe is taking too many risks. It is the policy close to the edge, jumping from one crisis to another. At the last minute is the minimum needed to get out of this crisis. The difficulty of this cliff policy is that there is likely to fall from the cliff. The longer they keep this larger policy is the probability of a severely serious crisis. I could not say when it will happen the next crisis, the next six months, three years, six years, but the longer it takes Europe to wake up to the problems, the greater the likelihood of a very serious crisis.
European leaders are hoping the ECB’s performance and the asset purchase program (quantative easing). It is the solution to European problems?
It is very clear that the ECB will not solve these problems alone. There is a broad consensus among economists that monetary policy has limited powers. It has some powers, but are limited. They are best for getting an economy when there is excess demand than to stimulate it when there is lack of demand. Even how the ECB operates can contribute to the divergence and inequality.
Why
There are two aspects that may be contributing to the divergence and growing inequality: low interest rates themselves have the effect of increasing the prices of risky assets and to harm those who depend on interest of safe assets such as government bonds. So who holds assets safe? The olders. And who owns the riskier assets? Wealthier that can withstand the risk. So the most benefited have been the richest 1%, the 0.1% richest. People who suffer are retired. In terms of divergence between countries, the purchasing program sets that can only buy good assets. Ie weak countries like Greece are always close to being excluded from these programs. In Germany there have been doubts about the lack of debt securities to buy, then they decided to buy corporate debt. So what happens is that German companies will benefit from the ECB’s purchases, but of Portugal will not have this benefit. In short, the German companies will benefit, not the Portuguese.
In the book makes numerous suggestions for reforms to the euro area, around 20 structural changes. But if European leaders have not yet released the neoliberal orthodoxy, how would you rate the book, so far, because he believes that will do going forward?
(pause) To be honest, I’m not very optimistic. I wanted to emphasize in the book that the necessary reforms to make the euro work are not major reforms from the point of economic seen. The US has a single currency for 50 different states that works. The reforms I am proposing are much smaller than the economic institutions and degree of federalism that exist in the US. They are modest proposals. They can be easily implemented. But I think, in fact, that there is no political will, as he said. The euro was a political project but the political will to create political institutions to make the euro work were not it. And then they made a judgment on the reform process error. They said, let’s start the euro without these institutions and the momentum of the euro will lead to the creation of these institutions and this will lead to greater solidarity and positive momentum. But do not take into account that these institutions without the euro would bring stagnation in Europe, would disillusionment with the European project and policy making would increasingly ugly and difficult. It is precisely at this point that we met. So I do not think it will be easy these reforms be implemented at political level. If you believe, like me, to continue this swamp, halfway it is not feasible and think that the necessary reforms are politically out of the question, so we have to start thinking about other ways forward.
Then Portugal must have a plan to exit the euro?
Yes, I think that Europe as a whole should start thinking about an amicable divorce with some countries think of ways to deal with the output. There will be a process immune to difficulties, but we must recognize that the current system is extraordinarily damaging. Portugal knows this, of course, it was a lost decade and in the case of Greece we are talking about a lost quarter century at least. The costs were enormous. Emigration. I have friends in Portugal who saw the children go to Australia, Canada, USA and are unhappy because they do not see the children. What this does to families, the economy … means that the future growth of Portugal is at risk, we are not just talking about today, but also tomorrow and in the long run. So, the choices are not pleasant, but if we recognize the cost of continuing this swamp, the risk of a euro Portugal output may be lower than stay.
This is one of the core issues, make this balance. When we see the political landscape and see that the German orthodoxy prevails, almost every day the German tabloids call us, the South Peoples, lazy and irresponsible, we see that it is almost impossible to change the European structure. So, what is worse: stay in the eurozone or exit?
I think it’s increasingly clear that getting it is more expensive than getting out. The idea of being has been defended on the basis of hope that there will be a softer position in Germany, the austerity policies prescribed by the Germans will work even if the economic theory and even the IMF clearly show that austerity will never work! But what happens is the opposite of what the visionary creators of the euro expected: expected the euro would lead to prosperity, so the political solidarity. But what is really happening is that the euro has led to stagnation, a lack of solidarity and discrimination. I’ve never seen the kind of division that we see today. The caricature is that the southern Europeans are lazy, even if it goes against the facts. The OECD clearly shows that the Greeks work longer hours than the Germans. But Germany refuses to acknowledge it. Germany continues to believe that the main problem was the budget out of control, when Spain and Ireland had fiscal surpluses before the crisis. They can not accuse them of runaway budget as a cause of the problems. They continue to fail in the diagnosis, then continue to fail on prescription.
The countries now that are or have been in crisis, including Portugal, Greece, Ireland, Spain, Italy, could have avoided the crisis if they had the balanced budgets?
No! We have to realize that the euro was created in a particular moment of time, in which an economic ideology was predominant, an ideology which we now know is wrong and that many of us already knew that was wrong before. The ideology was that if governments do things well – keep the deficit down and keeping inflation low – the private sector would handle it. We would have economic stability, economic growth, economic efficiency. If the euro had begun seven years later, after the Asian crisis, they would see that these countries had surplus budgets and low inflation. They had no problem from the public side, was entirely a problem of the private sector. And if the euro had created a bit later, after the 2008 crisis, we now see that private markets are not efficient nor stable. What we need is strict and strong regulation by governments. The only flaw of the Governments was not regular enough. So the irony of all this is that while the economies in the rest of the world, and citizens of the rest of the world began to realize this vision, began to realize the market limits, these are the sources of the problems – even the IMF, which was the bastion of austerity now recognizes that austerity leads to contraction, the contractionary policy is contractionary. The IMF strongly recommends growth policies rather than austerity. Therefore, Germany is virtually unique in the world and yet, because it has a key role in the Euro imposes policies that are failing. Not because Greece, Portugal and Spain did what they told them that they are in trouble, but they are so because they did what they were told to do. austerity policies have exactly the foreseeable effects of stagnation and economic decline.
And still have. I assume by your answers will be very difficult to countries in crisis, including Portugal, get out of this situation only by reaching the European targets: 3% deficit, for example. It is economically healthy pursue these goals? Is that in Portugal is almost everyone behind these goals.
No. The target of 3% deficit will not restore the economic health of Portugal, Greece, Spain in the near future. The fundamental problem when you have a fixed exchange rate is that the actual rate is misaligned. There are two ways to fix the real exchange rate: one is Germany to increase its prices for Portugal, Greece, Spain. The other is these countries lower their prices, but we know that deflation is very costly. It is a slow and huge side effects process. Japan had huge deflationary problems in the last two decades and continues with growth problems. The internal devaluation perspective, as it is called, deflation restore the health of the country is lax. If you happen it will happen very slowly. The reason is very simple: the crisis was created, in part, by high leverage in debt compared to GDP. But these countries are in euros, if we lower wages and prices you do is that you increase leverage.
But if Portugal leave the euro can become this debt in the new currency, as has been done in other countries?
When you exit the euro zone will have the difficult task of redenominate debt and will the opportunity to have a fresh start. We will have companies that will go bankrupt, but are already bankrupt today, throughout Europe. But once it comes out there is the possibility of a bankruptcy procedure that reflects the new reality, which enables expeditious restructuring for companies that go bankrupt, only because of the change of financial changes. I do not want to pretend it will be easy, but the current path is not easy, the future is too loose. The alternative gives at least the prospect of returning to growth. Argentina is an example, all countries are different. I do not mean that is the same, but Argentina is a clear case: had the exchange rate tied to the dollar. When he finished with that connection created in the background, a new currency, had to redenominate their debt. The result is that began to grow. Unemployment fell quickly, the increase was the second largest in the world, 8% from 2001, the height of the crisis to the global financial crisis in 2008. Of course, the start was turbulent, but then even surpassed the wealth they had before and they had a period of prosperity without coming.
The euro exit is a difficult decision, but rather should also be made complicated choices. Portugal must challenge the European Union to change and get ahead?
I think there are only two ways to proceed: either Portugal convince the European Union and the euro zone that has to be reformed, that the current state does not. Reforms need to be made quickly. Some people in Germany say: ‘We will have a banking union and a common deposit mechanism, but not now, not so soon. ” We have to understand the damage that is being done to these countries as capital leaves and weakens the financial system and force small businesses to go bankrupt, this damage will not be undone quickly. Do not fall apart after bankruptcies happen them. Therefore, this path is one that causes irreversible damage in the near future.
I wish it was clearer this answer: Portugal must confront the European Union?
Yes, I think that Portugal and other countries in crisis have to tell the European Union as it stands does not. We can not continue to suffer under a set of policies that will not work. The economic evidence that will not work is overwhelming. They must make it clear that Europe must decide if it makes reforms or there will be a critical dynamics in a country, or more in sets of separation. This process will create for itself a high cost to Germany. Therefore, Germany is interested in these reforms. The benefits of Germany have been partly at the expense of the European South.
Portugal are now discussing the next state budget. The new center-left is focusing on boosting domestic demand. One of the measures in the pipeline is a new increase in the minimum wage, which was frozen and was increased by this Executive to 530 euros, which is preparing a new increase. It is a good measure?
In general, I think for most countries raise the minimum wage is a good measure. Surely that is a good measure in the US, where I studied, is a good measure in Germany. I can not speak in particular to Portugal without looking at the numbers, whether it would be appropriate, but in countries where I studied the measure is clear that there is a clear space to increase the minimum wage without having an adverse effect. US data show that raising the minimum wage boosts the economy. This is because increasing salaries of people who spend all and increase aggregate demand.
Another problem is the growth of debt, which continues to grow since the financial crisis. A restructuring may be inevitable, stay in the euro?
The Greek experience is very demonstrative. The debt was 110% but because of the troika policies failed, GDP and tax revenue was always below forecasts troika, because GDP fell. The result is that today, even after the restructuring which was shallow, the debt is on the way to 200% of GDP. On the other hand, the US after World War II had a debt of 130%, the UK 200%. The debt grew not because of investment in the country, but because they needed to fight the war. But did the opposite of German policy. The opposite: we had a policy of growth, investment in people, in infrastructure, technology, grow the economy and the result is that GDP grew and so the debt / GDP ratio went down, down, down.
So if these austerity policies remain in Europe, the debt restructuring in Portugal is inevitable?
If you keep these policies the debt restructuring is inevitable. We see very clearly that the IMF said the Greek debt had to be restructured and the Germans hid our heads in the sand and said ‘do not accept a debt restructuring’. The result is that Greece can not pay the debt.
What if leaving the euro could?
When you exit the euro may, as part of the process, restructure debt, and are free of the constraints that prevented from growing. It’s a tough transition, but then the economy will be able to grow. The problem is that for countries like Greece and Portugal restrictions cause endless recession and in the case of Greece depression endless. The latest program adopted in 2015 in Greece was supposed to be the cure for the problems of Greece, but the GDP continued to fall because the austerity continued to be applied.
We are coming to an end, we enter the phase of rapid response, 10/2 by theme. Dilma Rousseff was removed from the Brazilian presidency, is concerned?
Yes, I am worried. The charges were about incompetence, but incompetence is not a reason for impeachment, are a reason not to re-elect a person as a leader.
Elections in the United States: Bernie, Hillary or Trump
?
Well, now the elections are around two candidates (smiles). That answer is one of the easiest, clearly Hillary is one of the most qualified candidates that the country has ever had in terms of preparation. Trump is one of the worst candidates that the country had fortunately most Americans is to realize this.
Corbyn be able to change the European left?
Unfortunately Corbyn is facing an internal challenge, has much grassroots support. The curious thing is that the party in parliament seems to be against the bases. It’s a very peculiar situation, partly because of the legacy of influence Blair when conservative policies into the labor party. There is a particular dissatisfaction because of the dishonest way entered the war. So we mainly young people to criticize Blairites, but the legacy is still a part of the parliamentary party.
If you had to give a note to the troika, from 0 to 10 which would it be?
Zero is the lowest? Perhaps less 1. It is hard to imagine it could be worse.
About the rating agencies, Portugal is still stuck by a rating agency, DBRS. So many years after the financial crisis, why have we listen to them?
I think the influence of the rating agencies reflects the deep inefficiencies in the financial markets and its irrationality. Let us remember that the rating agencies gave top marks to products that led to the collapse of the US financial system. They were involved in fraud, deception. So why should we pay attention to these rating agencies with history so poor and so with a questionable honesty is a mystery to me. The fact that financial markets still pay attention to them says more of themselves than anything else.
Last question, on the bank. Portuguese banks are facing many difficulties, including public bank. What should be done to improve the bank? And take this opportunity to ask you if you agree with the sector’s consolidation driven by the ECB?
The best thing to do in the medium term to help the bank is putting the economy to grow. When we have the economies in recession banks will not look good because people will not pay the debts. So, the best policy for the bank is to help the economy. The banking consolidation strategy will lead to a less competitive and dynamic sector, higher interest rates and a financial system less able to respond to society’s needs. I find this very questionable strategy.
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