De Grauwe: Euro area in ‘deep trouble’

Interesting interview with Paul De Grauwe

He spoke to Bloomberg Surveillance about the situation in Cyprus specifically and in the euro zone more generally. A partial transcript is below. 

De Grauwe On whether the European Union could fall apart right now:

“Not necessarily the European Union, but the euro zone, yes, which is part of the European Union is in really deep trouble. So many big mistakes have been made, and now the fragility of this whole system has been exacerbated. And there is a prospect that Cyprus will get out, yes.”

On how Cyprus has completely upset the geopolitics of the developed world:

“Well, I guess the main reason is ineptitude of the policymakers. They allowed this crisis, which is a serious one, no doubt, to degenerate into a systemic crisis. But it is not the first time. We have seen the same thing with Greece, right? Greece is also not a very big country, a little bigger than Cyprus, and the same thing happened there. So in the case of Cyprus now, things could have been solved, but then European leaders insisted that deposit holders should also pay. Now, it sounds like a good idea in order to avoid that the German taxpayers have to pay. But if you do that you should tell the profit holders you are going to pay. Then, of course, you trigger possible reactions of panic elsewhere, and that has not been taken into account when decisions were made.”

On what policy advice he would give the prime minister of Cyprus:

“Well, he has to make up his mind because, I think at the moment, up till recently, he was pursuing objectives that could not be square. I mean, on the one hand, he wanted to maintain a business model that involves essentially Mafia money being deposited in Cyprus, and that was a source of revenues for the Cypriot economy. And at the same time, he wanted to make sure that the deposit holders, the smaller deposit holders could maintain their money. And he couldn’t really decide what to do.”

“So I think what he should do now is to realize that the banks are broke, that some resolution is necessary, that deposit holders that have more than EUR100,000 deposits should pay because this was not ensured, and these are the Russians, right? And he should use – shoot for revenues that, if they are likely to come from gas and oil, to create future revenues and in such a way try to get a total package.”

On how Russia fits into the equation:

“At this moment, it is the main supplier of gas to western Europe and, clearly, if Russia can get a hold on the gas in Cyprus or in the sea around Cyprus, it would just increase its near monopoly the supply of gas. So certainly, Western Europe should make sure that it doesn’t happen, and western Europe and the euro zone have the financial clout to do so and should.”

On whether he’d recommend that Angela Merkel should negotiate directly with Vladimir Putin and Dmitry Medvedev over the crisis in Cyprus:

“Well, I’m not sure that would be a good strategy. I think she should just go ahead instead of being defensive. She should go out to Cyprus, together with the rest of the euro zone, and make a deal and say we are going to set up an investment fund with you and the future proceeds of that will be part of the total package. But we should certainly avoid that the Russians take a hold. I don’t think she has to go to Putin personally to do that.”

On what he wants to see from the European elite to start turning around the Cyprus disaster:

“Well, surely we should be willing to fund it out. I mean, of course, there have been stupidities in Cyprus, but refusing to help them out would make things even worse. So we should set aside our concerns that taxpayers in Germany and the other countries are not – do not like this. We should, at some moment, if we are in a union, right, you have to help each other out. If you don’t want to do that, you shouldn’t be in the union.”

On whether we’re any closer to a shared sacrifice in Europe:

“No, not at all. We are farther away than ever. So one of the other problems that we face in Europe is that each time, in a particular country, banks are in trouble, the sovereign, the governments of that country, are also in trouble. And so the whole idea was to have a banking union so that we could cut this right, between the sovereign and the banks. And initiatives were taken last year to do that, but now we see the first time that, with a banking crisis, still the others are not willing to share in the cost.”

On whether we are in a currency war:

“I think we are not yet in a real currency war. In the 1930s, you could say, yes, there was a real devaluation. Every country was devaluing and we all had to react. And I think we are quite far from this and I’m a little bit relaxed about this. Some countries, of course, are like the U.S., but there is also Japan now, more recently, has used a monetary weapon to bring down the currency. I’m not saying that there may not be a problem if everybody starts doing this. But up to now, I think the affect has been relatively limited.”

On Ben Bernanke’s performance:

“Well, I think he has done a good job. I mean certainly, if he had not done so, he had not taken the risk – because he took a risk in applying these unconventional measures and massive increase in liquidity – the U.S. economy would not be where it is now. It probably would be more like the United Kingdom or maybe even the euro zone countries. So in that sense, I would say, yes, he did a good job.”


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