Germany is like an insurance company that doesn’t want to pay after an accident," said Robert Johnson, ED, Institute for New Economic Thinking. When Germany joined Europe they were supportive of Europe but......
Germany is like an insurance company that doesn’t want to pay after an accident," said Robert Johnson, ED, Institute for New Economic Thinking. When Germany joined Europe they were supportive of Europe but now are trying to get off the hook, he added.
Johnson feels that Germany should stop protecting French banks. "One needs to acknowledge that this sovereign debt crisis is unnecessary and has turned into a banking crisis. Restructuring banks and stop protecting banks is the most important policy change that could take place," he added.
He further said rise in Italian interest rates suggests there could be contagion of the size of Lehman Brothers or beyond throughout the world.
Citing his views about US he said though the US economy is quite beaten down but it doesn't seem to be on the the cusp of a collapse. "The US economy will muddle along between negative 1% growth and positive 2% growth."
Below is the edited transcript of Johnson's interview with CNBC-TV18. Also watch the accompanying videos.
Q: The markets want a short-term resolution to the debt crisis but what about the medium-term, the healthier option resolution? Germany in some sense has got it right when it shows so much hesitation in wanting to give more and more money to Greece and other peripheral countries that are suffering the sovereign debt problem because ultimately that solution is only going to add to the problem of too much indebtedness.
A: I tend to disagree with that perspective. When they joined Europe, they said that they were supportive of Europe and they are like an insurance company that doesn’t want to pay after an accident. Now they are trying to get off the hook.
The Germans made a pledge to Europe they are already members and the idea that they are backing away is creating tremendous problems. I believe Greece is basically in default and does need to restructure their debt, but the Germans are not getting it right. The Germans are making it much worse than it needs to be.
Q: What would you prefer the Germans did? Would you prefer that they wholeheartedly backed ECB intervention in the bond market or they backed a substantial expansion of the EFSF beyond the approval that it currently seems to have at the 450 billion Euro level. So maybe take it all the way to a trillion Euros, is that the firepower Europe need? Is that what you hope Germany would do?
A: No. I hope Germany would stop protecting their banks and French banks. Portugal, Ireland and Greece should definitely restructure their debts and obligations. The banks should take a loss and the governments should recapitalise over the EFSF or European community or the countries themselves should recapitalise banks. One needs to acknowledge that this sovereign debt crisis is unnecessary and has turned into a banking crisis. Restructuring banks and stop protecting banks is the most important policy change that could take place.
Q: Many people believe that maybe there is no way to avoid a Greece default but there are good chances that its consequences could be even beyond what happened when Lehman failed a few years ago. What do you think the consequences are going to be? How damaging will it be not just to the financial system in Europe but financials across the world?
A: Greece which is no larger than the State of Nevada in the United States if defaults will set a president that shows the dysfunction of the European system. People will become more suspicious of Portugal, Spain and particularly Italy. The rise in Italian interest rates suggests that we could see a contagion of the size of Lehman Brothers or beyond throughout the world.
Our international banks are very, very poorly regulated. They are not transparent and none of us have any way of knowing about it due to derivatives instruments like credit default swaps. Who bears the loss? So it’s like a musical chairs game where somebody turned the music off but nobody knows who is going to have what chair. As a result the entire world’s financial system can freeze up.
Q: In what period of time do you expect this restructuring to take place? Do you believe that this is a medium-term solution and we can continue to push the can down the road for at least about a next one year whilst all these measures are put in place for instance to be recapitalise banks and then allow a Greek default to take place or do you believe that no matter what we wish a Greek default is likely to happen much much faster?
A: I believe that a Greek default will happen much faster. I am not predicting that the process will produce restructuring I am saying that’s the policy which would be best and healthiest for Europe and the world economy.
Q: It seems to me that Germany and France will willy-nilly have to pay for all the misdeeds of the peripheral countries. What is that going to mean for Europe over the course of this decade?
A: German and French banks made lots of loans. German and French people bought lots of properties in those peripheral countries. German and French companies sold lots of goods in all of those countries. This is not about profligacy in the south and holiness or prudence in the north. That is a very wrong way to interpret what’s happened.
The Germans are huge beneficiaries and now that there is an accident they are trying to export the burden of adjustment onto the peripheral economies. Greece itself was excessive. But the European system evolved emanating from the core of Northern and Southern Europe. It was a dance that they did together.
Q: The problems in US while they seem smaller compared to Europe are not small by any other means. What do you make of the economic data seen more recently? Do you believe the US will be able to avoid a second recession?
A: There is an old saying, once burnt twice shy. The Lehman Brothers crisis scared people to death in the United States and now the biggest fear emanates from Europe. The United States economy is quite beaten down but I don’t think that it’s on the cusp of a collapse.
The US economy will muddle along between negative 1% growth and positive 2% growth. It will be very unsatisfying in terms of employment growth. The biggest danger to the US economy is the reckless behaviour that’s taking place on Capitol Hill. There they want to do preemptive cuts as if the United States was in the same problem as Greece. The United States has no where near the fiscal difficulties associated with Greece.
The problem the United States has fiscally is that we pay way too much for healthcare. When the baby boom ages and becomes senior citizens we have a demographic bulge in the cost of healthcare, medicare and medicaid and that’s still 15 years away. The United States is caught in a hysteria which is really about the Republic Party trying to strangle the economy so that Barack Obama loses his reelection.....back
Johnson feels that Germany should stop protecting French banks. "One needs to acknowledge that this sovereign debt crisis is unnecessary and has turned into a banking crisis. Restructuring banks and stop protecting banks is the most important policy change that could take place," he added.
He further said rise in Italian interest rates suggests there could be contagion of the size of Lehman Brothers or beyond throughout the world.
Citing his views about US he said though the US economy is quite beaten down but it doesn't seem to be on the the cusp of a collapse. "The US economy will muddle along between negative 1% growth and positive 2% growth."
Below is the edited transcript of Johnson's interview with CNBC-TV18. Also watch the accompanying videos.
Q: The markets want a short-term resolution to the debt crisis but what about the medium-term, the healthier option resolution? Germany in some sense has got it right when it shows so much hesitation in wanting to give more and more money to Greece and other peripheral countries that are suffering the sovereign debt problem because ultimately that solution is only going to add to the problem of too much indebtedness.
A: I tend to disagree with that perspective. When they joined Europe, they said that they were supportive of Europe and they are like an insurance company that doesn’t want to pay after an accident. Now they are trying to get off the hook.
The Germans made a pledge to Europe they are already members and the idea that they are backing away is creating tremendous problems. I believe Greece is basically in default and does need to restructure their debt, but the Germans are not getting it right. The Germans are making it much worse than it needs to be.
Q: What would you prefer the Germans did? Would you prefer that they wholeheartedly backed ECB intervention in the bond market or they backed a substantial expansion of the EFSF beyond the approval that it currently seems to have at the 450 billion Euro level. So maybe take it all the way to a trillion Euros, is that the firepower Europe need? Is that what you hope Germany would do?
A: No. I hope Germany would stop protecting their banks and French banks. Portugal, Ireland and Greece should definitely restructure their debts and obligations. The banks should take a loss and the governments should recapitalise over the EFSF or European community or the countries themselves should recapitalise banks. One needs to acknowledge that this sovereign debt crisis is unnecessary and has turned into a banking crisis. Restructuring banks and stop protecting banks is the most important policy change that could take place.
Q: Many people believe that maybe there is no way to avoid a Greece default but there are good chances that its consequences could be even beyond what happened when Lehman failed a few years ago. What do you think the consequences are going to be? How damaging will it be not just to the financial system in Europe but financials across the world?
A: Greece which is no larger than the State of Nevada in the United States if defaults will set a president that shows the dysfunction of the European system. People will become more suspicious of Portugal, Spain and particularly Italy. The rise in Italian interest rates suggests that we could see a contagion of the size of Lehman Brothers or beyond throughout the world.
Our international banks are very, very poorly regulated. They are not transparent and none of us have any way of knowing about it due to derivatives instruments like credit default swaps. Who bears the loss? So it’s like a musical chairs game where somebody turned the music off but nobody knows who is going to have what chair. As a result the entire world’s financial system can freeze up.
Q: In what period of time do you expect this restructuring to take place? Do you believe that this is a medium-term solution and we can continue to push the can down the road for at least about a next one year whilst all these measures are put in place for instance to be recapitalise banks and then allow a Greek default to take place or do you believe that no matter what we wish a Greek default is likely to happen much much faster?
A: I believe that a Greek default will happen much faster. I am not predicting that the process will produce restructuring I am saying that’s the policy which would be best and healthiest for Europe and the world economy.
Q: It seems to me that Germany and France will willy-nilly have to pay for all the misdeeds of the peripheral countries. What is that going to mean for Europe over the course of this decade?
A: German and French banks made lots of loans. German and French people bought lots of properties in those peripheral countries. German and French companies sold lots of goods in all of those countries. This is not about profligacy in the south and holiness or prudence in the north. That is a very wrong way to interpret what’s happened.
The Germans are huge beneficiaries and now that there is an accident they are trying to export the burden of adjustment onto the peripheral economies. Greece itself was excessive. But the European system evolved emanating from the core of Northern and Southern Europe. It was a dance that they did together.
Q: The problems in US while they seem smaller compared to Europe are not small by any other means. What do you make of the economic data seen more recently? Do you believe the US will be able to avoid a second recession?
A: There is an old saying, once burnt twice shy. The Lehman Brothers crisis scared people to death in the United States and now the biggest fear emanates from Europe. The United States economy is quite beaten down but I don’t think that it’s on the cusp of a collapse.
The US economy will muddle along between negative 1% growth and positive 2% growth. It will be very unsatisfying in terms of employment growth. The biggest danger to the US economy is the reckless behaviour that’s taking place on Capitol Hill. There they want to do preemptive cuts as if the United States was in the same problem as Greece. The United States has no where near the fiscal difficulties associated with Greece.
The problem the United States has fiscally is that we pay way too much for healthcare. When the baby boom ages and becomes senior citizens we have a demographic bulge in the cost of healthcare, medicare and medicaid and that’s still 15 years away. The United States is caught in a hysteria which is really about the Republic Party trying to strangle the economy so that Barack Obama loses his reelection.....back