Episode 3 Stephanomics

around the world. Time now for our around the world. Time now for our

economics editor to discuss the global financial crisis with a panel

of top economic thinkers. The plan to save the euro is falling

apart again, just in time for the G20 summit in Cannes. This week I'm

asking my guests are to fix the world's financial

problems or is the lesson last few years that national

governments and global markets don't mix?

We are filming this special of programmes so you can see the

With me to discuss all of this are a With me to discuss all of this are a

superbly well-equipped cast. Jim O'Neill, chairman of Goldman Sachs

asset management probably best known for coining the phrase "bricks" (

chief economist of Citigroup and a former member; and a member of a

think-tank based in London. I want to talk about summits, the

European Central Bank, International Monetary Fund and

course the G20, but let's start first with Greece's announcement

that it's holding a referendum on the euro deal because you might say

it raises some of the same but from a different direction. Jim

O'Neill, in doing this, hasn't the Greek Prime Minister rather

up the hole in all these rescue plans, that if ordinary

aren't behind it, then it just going to work? The very fact you

raised that question suggests that that question will survive

beyond what actually happens this week because it is part of the whole

underlying dilemma, that especially people in this country often think

about the topic and it's not to go away, that's for sure. But it

is inconvenient. Everyone, and everyone is so shocked that he

should have done this, but to be some kind of legitimacy for

these austerity programmes, there? There's a fundamental

conflict here between what you could call the primacy of the market, you

need crick decision-making, shock and awe tactics, things that

easy to understand, and the very slow decision-making in modern

democracies, especially democracies under strain like you see the one in

Greece but also in other European countries where we had big debates

in places like Slovakia or Finland that we don't usually pay that much

attention to on the global stage, suddenly moving global markets.

how this ultimately gets nobody knows, but that is

fundamental conflict that we just have to deal with. What I thought

was going to happen is that at one point in time the people who hold

the assets, who move the markets, understand that decision-making is

slow and cumbersome, and stop these expectations that just the

next summit will really come up that final enormous package that

will resolve what is a very intractable crisis and will

long time to resolve. I think is really - I think most of

been said is quite irrelevant. is not about the European Union or

the world monetary union, it's about a country on a programme, there are

hundreds of those, IMF programmes, this happens to be a troika

programme where the Prime has decided to kick the can out of

his own hands, into the hands of the people, because he can't basically

carry his party with him to make decision. Certain decisions,

political decisions, constitutional decisions, may well be legitimately

taken by a referendum. This is not one of them. This is simply about

IMF programme, troika programme, where a temporary surrender of some

national sovereignty is always involved. Politicians take

decisions, that's why you have representative democracy, and

think it is fully understandable why the man did it. He panicked, he was

blocked, and he decided to pass the buck to the electorate. Two angles

on it. If let's say that the voters won, maybe that's not a bad thing,

because it will give the impression both to the markets and probably to

other policy makers that there is more support for them going down the

path than they might have believed a week ago. If he wins the

referendum. If he can get it through, yes. Secondly and slightly

facetious but being around markets for 30 years, maybe it's not

entirely crazy for European policy makers to keep saying they

to do things in the future and to effectively lower expectations of

imminent delivery because, in fact, until the past week October

out to be the best single month for many stock markets since 1987,

simply because I think policy makers said: don't expect anything

tomorrow, we are going to spend few weeks waiting on this so it

doesn't necessarily have to conflict. I don't really go with

that. But what if they vote no? If the whole thing falls

will be in for a lot of blame. we may be closer to the endgame. We

might be closer to that in any case because, even if he has a referendum

and it's won, it is very questionable whether the IMF

able to disburse money to Greece in the meantime because the

agreement on which, on the programme on which the IMF's disbursement is

conditional, has been put up grabs. So if the IMF doesn't

disburse then other European countries will not disburse their

money and Greece has a disorderly default on 5th December. In that

case, the thing unravels in any case and the exit of Greece from the

area area with all that implies for the

sustainability of the rest of exercise becomes a real possibility.

You talk about the endgame. Is that the end of the world or just - It's

just the only issue. I'm in a camp that believes Greece doesn't

that much, given the banks have discounted a major Greek default

a long time. If they leave the euro does that change then? I think

would create some clearly additional issues but of much greater

dimension, the uncertainty of how the Greeks have operated in the

few days has kicked off but growing in the background, is of

course the whole issue of Italy. That's of a much greater importance

in my judgment than anything that happens in Greece in the next few

days. Greece matters because if it were to leave, either in a rage or

pushed out effectively by - I quite like the rage. That sort

of gets a bit more of an endgame. If they were to leave in a rage it

probably would not be quite as damaging as if they were pushed out

because if they were pushed out by say a refusal to fund them or their

banks, then exit fear contagion would take place and no country

the periphery of the euro area would be able to fund itself because they

would fear they might introduce their own currencies - Where does

the end of the periphery stop in such a scenario? Somewhere after

Paris. Just stepping back from the dominos and disaster scenarios,

issue about the conflict between Democrat governments trying to reach

decisions and the speed which the financial markets have wanted them

to act with, although both Jim and Willem are saying they need to wait

a bit, there is something here about the whole single European currency

project. Is it going to be legitimate at the end of this if

governments are perceived just done a lot of - basically

stitched everything up and not listened to the people at

any point? I think honesty amongst politicians is key here

of the problems I believe have in Greece is that they have an

opposition leader who paddles alternative path. He says: we

need to do this. Now, Greece's main problem inside or outside the

is that it has a very bloated and expensive public sector and that it

needs to open up its economy a bit more to unleash more

energy into the economy rather than sucking all resources into a public

sector where now wages are 70 to higher than in the private

So that's something they need to fix, whether they are inside or

outside, but the problem that they then have in their political

is that somebody is offering them an alternative path. It will be OK.

don't have to do that austerity. Which of course to my mind isn't

path that is open to them . So a bit more enlightened debate -

which is why a few months ago they tried this age old solution of: why

don't we have a technocratic government, which is also what they

are now talking about in Italy because they don't think they can

get this honesty in their political debate so they are going down the

route of technocrats, saying this is necessary and let's forge a national

consensus, but that of course is not what we traditionally understand as

democracy. Willem, you mentioned the Greek troika programme which is

the Europeans, European Central Bank and the IMF. Has the

Central Bank become at the centre of this, has it

able to act in a way that governments haven't been able

act? Well, it has been forced to act in a way that Central Banks

shouldn't be asked to act this has been forced to make up for

the minimal fiscal Europe that is required to back up a common

currency, and that is, in fact, an illegitimate use of Central Bank

powers, but given the absence of anything else they had no choice. To

regain legitimacy, intergovernmentallism isn't going to

do it obviously because this is supernational; not an

intergovernmental entity that is doing the heavy lifting now but you

agree it has lost legitimacy? It has done things the Central Bank

ought not to do. Maybe people like it. I would take an opposite. I

think the ECB's general behaviour on it has made the whole thing worse.

This notion that a Central Bank, particularly without some aspects of

democracy for all the governments we were discussing, that they can

protect every aspect of precious independence

much - They are incredibly independent. It is very

unrealistic. If you look at their statutes, it's very hard to see how

governments could even get rid of them. They are the most

Central Bank in the world. this notion of asking the Chinese or

other countries to help us out but is that realistic when

Bank at the core of the whole thing says: we will do it for now but

don't expect us to do it too voluntarily. The whole spirit of how

the ECB has behaved in my has made it considerably more

challenging than - But it has to behave that way because of its

constitution because of the Treaty. It had I think this ludicrous degree

of independence - Treaties get changed. No, no, I would

favour of that and then time the correct accountability

mechanism, the political accountability mechanism for the

ECB, which is not the national governments, it is the

Parliament. But I interviewed Claude Trichet just before his

day earlier this week and I put to him and he thought the ECB

behaved marvellously and done everything right, as you

surprised to hear, but it is funny because the Jim O'Neill complaint

that the rest of the world have too German and constrained, only

concentrated on inflation and very halfhearted about the crisis - in

Germany it is felt they have not been German enough, buying all this

debt, what do you think? They have been propping up the banking

and - If they had been so Germanic, I ask you why did their two German

representatives resign in a huff? The ECB has shown independence by

going down the bond-buying route. The Germans have resigned saying for

personal we don't want that, saying we want to block what's going

on there - but they go down that route after saying: we don't really

want to do it. This is also the debate - That immediately stops its

effectiveness. But the right for the ECB to do it is the way the

Bank of England does it. In 1998, completely out of the blue there was

a change of mind and hardly anything was spent in one of the most liquid

currencies in the world and that reversed the trend. The ambivalence

that you see in the ECB statements comes to me from the fact that they

are a central bank for 17 sovereign nations so they want to be

understood and legitimate in all these countries. On the one hand

they say: we do what's necessary, go down the route of bond buying.

the same time they sound a bit reluctant because that's what's

needed in countries such as Germany or the Netherlands. Not just there

but the whole fact of a Central Bank buying - Who else is going to buy

the bonds? The fact of a Central Bank buying dodgy foreign debt or

accepting to make loans to basically insolvent banks, the Bank of

does it under a full sovereign guarantee and that is the

difference. If the ECB could do it under full, joint and several

guarantee from the 17 that would be entirely legitimate

but the Bank of England is not doing a dime of even

purchases without a full sovereign guarantee. And which is of course

what you can't have - there isn't government to stand behind it - you

can, you can have a joint several guarantee. That's not hard.

But a question for you. We have new EU President at the helm. You

talk about sovereign debt. Not only is he not German, he is Italian.

Does that make things easy are worse? He will just have to hold

his nose and purchase Italian, Spanish debt to the extent required

to stop these falling over into default. That will in turn - these

two countries, like Greece are some kind of programme - so he can

point to this potentially illegitimate action of the Central

Bank as being in because it's not solvency support

but liquidity support, which is important task of the Central Bank.

Do you think that Mario Draghi is going to have to be more German than

the Germans? Is it inconvenient that he is German? He is a very

intelligent person who happens have been born in Germany and I know

him, and I think of the tough candidates that were up for the job,

he is very well qualified but the very fact you are raising his

nationality will be picked up in Germany in a big way a his first

weeks will be quite challenging for him. The Germans had that debate.

I hope so. It's a bit similar. Been there, done that. Of course if they

continue buying the bonds don't expect Germans it like it. So if

Italian bond yields really dropped next week, people would say: that's

because we have an ECB Italian who is deliberately helping -

Maybe, but so what? That would be great thing. If the uninformed say

uninformed things, it's their constitutional right. Another time

when Jean Claude Trichet had to step down because he said he didn't want

the International Monetary Fund getting involved, about two days

after he said that the Greeks asked the IMF to get involved and they

have now been involved in quite a lot of bail-outs of European

countries. What do we think about the International Monetary Fund

how it has responded to the not just in the eurozone

generally over the last couple of years? The IMF has a couple of

fundamental advantages over the Europeans bailing themselves out.

has lots of experience with doing that sort of task and it is not a

Government. There's a world of a difference between some bureaucrats

from the IMF going in and saying: can you please sack some civil

servants, raise your retirement age, do whatever it takes to put your

state budget and debt levels sustainable footing, and the

Europeans telling each other to do that, which is seen as a completely

different way of interfering in each other's sovereignty, so very good

that we have the IMF on board for simply that reason, and looks

we also need their resources. you think, Jim, the IMF can

role - The IMF were struggling for a purpose until the global credit

crisis. The IMF, in my judgment, was in danger of running out of having

any reason to exist. It has a really bad Asian crisis and struggled

through this great era of prosperity beforehand so in some ways the

crisis has been fantastic for the IMF. There's talk of maybe a new

IMF fund for the eurozone, will that help? First of all, in Greece

were on the side of darkness, right, because as Dominique Strauss-Kahn,

the then Managing Director in May, basically overruled his own staff

and agreed to a programme for involving lending without first

restructuring the sovereign. Well, Greece was clearly - Do you

that would - without writing off some of the debt. Yes, and so

really didn't help, so that expertise, which they do have, which

is very essential, I think, was the politically emasculated. Hopefully

it's like that, you will get a more sensible attitude towards

restructuring, writing down the debts of sovereigns but

have only very little money and no money in the kitty they can't do

much. We had the Bank of England the other day

saying: nothing is really going to go right in the global economy until

we get to the bottom of this crisis which is the global imbalances, the

fact that you have these big creditor countries who just keep

saving too much, if you like, and making it very hard for countries

like America and Britain or even Greece to get themselves out from

under their debt. Jim, do you agree with that? Do you think we could

ever get a deal on global imbalances or are we just going to have to

watch it play out. I'm baffled when I see people like Mervyn say this.

Nine months into the year the Chinese trade surplus is not

more than 2% of GDP. Before the global credit crisis it was over

10%, so I'm not - So the problem is fixed? I'm not sure about it being

fixed but we are definitely the right direction. There

a rise in real terms probably close to 30% for the past five years -

Which is what Americans have wanted, the Chinese exports to get less

competitive. Of course, luckily the Chinese realise and on this

particular topic, and I'm struck by how narrow-minded a lot of western

leaders seem to be on it, and at times there's a lot of progress. I

agree that the global imbalances are a very minor part of the story.

would be nice to see America running a surplus on trade and China a small

deficit, because that's the way capital should flow, but so it's the

wrong way round, it's not the the world. The real problem is

there's just too much debt in advanced countries, too much

government debt and household debt. But isn't debt the flip side of

those imbalances? The governor would say that but I'm not sure -

Because Europe has had surplus current account for most of the

years - past 20 years and it has even more debt, the level of the

banks and household sector, in United States. So no, there is

simply a deleveraging crisis are facing that will take another

decade to deal with. Do you think there's a point to having the G20

and, if so, does it have anything to do with global imbalances?

anything they can contribute? course there's a point to having

G20 and it is the right group to address these issues because it's

not as - it's more representative than the G7 was and not as

as some of the bigger although it's becoming more

by the day because of small past successes, now everybody wants to

get into this grouping, so it might be a victim of its own

the end. When it comes to imbalances, countries are very

touchy about being told by outsiders how to run their economies and

especially those countries that have surpluses. They still think in sort

of of - selling more stuff around the

world than you are buying is still seen as a good thing in countries

like China or Germany. Does that matter? Of course it does

what is the point in exporting your savings to effectively then buy

dodgy debt around the world that you then have to bail out other nations,

which is both what China and have been doing. That's not a very

good economic model. But if we can't fix that at the European

level, it's crazy to think we can fix it at a global level. If you

look at the core effectiveness of global co-operation, history tends

to suggest that in practice, when global interests happen to coincide

with the prime interests of the players domestically, then it works.

1985 was a fantastic example of that. When they agreed - Everybody

agreed collectively to dollar down. In 1995, when the

reverse happened, there was pretty strong consensus between them then.

I think effective co-operation involving monetary matters is doable

on a global basis including at a G20 level. There's a number of

about all of this that are not being discussed enough. The world is not

just led by Europe. China will create three more Greeces in the

next 12 months. The BRICs create another Italy in the next 12

months. Some will have a role to play. We should say you are not

actually talking about creating another Italy or Greece because that

would be probably bad for the European economy. The equivalent of

it. The dilemma is when it comes to fiscal co-operation which goes to

the core of EMU, requiring issues on taxing or voting which those

countries want to have a say on but there's a lot of evidence that

co-operation has succeeded in the past and it can today again. But it

doesn't work when you actually are having to give up some control,

example on the fiscal side - we've seen that on the eurozone -

to be very brief but to link what I said earlier, what is odd is

policy makers in the west has been no progress on these things

but actually there has been three years ago and it's weird that

key western figures don't it in front of their very eyes.

China is importing a lot more, and China's exports aren't as strong. If

you ask many - you get some people on here, lots of heavy

industrial producers don't want to produce in China