Estonia also got trounced along with ireland, and had 19% unemployment: so they again slashed corporate taxes, cut gov't, etc. and now are uptrending. Russia has drill baby drilled their way fully out of an economic chasm (while obama's gonzalez' EPA refuses to issue Gulf permits), now with a $50 billion surplus as they move to dominate Europe's gas sector.
If the world's currency were not the US Dollar, our standard of living would decline 25% as they came back to us, worth far less.
ATTENTION: Bloomberg's Matthew Lynn On The ECB Presidency And The Eurozone Crisis
By Benzinga Staff
March 07, 2011 12:51 PM
Tags: euro, Benzinga Podcast, BLOOMBERG NEWS, Matthew Lynn
Posted in: Movers & Shakers, Life
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I'm Matthew Boesler. Joining me on the line now from London is Matthew Lynn, Bloomberg News columnist and author of the new book Bust: Greece, the Euro, and the Sovereign Debt Crisis.
How are you doing today, Matthew?
Matthew Lynn: I'm good thanks. How are you?
Good. Now, your latest column: "Madman Is Wanted to Fill Europe's Job from Hell," and right away you say, "You would have to be bordering on insanity to accept the role of European Central Bank president when Jean Claude Trichet steps down in October this year." What is so bad about being the second most important central banker in the world right now?
Matthew Lynn: Well, you put it like that, and it doesn't sound so bad. It's an important job; it comes with a quite good salary you get a nice office, and you probably get a chauffeur-driven car and expenses and all that kind of thing.
I think the problem of it is that the job is impossible. What you're going to be asked to do is basically undoable. The crisis in the eurozone--people have been talking about this for about a year or so--it's gotten a bit quieter in the last two or three months but at an underlying level, it hasn't been fixed.
It's actually getting worse, because the basic problem is that the economies--the seventeen economies in the single currency--were supposed to converge; they were supposed to get more and more similar as a result of having the same money. It's just not happening; they're actually getting further apart.
So you see Germany, for example, still doing very well, growing strongly. Someone like Greece is still stuck in deep, deep recession. They're contracting at six percent a year now on the latest figures. So the actual imbalances within the system are getting worse all the time and that means that the crisis is getting worse, even though you may not be hearing quite so much just at the moment.
Right, and we're seeing the sort of two-track growth in the eurozone right now that you're referring to, with the core of Germany, France, Austria, the Netherlands, Belgium--they're all doing quite well in terms of growth. Then, of course, on the periphery you have Ireland and Greece in recession, and Spain and Portugal certainly walking that fine line. What are the implications going forward in terms of widening imbalances and their effect on greater fiscal and economic coordination within the eurozone?
Matthew Lynn: The simple answer is that it makes it much, much harder because the imbalances are kind of the core of the problem. You have big differences in growth between the eurozone countries and it translates into big trade deficits and trade surpluses. You have big surpluses in Germany, you have big deficits in places like Spain, and they have to be recycled through the banking system. It might come out through government borrowing, it might be personal borrowing. It might be borrowing by property developers in the case of Ireland, but somehow the money has to be recycled through the system for the cause of these imbalances and the way these economies grow. That just creates another debt crisis, so on an underlying level, the problems just keep getting worse and worse.
To come back to my point about being the new ECB president--you're the guy, you're going to sit there, and they're going to shout at you, "fix that! Get that sorted," but there isn't really any way to sort it; it's a dysfunctional system.
Then, there are other problems coming down the track. You've got differential inflation rates because the German economy is booming. Germany now has an exchange rate because of the euro that's significantly too low as opposed to if they still had the deutsche mark. Because Germany's doing so well at the moment, you'd have a steady rise in the deutsche mark and investors would be trying to get into that currency, trying to get into the German economy, and it would be gearing up.
But that doesn't happen, so instead you're now getting inflation in Germany well above the ECB's two-percent target rate. Some are saying it's going to be up to four percent or so by early next year. That's really a high level of inflation for Germany. The Germans absolutely hate inflation for all kinds of historical reasons.
But can you put up interest rates? Try to control that when you have an economy like Greece that's contracting at six percent per year. You can't come along to an economy that's contracting at that kind of rate--that's 1930s levels of contraction--and that start putting up interest rates. It's a catastrophic thing to have to do, and that's why it's the job from hell.
Right, and we see reports out of Germany indicating the highest level of inflation they've seen there in two years. Will the ECB be forced to raise interest rates eventually this year? What will it mean when they do for those peripheral countries?
Matthew Lynn: You really don't need to be John Maynard Keynes to figure out that it's not going to be great for places like Ireland and Greece, which is still in deep recession, for places like Spain and Portugal, which are really suffering under huge levels of accumulated debt. At the same time, the core of the eurozone is Germany, and they've got really quite significant inflation. Monetary policy with one-percent interest rates is almost certainly too low for where Germany, France, and the Netherlands are at the moment.
So again, it all comes back to this imbalances question, and the convergence. These economies were meant to converge, and that was the theory of the euro when they launched the thing. The idea was that it would make these economies work in a more similar way, so you would have similar growth rates and similar inflation throughout the eurozone, which means it would be ok.
Running the ECB would be like running the Bank of England here in London, or running the Fed over in Washington. Obviously there are differences in the United States economy according to whereabouts in the country you go. It's a big place. But it's roughly the same; the inflation rate on the east coast is roughly the same as the inflation rate on the west coast, and the Fed can look at that and make decisions accordingly.
The problem for the person running the ECB in Frankfurt is that these inflation rates and the economic conditions are just nothing like each other. You have economies like Greece where you have to have very low interest rates for an incredibly long period of time, and other places like Germany where you need to put interest rates up. Again, they're going to shout at you, "Fix that! Do that, do something about that, solve that problem," but there isn't really a solution to that problem.
You also note that with all these problems coming down the pipe in the eurozone, the next president of the ECB will probably be presiding over a situation where ECB independence will be compromised. How do you see that unfolding?
Matthew Lynn: I think it's going to be very hard to maintain independence.
Legally, the way it's set up, the president of the ECB is supposed to be independent of political interference, much the same way as the Fed is in the United States and other central banks around the world. I think it's going to be difficult to maintain that, because a huge amount of political capital has been invested in creating a single currency by a whole generation of political leaders in Europe. They desperately want this thing to survive.
I think the reality of it is that it probably won't, but they haven't reached that point in the logic of the argument yet. So, they're going to do everything they can think of to try and keep the show on the road, and if that means sacrificing the independence of the bank, that's what they'll do. If they need to print a lot of euros to keep the banking system afloat, they'll do it. If they need to let inflation rip for a while because the peripheral countries can't handle a rise in interest rates, they'll do it.
The pressure to keep the thing afloat is so great that I think it's just impossible that the independence of the bank will survive. We've seen bits of that already. The leading German candidate for the job--and it was supposed to be a German who got the job this time around--was Axel Weber from the Bundesbank, and he didn't like what the ECB was already doing.
It's not supposed to print money; it's not supposed to do quantitative easing in the way that the Fed does in the U.S. or the Bank of England here in the U.K. But it's kind of doing it by the back door when it goes out and buys bonds, buys debt in the market. You need a fairly technical economist to try and explain why that's not printing money--sure looks like printing money.
So, in some ways, independence has already been pretty compromised, and I think that will just happen more and more as the crisis gets worse.
You mentioned Axel Weber, president of the Bundesbank, and he was widely considered to be the frontrunner for the position of president of the ECB when Jean Claude Trichet steps down. He announced that he was not going to be looking to fill that post, and in addition, he was going to be stepping down a year early from the Bundesbank. What is your read on that situation?
Matthew Lynn: My read is that he just didn't want to do it. He's a pretty straight character. He's very much steeped in that sort of Bundesbank tradition, and the Bundesbank is kind of a funny institution.
I think it's difficult for people in England and people in America and in other countries to understand the relationship of the ordinary German to the Bundesbank. We're not that bothered by our central banks; we don't really think about them very much. But in Germany, it's different because the Bundesbank was created directly after World War Two, and the whole country was in crisis. Post-war Germany has been a very successful country; it's done extremely well, it's been peaceful. The whole post-war experience has been much better for Germany, and they kind of associate that with the Bundesbank, much more than any other institution. So it has this kind of very special place in German culture and in the German national psyche.
I think Axel Weber saw himself as very much a part of that, and as I was saying a few moments ago, they thought the ECB would be like the Bundesbank, that's what they wanted it to be. It's not working out that way. It's not turning out to be the old Bundesbank we created; it looks a lot more like the Bank of Italy, and that's not what the Germans want.
He didn't want to run the ECB in those circumstances; he made the decision that was something he didn't want to do. I can sympathize with him; I think he probably made the right call.
So, that's the first candidate to walk away with it, and it was a shame because that's what they need at the moment; they need a central banker of substance. It's hard to see who they're going to get--they're discussing various options like the Finnish central banker, Erkki Liikanen, but it's a big step up from running the Finnish central bank. That's really a tiny little country to go to running the central bank for all of Europe--second most important central banker in the world, as you said in your intro.
Now, let's look to the Middle East for a moment. We have a situation in Libya; we have a situation unfolding in the Gulf. Oil prices are obviously reacting to this news and they're shooting upwards. What is the impact of sustained high oil prices on some of these peripheral countries that not only rely heavily on Libyan oil but also are facing fragile economic recoveries right now? Will that hasten the problems in the eurozone?
Matthew Lynn: Yeah, almost certainly. The last thing the eurozone needs at the moment, really, is any kind of external headwinds. You need a very favorable global economic environment to pull through what is a difficult time. So yeah, anything that makes the global economy more difficult is bad news.
And also in Ireland, we have elections for a new parliament. The people are obviously upset with the banking system and the way that all went down. A new party's going to come into power and they're looking to renegotiate the terms of the IMF and ECB bailouts they've received. Do you think they will be successful in that?
Matthew Lynn: I think they can negotiate and I think they should. It was a fairly bad deal that they got--it wasn't really much of a rescue package.
I think the Irish elections are a very interesting stage in this process. This is the first time we've had an election in a peripheral country that had to be bailed out. Fianna Fail is going to be pretty much wiped out in these elections. They've been the dominant party in Ireland ever since independence in the 1920s. It's been in power for four out of every five years since Ireland became an independent country. It's just going to get obliterated in these elections; I think they have 15 percent in the polls. It's going to send a worrying message to political leaders in the rest of the eurozone that support the euro.
The single currency takes a lot of damage on the economy and so it also inflicts a lot of political damage. Whoever the incumbent is when you have to impose the kind of medicine that the single currency requires just gets hammered in the polls.
You're seeing it all over Europe--I'm just writing a piece about it next week actually--in Germany the Christian Democrats got hammered in regional elections; in Hamburg, they had their worst result they've seen in that region since the second world war. Sarkozy doesn't look like he's going to get reelected in France next year--he's way behind in the polls. Silvio Berlusconi has all kinds of problems that we know about in Italy. He's going to go on trial later this year; his grip on power is very weak. The Greek Socialist Party is imposing austerity in Greece as part of the bailout package and is in terrible trouble in the polls. So I think politicians aren't stupid; they respond to incentives and they know what gets you elected and what gets you hammered. And they don't like getting hammered in the polls.
So I think people going to see this, and this is yet another problem for the single currency--whoever supports the medicine that's prescribe for the euro, which is austerity in the peripheral countries or bailout packages in France and Germany, the big countries, voters don't like it. And whoever happens to be in power when it gets done gets kicked out, and it's a big disincentive to pushing through any more of these programs.
Just to go back to the top ECB post, what do you think of Mario Draghi? What is your opinion of him in that role?
Matthew Lynn: He's obviously the favorite. In and of himself, he's a good candidate. He's got a good track record, he's done a good job at the Bank of Italy. I think the problem is Germany. The problem is that he's an Italian.
Effectively, the euro now rests on the willingness of the German taxpayer to carry on subsidizing these bailouts. For the next few years, that's really the key to it because Germany is the big surplus country and it's the only country with the resources to really bail out the rest of the system. The ordinary German doesn't really like the idea of an Italian running their central bank; they associate that with Italy--with weak government, high inflation, and weak monetary policy. It's going to be a very high-risk thing for him to do. It's unfair to him personally, but life is unfair.
It won't be the most unfair thing that's ever happened in the history of the world if he doesn't get the job because of his nationality. So I think if you put an Italian in that job, it's going to be very difficult for him and it's going to come at a very bad moment in the job and in public opinion.
Matthew Lynn, Bloomberg News columnist and author of the new book Bust: Greece, the Euro, and the Sovereign Debt Crisis. Matthew, thank you for coming on today.
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