Stephanie Flanders: As an economist, you had always pointed to some of these flaws in the
project, things that might go wrong. Is that all coming true? And do you see the same lessons
as Gabor in terms of needing to have political integration to make this --
>>Joseph Stiglitz: That's where you began with this, the view that the -- there needed
to be more political integration to make the Euro work. That was very clear.
And many American commentators on the Euro at the time said, optimistically, this was
an unfinished project, and there will be a crisis sometime down the line. And the hope
was when that crisis occurred, there would be an effective response.
I think the general sense is, there hasn't. One of the reasons that there hasn't is that
there are two very different conceptions of what went wrong. And I think this discussion
has brought that out very clearly. And I'll just say my -- I think David's totally
right. And it echoes much of what I saw when I was the chief economist at the World Bank
and saw the bailouts in East Asia, Argentina, Latin America, and so forth. And there were
two ways of describing those bailouts. One of them was they were a bailout of Mexico
or a bailout of Argentina. The other one is, they were a bailout of Citibank. They were
a bailout of American western banks. And the true description from an economic point of
view is very clear, and even from a political point of view. They were a bailout of the
lenders. They were a bailout of the big banks who had not done their job in lending.
You talked about the word sinners, you used. But every loan has a lender and a borrower.
And the person who is supposed to be more informed about the criteria of lending should
be the guy who manages risk, which is the bank. And these are the guys that consistently
did a bad job. Now, partly, it's understandable. They were
very politically connected. They were in the White House. They were in every government.
And so they knew when they lent badly their friends in the White House would bail them
out. And they were perfectly correct. I was in the -- at the Council of Economic Advisors
when the first of these began in the Mexican bailout. I said, "Why are we bailing out American
lenders? Why do we use the name 'Mexican bailout'? It's not a bailout of Mexico."
So that seems to me, the way you frame this is absolutely critical. Then you ask the question,
let's go back and think about what are the economic frameworks that are that are going
to be necessary to make the European project work, Euro work.
And the basic idea here was very simple. You have taken away two important instruments
of adjustment: Interest rate and exchange rate.
And you haven't really put anything in its place.
As an example, just to give you one of the ironies here, the crisis, the worst manifestation
of the crisis was Iceland. I don't know if you remember the joke, what was the difference
between Iceland and Ireland? >>David McWilliams: Thank you very much.
>>Joseph Stiglitz: Anyway, the point was, Iceland had a much worse crisis. But now they're
doing pretty well. Not great, but pretty well, because they had a flexible exchange rate
and they restructured their debt. What's happened in Europe is they've not allowed
it to restructure the debt. They've bailed out German banks, in effect. And they've kept
the countries -- put the burden on Ireland and Greece and the other countries, which
is beyond their ability to pay. It will happen. I mean, I think it almost inevitably will
happen. Unless there is a real, real commitment of a European project. And I don't see that
on the way. Let me explain what I mean by that.
Japan has a 200% -- more than 200% debt/GDP ratio. It's not a problem, at least right
now. If interest rates are 2% and 1%, a 200% debt/GDP ratio means you have to pay 2, 3%
of GDP to service debt, and countries can do that.
So if there were a real commitment to have the European project succeed, interest rates
would be low, the countries could repay, and there's no bailout. It's just making sure
they can repay. On the other hand, if you start trying to make profits off of the members
of the Europe family, which is what most -- the German and other governments are doing, quite
proud about the fact, we lent money to Greece at 5% or 6%, and we borrowed at only 1 or
2%. We just -- look, we made several hundred million dollars out of profits from our, quote,
neighbors. You know, this is a nice family relationship here. You're making -- So if
you're going to charge 6% and you have a debt/GDP ratio of 150%, that's 9% of GDP, it will go
down the drain and there will be restructuring, and they'll have to pick up -- the Germans
will have to pick up the cost of restructuring the German banks, because there will be that
kind of restructuring. And there should be. So it's really a political decision which
of these alternatives Europe wants to go. Does it want to really help -- does it really
believe in European solidarity? Or does it want to have a restructuring?