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State of the Global Economy

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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

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twilight zone. So far too big to fix, far too big to fail. Its

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members desperately papering over the cracks. The problem is the

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travails of the world's richest economic bloc threatened to

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destabilise an already fragile global economy. My three guests

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today are all leading analysts of the European and international

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:00:48.:01:13.

picture. How long will the world be Vicky Pryce, and your colleagues,

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welcome. The collective wisdom of economists seems to be that the

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eurozone will not survive the next 12 months in its current form. Do

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you share that view? There is a possibility something will happen

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with Greece but I think the political will is there to ensure

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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

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think Greece is probably going to default. The haircut that has been

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taken by the bankers, in other words the losses they will have to

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bear, could be almost 100%? write-off? Absolutely. Can it do

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that and stay in the eurozone? It is not a very big country. I

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admit quite a few civilians there would need to be written off up the

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cost of letting Greece go in terms of the wider implications are so

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great. Because the markets would immediately try and destabilise

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Italy, Spain, Portugal, Ireland and so on and possibly some of the

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other countries like France. terms of full disclosure, we should

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say that you live Greek, but have lived in Britain a long time. --

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that you are native Greek. eurozone cannot survive in its

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current format. Good politics is not always good economics, good

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economics is always good politics. Instead of being driven and set up

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:03:12.:03:12.

on economic criteria, the European policy is all about politics. We

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have a mismatch in a whole host of countries that are not similar to

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one another trying to remain in the system. Vicky touched on the fact

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that we should not underestimate the political commitment to keep

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the prospect together. But the politicians within Europe should

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not underestimate the economic pain the austerity that is going to be

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endured, not just increase but in Portugal, Spain and Italy. -- in

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Greece. I want to get your view on this idea that Greece could default,

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and then despite what Vicky just said, be removed from the eurozone,

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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

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gotten rid of and the other southern Europeans be protected?

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First, the eurozone will survive. Second, Greece is a serious risk.

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There is a significant risk that Greece will have to leave the

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eurozone because the other European countries may decide to no longer

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provide further funds to Greece. That is the risks, it is not likely

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but it is a risk. Greece leading the eurozone would be a major

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political. Having said that, the biggest potential risk from Greece

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was always the risk of contagion to Italy, Spain and France. As we have

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already now got contagion for Italy and Spain, the risk emanating from

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Greece has actually shrunk considerably. The eurozone would

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survive the departure of Greece. I think it won't happen but if the

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test was made, the eurozone would survive. You say we already have

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contagion but it could get worse if Greece leaving lead to another

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severe loss of confidence in, for example, the sovereign debt of

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Italy, Spain or Portugal. Yes, it could. Having said that we already

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know what would have to be done. The European Central Bank is not

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ready yet to support Italy and Spain, wholeheartedly, but they do

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know if the test were to be made they would have to do that and

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they're very likely would do it. In that sense it would probably be a

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one-off serious crisis followed by a serious response from the ECB and

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then the eurozone would get over it. There are accusations that some

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political leaders in Europe are still deeply complacent about how

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serious the place is that we are in right now. I am thinking of your

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compatriot, the finance minister of Germany, who said over the new year,

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"We will have banished to the dangers of contagion and stabilised

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the eurozone within the next 12 months." does anybody buy that?

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is very likely to be right. The funny thing is, because the

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situation at the moment is unstable, things will come to a head before

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the end of this year. Before the end of this year we will know

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either or and it probably will be the outcome of the eurozone sell-

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out. There will be loads of crisis. The reality is we will have a

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single currency area which is not optimum. Jeremy is right, Greece

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should not have been in it, but neither should have other countries.

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Now where are we? The question is where is the will? Expelling

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countries will not get you there. But through the ear the markets

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will be looking at the debt levels of some of the other countries --

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three the year. Spain, Portugal in particular. But also worrying about

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Ireland as well, they also have unsustainable debt levels and

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austerity packages imposed on them which are simply unworkable. The

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markets will want to see some solution that includes a pass to

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including fiscal austerity, but in a sensible way. -- A Path. Greece

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is relying on that right now. wonders just how divergent the

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eurozone can become before everybody recognises it is

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untenable. Looking at the economic statistics over the last couple of

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days and compare and contrast Germany and Spain. Germany is

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managing to conquer unemployment, its unemployment levels have gone

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down, 6.8%. The German economic motion appears to the purring along.

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In Spain unemployment has gone up to 24% roughly on a seasonal level,

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and among youths it is 46%. It is unsaleable. The European Monetary

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Union stands for even more unemployment in the periphery

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countries -- and tenable. Who is highest first? -- untenable. Does

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the periphery tire of the austerity? Because the austerity

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means high unemployment. Or do the markets tire in terms of tying up a

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blind less debt? What is your answer to that? What is likely to

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happen over the next six months is that the core economies led by

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Germany will basically be very hard line. They will want to provide no

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further help. They will expect the austerity to be borne by the

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periphery countries. The markets would demand higher rates. The

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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

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themselves if it is a sensible policy. What worries me is where

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the peripheral country definition stops. We need to define which

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countries we are talking about. You're talking about half the

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eurozone right now. At least five countries. If you include Spain and

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Italy... You could include France, there was a serious loss in

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confidence. France could come into play. That is why we have started

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to talk about Greece, the Greek solution is not the issue,

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expelling them will not solve the problem. Interestingly, if you look

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at what the reforms have been proposed in Italy are meant to

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achieve, you could have taken out Greece and put Italy on top of them,

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in to change them. If you look at Spain, quite a lot of the rules

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apply there as well -- in to change. We have ended up with countries in

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the eurozone after ten years being more divergent than when they first

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entered in. That I think is not a correct description. If we go back

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five, six, seven years, what we see is we had in a way the worst

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possible euro crisis without a lot of people noticing. Because six or

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seven years ago we had the biggest of the eurozone economies, Germany,

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in a severe crisis. Germany was the sick man of Europe. Germany

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breached the stability package in 2003. Then Germany went for Labour

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Party reforms, austerity, after two rough years, Germany emerged as the

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new powerhouse of Europe. Germany has shown that with a monetary

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union you can reform your economy. This is exactly what we are now

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seeing on the eurozone periphery. It is tough but if you persevere

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and don't overdo it, Greece is a special case, you will be rewarded

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by a much stronger growth. speak as the chief economist of a

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private German bank, your assumption seems to be that if only

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southern Europe and let's face it, many countries in the European

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Union, maybe including France, if only all of these countries would

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do as we do, become more German, then the problem would be solved.

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It is not more German, it is like Margaret Thatcher in the UK, if

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your labour market is rotten, reform it. What you are seeing now

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is painful in the eurozone. But in a couple of years the eurozone will

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have done the hard work, which Britain and the US still has ahead

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of them. Will it? Looking at youth unemployment in Spain of 45%, you

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think it is tenable to imagine that they will pile austerity on

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austerity in the current climate and not end up blaming Germany and

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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

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that will be the experience of Spain and Italy. We have half the

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story here. Countries need to have changed but it does mean austerity.

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We haven't talked about the key issue of growth. There is a

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complete lack of growth. You can't expect the Greek economy to become

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like the German, it is nonsense. You need change but the best time

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to have changed is when you are growing. They can force economies

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to change when there is no demand. Britain is outside the euro area,

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we are able to set interest rates and fiscal policy to suit. Greece

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and the other economies do not have the ability to use their' economic

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policy tools as shocked observers because they are tied to what the

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court once. Clearly these economies need to change, and I understand

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the German perspective, but it is only half the story. You can't

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force them to continue to squeeze demand. If companies, people and

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governments are not spending you have deep recession and the risk of

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depression. Bringing your Greek perspective as well as your

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perspective from the UK, looking at the politics, is there a danger

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that in the coming months we could see a rise of a dangerous level of

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:13:40.:13:41.

anti-German sentiment to put it 4th there is already evidence the

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Germans are imposing their few on the rest of the world. As Gerald

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said, you cannot transform countries overnight. Germany had to

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do this because they had not done it for a long time by comparison to

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the UK. Their labour market system was very rigid. It was a noose

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around the necks of companies. It was lucky it did reforms when the

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rest of the world was still growing so it could be in a good position

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when the crisis hit. It is not easy for other countries. But everyone

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is implementing those reforms, even Greece. They will take longer,

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because these practices are so ingrained and when you have no

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growth, politically it is almost impossible. Europe will divide more,

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because they dislike what is being imposed from the North. A final

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thought on Europe. In Europe, as you have talked about economic and

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political challenges, does it end up with a conclusion that for the

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eurozone to work there must be full integration, fiscal union, one

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Treasury making all decisions for the entire area, something that

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even now no politician will talk about. Or do nothing so. Note, the

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eurozone does not need a common fiscal policy. Kidneys deficit

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limits and then active Central Bank. That is the major difference. -- it

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needs deficit limits. The European Central Bank needs to do a lot more.

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It has done a good job so far. The Germans have not let it to enough.

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History shows that currency unions of large sovereign nations do not

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survive unless they become a political union. That is what must

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happen. If Greece is in danger of leaving, that will make the call

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more determined to keep the court to get be. But if we are serious

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about the economics of the core, the core would only be five or Six

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Nations. The core economies are road be a handful. To keep 17

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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

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Treasury. It just needs to allow countries time to reform and help

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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.

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You do not need fiscal union. all have different perspectives,

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but there is common ground. You all see the next 12 months, the US-

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owned crisis will remain and present complex challenges. This

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complex challenges go beyond borders. -- the eurozone crisis. To

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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

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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

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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

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where we need policy co-ordination, policy makers will get it under

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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.

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