:00:03. > :00:13.them. In what is being described as a human data error, they sold 2000
:00:13. > :00:13.
:00:13. > :00:18.to many. Now it is time for The eurozone is fast becoming the
:00:18. > :00:24.twilight zone. So far too big to fix, far too big to fail. Its
:00:24. > :00:27.members desperately papering over the cracks. The problem is the
:00:27. > :00:32.travails of the world's richest economic bloc threatened to
:00:32. > :00:38.destabilise an already fragile global economy. My three guests
:00:38. > :00:48.today are all leading analysts of the European and international
:00:48. > :01:13.
:01:13. > :01:17.picture. How long will the world be Vicky Pryce, and your colleagues,
:01:17. > :01:21.welcome. The collective wisdom of economists seems to be that the
:01:21. > :01:26.eurozone will not survive the next 12 months in its current form. Do
:01:26. > :01:32.you share that view? There is a possibility something will happen
:01:32. > :01:35.with Greece but I think the political will is there to ensure
:01:35. > :01:39.that they stay in the eurozone because the implications of them
:01:39. > :01:47.leaving will be significant for the rest of the countries that are
:01:47. > :01:52.members of that particular group. It is going to be hard, no doubt, I
:01:53. > :01:57.think Greece is probably going to default. The haircut that has been
:01:57. > :02:05.taken by the bankers, in other words the losses they will have to
:02:05. > :02:11.bear, could be almost 100%? write-off? Absolutely. Can it do
:02:11. > :02:15.that and stay in the eurozone? It is not a very big country. I
:02:15. > :02:20.admit quite a few civilians there would need to be written off up the
:02:20. > :02:25.cost of letting Greece go in terms of the wider implications are so
:02:25. > :02:30.great. Because the markets would immediately try and destabilise
:02:30. > :02:34.Italy, Spain, Portugal, Ireland and so on and possibly some of the
:02:34. > :02:44.other countries like France. terms of full disclosure, we should
:02:44. > :02:45.
:02:45. > :02:52.say that you live Greek, but have lived in Britain a long time. --
:02:52. > :02:57.that you are native Greek. eurozone cannot survive in its
:02:57. > :03:02.current format. Good politics is not always good economics, good
:03:02. > :03:12.economics is always good politics. Instead of being driven and set up
:03:12. > :03:12.
:03:12. > :03:15.on economic criteria, the European policy is all about politics. We
:03:15. > :03:19.have a mismatch in a whole host of countries that are not similar to
:03:19. > :03:23.one another trying to remain in the system. Vicky touched on the fact
:03:23. > :03:27.that we should not underestimate the political commitment to keep
:03:27. > :03:30.the prospect together. But the politicians within Europe should
:03:30. > :03:35.not underestimate the economic pain the austerity that is going to be
:03:35. > :03:42.endured, not just increase but in Portugal, Spain and Italy. -- in
:03:42. > :03:47.Greece. I want to get your view on this idea that Greece could default,
:03:47. > :03:52.and then despite what Vicky just said, be removed from the eurozone,
:03:52. > :03:57.without spreading the contagion to the other southern European
:03:57. > :04:01.countries that are drowning in debt. Could that happen? Could Greece be
:04:01. > :04:07.gotten rid of and the other southern Europeans be protected?
:04:07. > :04:11.First, the eurozone will survive. Second, Greece is a serious risk.
:04:11. > :04:14.There is a significant risk that Greece will have to leave the
:04:14. > :04:19.eurozone because the other European countries may decide to no longer
:04:19. > :04:25.provide further funds to Greece. That is the risks, it is not likely
:04:25. > :04:29.but it is a risk. Greece leading the eurozone would be a major
:04:29. > :04:35.political. Having said that, the biggest potential risk from Greece
:04:35. > :04:40.was always the risk of contagion to Italy, Spain and France. As we have
:04:40. > :04:44.already now got contagion for Italy and Spain, the risk emanating from
:04:44. > :04:47.Greece has actually shrunk considerably. The eurozone would
:04:47. > :04:52.survive the departure of Greece. I think it won't happen but if the
:04:52. > :04:58.test was made, the eurozone would survive. You say we already have
:04:58. > :05:03.contagion but it could get worse if Greece leaving lead to another
:05:03. > :05:08.severe loss of confidence in, for example, the sovereign debt of
:05:08. > :05:12.Italy, Spain or Portugal. Yes, it could. Having said that we already
:05:12. > :05:17.know what would have to be done. The European Central Bank is not
:05:17. > :05:22.ready yet to support Italy and Spain, wholeheartedly, but they do
:05:22. > :05:27.know if the test were to be made they would have to do that and
:05:27. > :05:31.they're very likely would do it. In that sense it would probably be a
:05:31. > :05:36.one-off serious crisis followed by a serious response from the ECB and
:05:36. > :05:39.then the eurozone would get over it. There are accusations that some
:05:39. > :05:46.political leaders in Europe are still deeply complacent about how
:05:46. > :05:51.serious the place is that we are in right now. I am thinking of your
:05:51. > :05:55.compatriot, the finance minister of Germany, who said over the new year,
:05:55. > :06:00."We will have banished to the dangers of contagion and stabilised
:06:00. > :06:05.the eurozone within the next 12 months." does anybody buy that?
:06:05. > :06:09.is very likely to be right. The funny thing is, because the
:06:10. > :06:14.situation at the moment is unstable, things will come to a head before
:06:14. > :06:17.the end of this year. Before the end of this year we will know
:06:17. > :06:23.either or and it probably will be the outcome of the eurozone sell-
:06:23. > :06:28.out. There will be loads of crisis. The reality is we will have a
:06:28. > :06:33.single currency area which is not optimum. Jeremy is right, Greece
:06:33. > :06:40.should not have been in it, but neither should have other countries.
:06:40. > :06:43.Now where are we? The question is where is the will? Expelling
:06:43. > :06:48.countries will not get you there. But through the ear the markets
:06:48. > :06:53.will be looking at the debt levels of some of the other countries --
:06:53. > :06:58.three the year. Spain, Portugal in particular. But also worrying about
:06:58. > :07:03.Ireland as well, they also have unsustainable debt levels and
:07:03. > :07:08.austerity packages imposed on them which are simply unworkable. The
:07:08. > :07:14.markets will want to see some solution that includes a pass to
:07:14. > :07:19.including fiscal austerity, but in a sensible way. -- A Path. Greece
:07:19. > :07:23.is relying on that right now. wonders just how divergent the
:07:23. > :07:28.eurozone can become before everybody recognises it is
:07:28. > :07:32.untenable. Looking at the economic statistics over the last couple of
:07:32. > :07:37.days and compare and contrast Germany and Spain. Germany is
:07:37. > :07:43.managing to conquer unemployment, its unemployment levels have gone
:07:43. > :07:48.down, 6.8%. The German economic motion appears to the purring along.
:07:48. > :07:55.In Spain unemployment has gone up to 24% roughly on a seasonal level,
:07:55. > :07:59.and among youths it is 46%. It is unsaleable. The European Monetary
:07:59. > :08:08.Union stands for even more unemployment in the periphery
:08:08. > :08:13.countries -- and tenable. Who is highest first? -- untenable. Does
:08:13. > :08:19.the periphery tire of the austerity? Because the austerity
:08:19. > :08:24.means high unemployment. Or do the markets tire in terms of tying up a
:08:24. > :08:28.blind less debt? What is your answer to that? What is likely to
:08:28. > :08:33.happen over the next six months is that the core economies led by
:08:33. > :08:38.Germany will basically be very hard line. They will want to provide no
:08:38. > :08:42.further help. They will expect the austerity to be borne by the
:08:42. > :08:47.periphery countries. The markets would demand higher rates. The
:08:47. > :08:51.European Central Bank will have to do more. Ultimately if in six or 12
:08:51. > :08:54.months, the peripheral economies still face another year or two
:08:54. > :09:00.years of austerity and high unemployment, they will need to ask
:09:00. > :09:03.themselves if it is a sensible policy. What worries me is where
:09:03. > :09:07.the peripheral country definition stops. We need to define which
:09:07. > :09:12.countries we are talking about. You're talking about half the
:09:13. > :09:17.eurozone right now. At least five countries. If you include Spain and
:09:17. > :09:22.Italy... You could include France, there was a serious loss in
:09:22. > :09:26.confidence. France could come into play. That is why we have started
:09:26. > :09:32.to talk about Greece, the Greek solution is not the issue,
:09:32. > :09:38.expelling them will not solve the problem. Interestingly, if you look
:09:38. > :09:43.at what the reforms have been proposed in Italy are meant to
:09:43. > :09:48.achieve, you could have taken out Greece and put Italy on top of them,
:09:48. > :09:54.in to change them. If you look at Spain, quite a lot of the rules
:09:54. > :09:57.apply there as well -- in to change. We have ended up with countries in
:09:57. > :10:03.the eurozone after ten years being more divergent than when they first
:10:03. > :10:07.entered in. That I think is not a correct description. If we go back
:10:07. > :10:12.five, six, seven years, what we see is we had in a way the worst
:10:12. > :10:16.possible euro crisis without a lot of people noticing. Because six or
:10:16. > :10:21.seven years ago we had the biggest of the eurozone economies, Germany,
:10:21. > :10:27.in a severe crisis. Germany was the sick man of Europe. Germany
:10:27. > :10:33.breached the stability package in 2003. Then Germany went for Labour
:10:33. > :10:38.Party reforms, austerity, after two rough years, Germany emerged as the
:10:38. > :10:43.new powerhouse of Europe. Germany has shown that with a monetary
:10:43. > :10:47.union you can reform your economy. This is exactly what we are now
:10:47. > :10:52.seeing on the eurozone periphery. It is tough but if you persevere
:10:52. > :10:56.and don't overdo it, Greece is a special case, you will be rewarded
:10:57. > :11:01.by a much stronger growth. speak as the chief economist of a
:11:01. > :11:05.private German bank, your assumption seems to be that if only
:11:05. > :11:08.southern Europe and let's face it, many countries in the European
:11:08. > :11:14.Union, maybe including France, if only all of these countries would
:11:14. > :11:22.do as we do, become more German, then the problem would be solved.
:11:22. > :11:26.It is not more German, it is like Margaret Thatcher in the UK, if
:11:26. > :11:30.your labour market is rotten, reform it. What you are seeing now
:11:31. > :11:34.is painful in the eurozone. But in a couple of years the eurozone will
:11:34. > :11:41.have done the hard work, which Britain and the US still has ahead
:11:41. > :11:45.of them. Will it? Looking at youth unemployment in Spain of 45%, you
:11:45. > :11:49.think it is tenable to imagine that they will pile austerity on
:11:49. > :11:55.austerity in the current climate and not end up blaming Germany and
:11:55. > :12:05.blaming the ECB, and saying, "This system does not work in a way that
:12:05. > :12:09.
:12:09. > :12:13.. You need the labour market reform. That is the German experience and
:12:13. > :12:18.that will be the experience of Spain and Italy. We have half the
:12:18. > :12:22.story here. Countries need to have changed but it does mean austerity.
:12:22. > :12:27.We haven't talked about the key issue of growth. There is a
:12:27. > :12:30.complete lack of growth. You can't expect the Greek economy to become
:12:30. > :12:36.like the German, it is nonsense. You need change but the best time
:12:36. > :12:42.to have changed is when you are growing. They can force economies
:12:42. > :12:48.to change when there is no demand. Britain is outside the euro area,
:12:48. > :12:52.we are able to set interest rates and fiscal policy to suit. Greece
:12:52. > :12:57.and the other economies do not have the ability to use their' economic
:12:57. > :13:04.policy tools as shocked observers because they are tied to what the
:13:04. > :13:08.court once. Clearly these economies need to change, and I understand
:13:08. > :13:13.the German perspective, but it is only half the story. You can't
:13:13. > :13:18.force them to continue to squeeze demand. If companies, people and
:13:18. > :13:22.governments are not spending you have deep recession and the risk of
:13:22. > :13:26.depression. Bringing your Greek perspective as well as your
:13:26. > :13:30.perspective from the UK, looking at the politics, is there a danger
:13:30. > :13:40.that in the coming months we could see a rise of a dangerous level of
:13:40. > :13:41.
:13:41. > :13:50.anti-German sentiment to put it 4th there is already evidence the
:13:50. > :13:54.Germans are imposing their few on the rest of the world. As Gerald
:13:54. > :13:59.said, you cannot transform countries overnight. Germany had to
:13:59. > :14:08.do this because they had not done it for a long time by comparison to
:14:08. > :14:14.the UK. Their labour market system was very rigid. It was a noose
:14:14. > :14:18.around the necks of companies. It was lucky it did reforms when the
:14:18. > :14:23.rest of the world was still growing so it could be in a good position
:14:23. > :14:31.when the crisis hit. It is not easy for other countries. But everyone
:14:31. > :14:34.is implementing those reforms, even Greece. They will take longer,
:14:34. > :14:40.because these practices are so ingrained and when you have no
:14:40. > :14:47.growth, politically it is almost impossible. Europe will divide more,
:14:47. > :14:54.because they dislike what is being imposed from the North. A final
:14:54. > :14:59.thought on Europe. In Europe, as you have talked about economic and
:14:59. > :15:07.political challenges, does it end up with a conclusion that for the
:15:07. > :15:10.eurozone to work there must be full integration, fiscal union, one
:15:11. > :15:18.Treasury making all decisions for the entire area, something that
:15:18. > :15:23.even now no politician will talk about. Or do nothing so. Note, the
:15:23. > :15:31.eurozone does not need a common fiscal policy. Kidneys deficit
:15:31. > :15:38.limits and then active Central Bank. That is the major difference. -- it
:15:38. > :15:45.needs deficit limits. The European Central Bank needs to do a lot more.
:15:45. > :15:49.It has done a good job so far. The Germans have not let it to enough.
:15:49. > :15:53.History shows that currency unions of large sovereign nations do not
:15:54. > :15:59.survive unless they become a political union. That is what must
:15:59. > :16:03.happen. If Greece is in danger of leaving, that will make the call
:16:03. > :16:09.more determined to keep the court to get be. But if we are serious
:16:09. > :16:15.about the economics of the core, the core would only be five or Six
:16:15. > :16:20.Nations. The core economies are road be a handful. To keep 17
:16:20. > :16:27.countries in, and accept structural reform, the court needs to put its
:16:27. > :16:32.hand in his pocket and found them. But it does not need a single
:16:32. > :16:41.Treasury. It just needs to allow countries time to reform and help
:16:41. > :16:46.them. It needs a mechanism with enough cash to be able to intervene
:16:46. > :16:51.when things look a bit dodgy in some countries and help the banks.
:16:51. > :16:58.You do not need fiscal union. all have different perspectives,
:16:58. > :17:03.but there is common ground. You all see the next 12 months, the US-
:17:03. > :17:13.owned crisis will remain and present complex challenges. This
:17:13. > :17:20.complex challenges go beyond borders. -- the eurozone crisis. To
:17:20. > :17:24.what extent will the crisis trade down the world economy? It will
:17:24. > :17:33.drag down the world economy in the first half of the year. But we
:17:33. > :17:38.should be positive about the global output. Ahead of the collapse of
:17:38. > :17:44.lemons, the emerging world was better insulated. No-one is
:17:44. > :17:49.separate, but the emerging world is better. There is greater trade and
:17:49. > :17:53.domestic demand in the emerging economies. China and other emerging
:17:53. > :17:58.economies have a lot of room for policy manoeuvre. That is not
:17:58. > :18:03.strictly true. The Chinese have a fundamental problem. Their economy
:18:03. > :18:08.is cooling but their inflation is higher. That cuts down there room
:18:08. > :18:15.for manoeuvre. It is possible to pay Day scenario in which the
:18:15. > :18:20.Chinese economy begins to suffer a hard landing. I certainly agree the
:18:20. > :18:30.Chinese economy will be calling in the first half of this year. High
:18:30. > :18:35.energy prices have forced them to tighten policy. India have
:18:35. > :18:45.persistent inflation, cutting their room for manoeuvre. The Parisian
:18:45. > :18:53.grave threat is down to 3.5% which is poor by their standards. -- the
:18:53. > :19:00.Brazilian growth rate. In the West, the fundamentals are not good,
:19:00. > :19:07.policy is Paul. Across the emerging world, the fundamentals are pretty
:19:07. > :19:11.good, the policy covered is very full, fiscal policy gives room to
:19:11. > :19:17.manoeuvre and confidence is good. But bottom line, if Europe, the
:19:17. > :19:24.richest trading bloc, is not buying staff, who are these emerging
:19:24. > :19:32.economies going to sell to? They can sell to the regions. Japan is
:19:32. > :19:38.doing reasonably well. Japan's economy is stuck. No, it is sort of
:19:38. > :19:44.recovering. A lot of trade takes place within Asia. It is not all
:19:44. > :19:50.dependent on us. We do export to those countries. We do still have,
:19:50. > :20:00.even though they are slowing down, the brick countries. We have eight
:20:00. > :20:00.
:20:00. > :20:06.to speed world economy. -- BRIC. Higher commodity and while prices
:20:06. > :20:10.have been one reason for the slowdown in the emerging economies.
:20:10. > :20:15.This will slow down recovery prospects in the West. That is a
:20:15. > :20:22.very serious issue that people have not taken into account. Everybody
:20:22. > :20:29.looks at all prices. They appear to be more inclined to go higher than
:20:29. > :20:34.Lower. But forecasts differ on this. It brings us back to politics, this
:20:34. > :20:39.time on a global level. Christine Lagarde has been on this show
:20:39. > :20:44.several times. In her New Year message she spoke of an escalating
:20:44. > :20:50.crisis for the entire world and said it can only be truly addressed
:20:50. > :20:54.if countries and regions all work together. If one thinks of trade
:20:54. > :21:00.policy and the massive imbalances, if one thinks of the strategic
:21:00. > :21:06.agreement on stimulating growth across the world, we do not see
:21:06. > :21:10.real co-ordination and co-operation. Do you believe it is possible?
:21:10. > :21:17.do not to seek -- need to see global co-ordination. The world is
:21:17. > :21:25.full of risk and Europe going wrong is the biggest risk. But so far it
:21:25. > :21:31.has not materialise. Risk on that scale induces fear and stops people
:21:31. > :21:39.investing. This is truly problematic. When the eurozone
:21:39. > :21:44.crisis escalated late last year, the US economy speeded up a bit. In
:21:45. > :21:49.China, now that inflation is more under control, the authorities are
:21:49. > :21:55.moving towards renewed stimulus. There is a lot of good news out
:21:55. > :22:00.there in the world economy. So far in Europe it has gone sort of wrong,
:22:00. > :22:04.but not disastrously. Chances are that eventually even in Europe
:22:04. > :22:09.where we need policy co-ordination, policy makers will get it under
:22:09. > :22:14.control and then the world economy will have a surprisingly good years.
:22:14. > :22:20.That is the most half full rather than half empty analysis I have
:22:20. > :22:26.ever heard. Had a decade ago the size of the world economy was 32
:22:26. > :22:33.trillion dollars. Ten years later it doubled in size. Since this
:22:33. > :22:37.crisis began the world economy has grown by 14% in four years. Some of
:22:37. > :22:43.that is inflation but most is strong growth from emerging
:22:44. > :22:52.economies. We have seen a shift in economic power from the West to the
:22:52. > :22:56.East. And to Africa as well, where growth rates are stunning? Asian-
:22:56. > :23:02.African trade is very high. Economy is in the West can do well. Those
:23:02. > :23:10.that do well will be those with the cash, commodities or creativity.
:23:10. > :23:16.America will bounce back quicker than Europe. A fund manager of the
:23:16. > :23:23.massive pain co-funded in the United States said he feels worried
:23:23. > :23:30.Anstead every day, not just as a fund manager, but as a father of a
:23:30. > :23:34.daughter, and the world she will inherit stop trade policy makers in
:23:34. > :23:42.the West can respond to that. We must embrace change and believe the
:23:42. > :23:48.fundamental outlook is positive. There will beefier in the short-
:23:48. > :23:54.term because of uncertainty. But the little girl will be richer than