"Europe must make it clear that it is standing alongside Greece"Interview with Joseph Stiglitz, Nobel Prize in Economics
Published in La Tribune, February 12, 2010
The winner of the Nobel Prize in Economics, who has just published Freefall: America, Free Markets, and the Sinking of the World Economy,* is pessimistic about the ability of the G20 to reform capitalism.
After the bail-outs of the banks, has the time now come for bail-outs of governments?
It is the very same financiers whose institutions were rescued last year by governments that are today speculating against Greece. And yet their situations are not comparable. The banks were on the brink of bankruptcy after having taken on excessive liabilities. The governments, such as Greece or Spain, are simply the victims of speculative attacks. Between 2003 and 2007, the financial markets were irrationally optimistic in imagining that destitute American households would repay their enormous mortgage loans—the famous subprime mortgages. Today they are irrationally pessimistic in wagering that Greece will not be able to repay its debt. They are the ones that are creating the problem by pushing the cost of financing the Greek debt to absurdly high levels.
What should the European Union do?
The large Union countries must explain to the markets that they are standing alongside Greece and will come to its rescue if necessary. If they are convincing, the situation will quickly return to normal and they will not have to pay out a single euro.
What does it mean to stand alongside countries under speculative attack?
In the short term, it means restoring confidence to the markets by guaranteeing that the countries under attack will not default on their debt. The European Union must also finance policies that will foster growth in countries forced to implement austerity plans. The European Investment Bank (EIB), for example, could finance infrastructure projects. Europe must also develop a solidarity framework to come to the aid of countries in temporary difficulties.
You criticized the management of the Asian crisis by the International Monetary Fund (IMF) in the late 1990s. How has the Fund managed the current crisis?
Much better than the previous one! We were lucky that Dominique Strauss-Kahn, who was not constrained by past policies, was head of the IMF at the time the crisis broke out. The IMF recommended that the large countries implement recovery policies, whereas during the crisis in the emerging countries in the late 1990s it had demanded the implementation of austerity policies. The people of Asia are furious and condemn the hypocrisy of the rich countries.
What progress has been made with the reform of capitalism promised by the G20?
Nothing has changed. There has been an intense debate for a year and a half about what should be changed, but I am very pessimistic about the end result. The situation in the United States is even worse than it was before the crisis. Accounting regulations are even more opaque and the banking sector is even more concentrated, which means that the large banks will be even more tempted to take excessive risks.
Interview by Xavier Harel
* J. Stiglitz, Freefall: America, Free Markets, and the Sinking of the World Economy, W.W. Norton & Company, 2010.