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