continuing from part 1 of the Willem Buiter interview with het Financieele Dagblad, here’s the translation. It’s a very good interview. I will have reactions at a later date.
Population pyramid on its head
"There needs to be a political rethink, not only in Spain but also in the periphery and throughout Europe. But there’s a big problem because our population pyramid is upside down.This means that the elderly outvote the young. It is not enough to reduce spending and increase taxes. A vote must be given to the generation that risks ending up on the scrap heap. I am worried — both as an economist and the father of two children. Don’t just look to the central bank and finance ministries. Look at social affairs and economic affairs and the political system. There must be reforms before you can solve economic problems."
"Of course. There is wrangling over increasing the retirement age to 66. Actually it has to go up to 70. Spain has a gun to its head – then things will go faster and further. Here to reforms are necessary. Necessity is the mother of invention, but in the Netherlands the situation is not yet pressing enough, but that time will probably come. No doubt about it."
Crisis is not a meteorite
"Basically that is much more important. Ultimately the political and social forces determine the options for reform. Positive shocks like Thursday have little meaning, but they remind us that we have opportunities to solve problems. The crisis is not a meteorite that must inevitably strike. There are self-inflicted wounds. Once we stop cutting our own wrists, the picture will improve. This will not happen quickly. We have taken several decades to get into these problems. If we’re lucky, it will take years just to get out."
"We must do it because these reforms are the only buffer between us and renewed panic in the markets. The panic in countries like Spain, Italy and also France, Belgium and Austria can precipitate the threat of default. I expect they will intervene late and in size. They are stuck at an ideological impasse. They need the excuse of disorderly markets which are ripping monetary policy apart. It’s nonsense, but that’s what they need because of that mysterious thing that Draghi called "the spirit of the treaty". What is that? Something like Christmas spirit? It means nothing to me. It is Weimar-phobia that is paralyzing the ECB and leads them to fight with one hand tied behind their back. So far the ECB has fought as well as it can. It will eventually be enough, but it will take a lot longer before interest rates fall."
European Court
"It’s a Stability and Growth Pact on steroids. It is only important because it brings the ECB onside. The ECB needs reassurance that this crisis will not happen again. The chance that this pact will be stronger than the previous one is limited. It is not even clear whether the European Commission can drag countries to the European Court. This means that countries must approve themselves. I have been in court a few times and there are few instances in which the suspect himself decides the sentence."
"We do not need a federal Europe or Eurobonds. The unification of fiscal policy we need is minimal. National sovereignty over national debt and budgets should be reduced if necessary. That decision is more important than this fiscal agreement. You will also need the ability to detach the banking sector from national governments. An insolvent banking sector and an insolvent government’s put each other in a death grip. That can be solved by taking banks out of national hands. All banks must be European companies, with a European regulator, European resolution authority and a European deposit guarantee scheme. The only dimension that requires national budgetary apportioning is a recapitalization fund of €400 billion to €500 billion. In such a system one can have a strong bank in a weak country and stop cross-contamination. Now you only have a weak bank in a weak country, because a bank is only as strong as the country itself."
"Nonsense. The euro is an excellent idea. It still needs some tinkering, but a common currency is necessary for the efficient integration of financial markets that Europe wants. The notion that each euro country would get better with the reintroduction of a sovereign currency is bad economics, apart from the idea that a country can devalue itself into prosperity. Then, Zimbabwe would be the richest country in the world."