If Europe were an integrated and truly centralized entity, the public debt problem we witness in Greece, Spain and Italy would have been solved automatically insists American economist and Nobel laureate Eric Maskin, in an exclusive interview to RT.
RT: If two, three, even four years ago someone had said the euro would be facing a crisis of this nature, people would probably have laughed in their face. Do you think scholars missed something or is it just that the model of world economy is running low and it’s out of battery? Is it unable to deliver growth?
Eric Maskin: I don’t think this crisis was missed… Many prominent economists pointed out at the founding of the monetary union at the beginning of the last decade that there was a serious asymmetry between the way monetary policy and fiscal policy were being handled. That monetary policy was centralized in the European Central Bank, and that fiscal policy was not centralized. That in the long run this asymmetry was not sustainable. So it was not a big surprise that the problems that asymmetry generated actually came to reality a couple of years ago.
RT: Greece’s public finance is practically paralyzed. How much worse can the cash crunch actually get?
EM: We don’t know the answer to that… I suspect that in the near future they can hobble through to the election (on June 17) but things could deteriorate and get even worse in the meantime.
I see the Greek situation as a tragedy because so much of what has happened could have been prevented. If Europe were truly an integrated entity, if the same steps have been taken on the fiscal slide, that is the public spending and tax side as we’ve taken 10 years ago on the monetary side – there would be true fiscal integration and centralization (in Europe). The public debt problem that we see in Greece, Spain and Italy would have been solved automatically by centralized Europe.
RT: According to reports, 3 billion euro in cash was withdrawn from Greek banks since last election in May, that’s nearly 2 per cent of all cash Greek banks hold, how sustainable is that?
EM: Clearly such transfers cannot go on indefinitely without being a banking collapse. Again, that is a failure of Europe. Look at what happened in the US a few years ago during the financial crisis. The federal government stepped in and bailed the banks out, partially nationalized them. Europe could have taken similar steps in Greece – and did not do so.
RT: Spanish Bankia has requested the biggest fail out in the Spanish banking history. Have the Spanish banks caught the flu already?
EM: Sure, Spain has some problems, too, whether not nearly a serious trouble as Greece. Still it is bad and the austerity program there has only made things worse.
RT: How much the financial power do national and the EU authorities have to support Spain and countries there in similar situation, like Italy, for example?
EM: If they wanted to exercise more power at the level of the Union – they could do it. There are lots of things that could be done to ease the fiscal problem in Spain and Portugal. One good idea that has been proposed and I hope will be adopted at some point is the idea of Eurobonds – to translate private or national debts into European debts.
RT: How does a country (Greece) leave the current currency (euro)?
EM: They (Greece) have either go back to drachma or adopt the dollar or some other currency. These things have happened before. Countries changed currencies. It is very rarely a smooth transition, and it is not expected to be smooth in this case.
It could be very bad for Greece, get very much worse economically. Greece could go into a long-term depression. Unemployment could grow into astronomical heights. Things are by no means currently as bad as they could get.
RT: Where do you think Greece will be in one year's time?
EM: It depends on politics… At this point, given what has happened, it is more likely than not that Greece will leave the Union. The signs seem to be pointing in that direction.
RT: Is dollar a safe place at this moment, because America itself has huge debts and the government’s debt excesses the US GDP?
EM: The dollar has always been a safe haven at times of economic uncertainty and I think it will continue to be a safe haven for many years to come. Yes, there is a debt problem in the US in the sense that the debt to GDP ratio is higher than it normally is. If you extrapolate the current situation going forward, it looks as though the debt-to-GDP ratio will actually continue to increase.
RT: So, you don't look at it like a crisis?
EM: I look at it as a fixable problem and not the problem that needs to be solved immediately, by any means. A much more important problem in the US is to get economy back to normal, and only then to worry about solving the long-term debt problem
RT:What about the rating agencies? How much have they contributed to worsening the crisis?
EM: They do not have so much power anymore. They did play a role several tears ago… in making the sub-prime mortgage problem in the US worse by overstating the safety of investing in some sub-prime mortgages. By now we’ve learnt to take what the rating agencies say with less seriousness.
I don’t think they have nearly the power that they had a few years ago.
RT: But you think they have contributed to worsen in the crisis a little?
EM: Sure, a little bit. Last summer there was an artificial debt ceiling in the US. This led to downgrading the US debt from AAA to AA. That didn’t do serious damage in the long run, but it certainly was not a positive step.