Adam Posen - Bank of England policy maker HARDtalk


Adam Posen - Bank of England policy maker

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unconditional talks. Now on BBC News it's time for HARDtalk.

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Serious questions are being asked about the competence of economic

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policy makers in the Western world. In the face of unsustainable debt,

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dwindling growth, rising unemployment and a banking crisis,

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have the responses been adequate to the challenge? My guest, Adam Posen,

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is about to retire as one of the independent members of the Bank of

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England's Monetary Policy Committee. Why is managing the world's richest

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economies proving so difficult? Adam Posen, welcome to HARDtalk.

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Thank you. You have spent three years in London advising the Bank

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of England. During those three years we have seen an anaemic

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economy in the UK and we have seen a double-dip recession. Are you

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leaving with a sense of great disappointment? Sadness that we

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were not able to do better. It was more about trying to make sure we

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understood things correctly. The Bank of England did what we could.

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Was the Monetary Policy Committee, was it consistently behind the

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curve? That is what it has looked like to outsiders. Every Central

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Bank and every economic policy maker was behind the curve in 2008.

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I did not get there until September, 2009. We caught up very quickly. We

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did great things. I did push for harder, more aggressive stimulus

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policies starting in late 2010. It took a while for the rest of the

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committee to go down that road map. That is where they were behind the

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curve. -- that route. It seems to me there is a fundamental problem.

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That is, growth forecasts, inflation forecasts, the gritty

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data you rely on has been consistently wrong over the last 3-

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4 years. It has been worse on the growth than the inflation. The

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inflation forecasts we have got our Bayern -- broadly right. The growth

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forecasts have been disappointing. People in the UK underestimated how

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much of a drag austerity was going to be. I have said that from a long

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time ago. Obviously, the eurozone is getting worse and worse and has

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been a big part of that. He has said you were battling against

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others inside the Monetary Policy Committee on the issue, in

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particular on how much to loosen monetary policy and quantitative

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easing. Pouring new money into buying government debt. You were on

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the site of listening it dramatically and indulging in

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quantitative easing. Others opposed you. Would have it made a

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difference if you won the argument earlier? I do not think they are

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posed me. They were worried about things that were not legitimate.

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Like inflation expectations getting out of control. Wages going up too

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fast. Credibility problems. All of which proved to be nonsense.

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they didn't. Inflation went up to 5%. When you get buffeted by the

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storms, you do not move the fundamental instruments. The Bank

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of England delivered what it was supposed to on inflation. Would it

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have made a difference if we moved earlier? I think it would have. I

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think investment would have been higher. In particular, I like to

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think that consumption would have been higher over the last couple of

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years. You have flip-flopped on this in recent times. You were an

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art advocate of quantitative easing. �370 billion, in April you had

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declare enough had been done. Then in May you call for it again.

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seem confused. It is made driving down this road, am I go in to take

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this exit or not? I think I'm almost there, I will take the next

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one. It does not fill me with confidence that you as a policy-

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maker no way you are going. We are in uncharted territory. This is

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going down the road in uncharted territory. I got within one exit of

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getting it right. This isn't me going down the A4 to Heathrow.

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Without stretching the metaphor too far, what sort of place is the UK

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economy in right now? How much extra stimulus does it need? The

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IMF looked at what you and your colleagues have been doing recently,

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the advice he offered, they said Britain probably needs more

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aggressive monetary policies. Think about lowering interest rates.

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Talking about whether to lower interest rates and quantitative

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easing, there is not a big distinction between them. What

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happened was, I do not think flip- flopped is quite fair. Where I let

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the data speak, we thought productivity was going to get

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better ones we saw the private sector kept hiring. There is no way

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that recession-hit businesses are going to keep adding employees.

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There was reason to think we were not in a disaster. A lot of reports

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are coming out saying we are not in the double-dip recession, we are

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not in the tight contraction we had in 2008 and 2009. Things are still

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unsatisfactory, but the UK economy, it is in a state of poor growth,

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stagnation, we could be doing better with the potential we have

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got. In terms of wider Europe, we are relatively lucky. The

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unemployment rate is nowhere near as high as it is in Spain or

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Portugal. It is still bad. Youth unemployment is particularly bad.

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Yet, the government points to the fact that jobs are being created in

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large numbers. How can that square with the fact that we are

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technically in recession? Jobs are being created. That is why some of

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us want to look past the technically in recession. Let's

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focus on the big picture story. Mervyn King has also emphasised

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this. We are not growing as fast as you normally would when coming out

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of the recession. We are not in complete contraction because

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private sector is adding jobs. On net. Youth unemployment is a real

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problem as Alastair Darling just read about there is a call for

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bipartisan ship on this. That is the one place where the UK labour

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market is not healthy. Compare it to the US, Spain or Portugal,

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participation rates in the US have come down. The UK market is working

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well. The Federal Reserve in the country you know best has a remit

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which is not just about keeping prices stable, but maximising

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employment. The Bank of England does not have that remit. It is

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only fixated on controlling inflation. Is that wrong? If you

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read the remit carefully, it is given to us by Parliament and

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confirmed by government. We are to keep inflation over the medium term

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and to say in a way that is consistent with a stable growing

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economy. We should not be shooting off like we did in the 70s. Doing

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everything possible to pump up the economy through short-term measures.

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We wanted to make sure the economy did not deflate... Not long ago you

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said, the Bank of England should have bands and anguished religious

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ethic over just filed intervention. -- justified. It is not a problem

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with the mandate. The problem the Bank of England had, the Bank of

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decide what assets the bank and buy the stock what intervention, the

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form of the intervention. -- the bank can buy. Myself and other

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members of the committee have suggested we should be buying other

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things. That was the key way I feel we did not live up. Bundles of

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private sector debt. Security debt. Special bonds being issued to

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finance construction or infrastructure. The creative thing

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that the Bank of England came out with is a step in that direction. I

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would want the bank to do more to go around the banking system rather

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than working with the current banking system. What about setting

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up a public bank specifically to lend to small and medium-sized

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enterprises which summed it all have admitted as the best way to

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getting money? -- some people. 2010 and 2011 I gave two speeches

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getting that issue onto the agenda. It has not been delivered. When you

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say some people. Is that why you are leaving? You are frustrated.

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I'm leaving because I came to the in a job

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in Washington at the Institute I used to work out. It was a job I

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could not refuse. There is a political context to this. We talk

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about monetary policy. That is what your committee does. You have to

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consider the wider economic context, which takes in fiscal policy, tax

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and spend issues. You have been working for the Bank of England in

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a country where the government is committed to an austerity programme.

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Which I suspect you believe has in some ways been damaging, am I

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right? I believe the short-term effects of the economy, what we

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have seen in the last couple of years was predictable. It made

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unemployment higher than it would have been. Consumption lower than

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it would have been. It interfered with public investment. It is for

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elected officials to decide what are the balances and risks. This

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government won a majority on this ballot. They were very clear this

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was what they were going to do. There are big ticket items that the

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Bank of England should not be deciding. There was this idea in

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2010, if we do not do something we might end up like Grace.

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appreciate the modesty. Mervyn King said in 2010, when the coalition

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was being formed, he chose to give what can only be described as

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backing to George Osborne's idea of eliminating the structural deficit

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in the UK within the lifetime of a single parliament. He said, I am

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very pleased there is a clear and binding commitment to accelerate

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the reduction in the deficit. said on record before the Treasury

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Select Committee in November 2010, I opposed to making that statement

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internally. I have been on record since the early 2000s, the central

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banks have no business, -- commenting on fiscal policy. I do

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not think unelected official should be doing it. The last 2.5 years you

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have had to advise and work closely with this guy who you believe made

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a fundamental and strategic error. We all have to work with different

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kinds of people. Mervyn King is a true public servant. He is trying

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to do the right thing for the economy. On that particular issue I

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disagree. A huge issue. Do you think it is time for Mervyn King to

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go? His term ends in less than one year. He will be succeeded by

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someone else. He is the party will be no bad thing? The Governor has

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been a true public seven for the bank and has done a lot of good

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things. He has been very brave on a lot of issues and he has given me

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and other members of the committee room to disagree with him. I am not

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going to get into that. I'm not going to evaluate his job. In that

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instance, I happen to disagree with him. I do nothing unelected

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officials should be speaking around It seems there is always,

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particularly right now, a debate within top economists about whether

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the current situation proves that in essence, King was right and the

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government has to pump the economy. Somebody has to do it and it has to

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be the government. Or, those who say absolutely not, at a time when

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I get is the insurmountable problem, piling new deck is a mistake. The

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private sector will deliver. have had the evidence on their side

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and it has turned out to be right, those that follow King. They have

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not won the argument because it was not all evidence base. Interest

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rates will stay low when there is a lack of private sector demand. The

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wages will stay low, the Government's I go in to not be held

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under threat by a bond government. And they're fee for what to do with

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their money. When you withdraw all add fiscal... All those things were

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proving to be right by King. And by recent experience in the UK and

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when I wait in Japan. You know... I do not know why... Except in a

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Europe with the sovereign debt crisis upon a sovereign debt crisis.

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You argue that you build up more dead. It is not a desperate effort,

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it is a necessary effort because we are in desperate situations. It is

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why you spend it on. As a different economists have said, 20 economise,

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none of whom have said we should do constructive public sector

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investment, you should not cut investment because what you spend

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it on and at what price. As interest rates are more -- lowered

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it does not make any sense to sit on the money. These arguments go

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far beyond the UK. Talking about the euro's on, mauve and King, the

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Governor of the Bank of England, has always said the greatest threat

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to the UK economy is the crisis in the eurozone getting worse and the

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prospect of a possible break-up, do you agree? I agree that if it will

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get worse, it will overwhelm the UK economy in ways we cannot do much

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about. You know Germany very well, when you look at the argument

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raging in Germany about whether to front up and guarantee the debts of

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the very weak Sovereign's around the southern periphery of a Europe,

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do you believe that in the end, for political and constitutional

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reasons, there is going to be we constituting of the euro, for

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example Greece leaving Europe? is in Germany's interests, its

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commercial and economic interest not just its idealistic injures, to

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restructure the debt. This is a mere -- mirror image of one Germany

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went through after World War One. For Germany to take the heat.

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Germany's lenders who made the mistake of lending to all these

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countries. They had to get the money from somewhere. It was a

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German government decision and Austrian banks and Dutch fans who

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lent the money to all these countries and they lend the money

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to countries and companies so they could buy German exports. Germany

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has been running, just as some prime lenders in the US, they had

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been running a scheme in the Rhone pingers. You want to restructure

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the debt. You can not make it all under borrow. Somehow it has to be

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more has an allowance. But at the Economist magazine ran a cover the

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other day, suggesting Angela Merkel is reaching a point of decision

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where she may look at the balance of the equation, when it comes to

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his campaign, and decide it is less long-term risk to supervise a

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break-up of the eurozone than continue down the path. That will

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be a ill-advised move. It is pure political pandering to pretend

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otherwise. The currency would should through the roof, the trade

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relations would be disrupted, the banks will be on the Ballard least.

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You would reinforce that incentives. You would reinforce and narrative

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in Germany that makes no sense that it was morally light and -- right

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to pay dud mack... There is democracy as well as economics. As

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long as the people are prepared to take the pain, that is not viable.

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All the pain they are going to get... If they did a proper debt

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restructuring, they would get some losses in the banking system but

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that would be it. Trade, export would go on, the losses would be

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slower, the would-be political stability, the currency would not

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decreasing at, the banks would dud mack maybe you're right but frankly,

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Germans may not believe. Just one final question on Europe, the boss

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of the European Central Bank has said all summer that the ECB will

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do whatever it takes to ensure stabilisation and stability in the

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euro's on. His back trouble? I wish they would get on with it -- is

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that incredible? I wish they would get on with it. I do not think the

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ECB has any business sang very risks to the eurozone bullet in our

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response until we see the fiscal measures we like. In Italy, there

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are shutdowns in the bond market. They are undermining the eurozone

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and the world economy. On your political point, it is not about

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economics. Angela Merkel is free. She is an elected official. She has

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every right to say she will not bail out those countries. But from

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the economics, it would be a self- inflicted wounds. I would hope she

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would explain the true to the people rather than pander to them.

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You are going home to the US to run an influential economic think tank.

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Do you have any confidence they are in better hands than in Europe?

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much. When you look at the election, considering that Mitt Romney is

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taking on Paul Ryan as his running mate who envisages the most

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swingeing cut to the Federal Budget and activity in the next decade, is

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there now that clear-cut government which will be the centrepiece of

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the election? That is my optimistic take. I am hoping that by me

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running decided to make Brian his running mate, we will have a debate

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-- Paul Ryan. Things will have to come out in public. When you talk

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about cuts, one of the things that has happened, since Paul Ryan has

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been nominated, is we have had some stuff about about his numbers and

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make the economic advisers looking in out to make his numbers were. We

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need to make sure the numbers work. It could be a good election. Some

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senior Democrats including the core author of the plant to get rid of

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the deficit, has praise Paul Ryan who he says has a sensible Budget

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plan. I do not want to praise politician one way or another. I do

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know that on the numbers, the current plans as examined by the

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