‘Budget cuts for Europe like pouring gas on fire’
Weisbrot is co-director of the Center for Economic and Policy Research in Washington D.C.
RT: Christine Lagarde said that the highest risk is another crisis in Europe. Do you think that is coming?
Mark Weisbrot: That is exactly right. There aren’t any big risks to the global economy other than what the Europeans are doing to themselves. And that is really what it is. It is a self-inflicted recession they are in right now. If the recession continues to deepen and, more importantly, if these governments do what they are being instructed to do by the European authorities – that would be the European Central Bank (ECB), the European Commission and the IMF. If they actually tighten their budgets further, cut spending further, they are going to go deeper into recession and then we do not know what happens.
That is what Christine Lagarde is worried about. In Spain, which is the biggest trouble spot right now because investors are selling their bonds and driving up the interest rate on 10-year bonds to dangerous levels – that’s the real fear right now, that’s what happened in Portugal, Ireland and Greece. The interest rates there got to a certain level, they can’t borrow sustainably on private markets anymore, then they have to go to the European authorities for money and then there may be debt restructure, bank losses – all the things that happened with Greece but on a much bigger scale – that’s what they are really worried about.
I don’t think this is necessarily going to happen, but the problem is that the European authorities are pushing them in that direction. Spain is supposed to make spending cuts this year or budget tightening of about 2.6 per cent of GDP. That is big. They have 25 per cent unemployment already, 45 per cent youth unemployment, the economy is shrinking, and here the authorities are doing the opposite of what almost any other government of the world would do. We did not do that here. We would never do that here. Our political system would not allow it. But because the Spanish don’t have control over the European authorities, they are being forced to do something that is really worsening their economy.”
RT: So, what is their alternative?
MW: It depends. There are two ways of looking for an alternative. One is if the European authorities co-operate and in that case to find an alternative is very easy: the ECB can actually just buy the Spanish bonds and push the interest rate down to a reasonable level so that it does not explode, so their debt does not explode, and keep it there. And they need to spend very much to do that, and they can create the money so there is no burden on the European tax payer. That’s the easiest solution. Now, if they won’t do that, and they insist on making Spain worse, then Spain really has to consider leaving the euro – that’s the only alternative for them.
RT: You think the European countries are not co-operating?
MW: No, they are insisting on these budget cuts. This is just pouring gasoline on a fire.
RT: The fact that they are contributing to the IMF, the fact that they are trying to bail out countries in the eurozone, like we see they did in Greece, that does not show co-operation and the fact that they are to help Spain right now?
MW: That kind of help I really would not wish on my worst enemies. Sure, they are putting together this fund, but they are attaching conditions to all the lending. And it is the conditions that are driving Europe further into recession and increasing the risk that you get a full-blown financial crisis like you had after Lehman Brothers collapsed. That risk has gone down since last December when it was really hard. And that is because the European Central Bank started loaning a lot of money – over a trillion US dollars they pumped into the private banking system and the private banking system used some of that to buy the European bonds.
But that is not enough. They have to really make sure that those interest rates on Spanish and Italian bonds, because those are the ones that are too big to fail – their debt five times the size of other countries-they have to guarantee their interest rates do not keep rising. Because that would set off panic. Once Spain’s interest rate reaches a certain level, they are not going to be able to borrow on private markets. And what is upsetting the whole financial situation right now is that some investors think that they are already close to that level or are at that level now.
RT: The G20 promised to boost the IFM lending resources with over $430 billion. Yet the IMF steering committee said that these new resources will not be used for a particular region. Do you think this is their response to the concerns that this money will be used to bail out the eurozone?
MW: I think it is clear that the reason they are asking for new resources is for Europe. They would have enough if it was for the other countries. It is only Europe where the big money goes – I mean the debts of Spain and Italy are enormous and that is what they are worried about. Even if there were only Portugal and Ireland and Greece, they wouldn’t really be that worried. It is really Spain and Italy – that’s what the money is for and any talk to the contrary is just talk.
RT: The rest of Europe is also contributing to this boost. They pledged $150 billion.
MW: Their approach is fundamentally wrong. They don’t have to do it. They can do what the Federal Reserve did in the US: our Federal Reserve has created over $2 trillion since 2008 – they have the ability, they can do this too – they have a Central Bank, they can create euro and they can do what the Fed did here – they can lower interest rates and even guarantee a certain interest rate on the Spanish-Italian bonds and that would put an end to this threat of a severe crisis.
RT: What about the BRICS powers? Those rising powers versus the voting rights at the IMF and the whole debate that took place at the spring meetings?
MW: These institutions have been controlled by the US since 1946. And it has not changed much at all. Some people think the Europeans control the IMF because they get to appoint a European, but that is not true. The US has the veto over the European head of the IMF, and they still have the dominant voice at the IMF. And Europe is the junior partner. That’s changed a little bit in recent years because now more than 60 per cent of the IMF loans are in Europe and the US Treasury Department would defer to Europe for matters that are focused on Europe. But in the rest of the world, in all the developing world where the IMF still makes loans it is US-decided. So, they control both: the IMF and the World Bank, which is two out of the three international institution that have any power. The third one is the Security Council. And there they have the veto as well. This is the world after World War II. And global governance has not changed. That is one of the reasons why they created the G20. But it is still the G7 making all the decisions – and mainly the G1 here in Washington – because that is who has power in these institutions of international governance that actually have power.
RT: You do not see that changing? Not only when it comes to voting rights, but the policies of these international organizations – the IMF and the World Bank.
MW: There is change. It is a slow change. The bigger changes are taking place outside of them. In other words, the IMF does not have a fraction of the power that it had even in 2007, or 2003. In 2007 it already lost most of its power in the developing countries. It was one of the biggest changes in the whole international financial system. And the media did not really pay a lot of attention to it but the US exercised influence through the IMF. But now you see the middle-income countries do not borrow from the IMF anymore. Russia, the Asian middle-income countries, the ones that got burnt by the IMF in the Asian financial crisis, they all got away from the IMF as fast as they could and are never going back. The same stays true for almost the whole of Latin America. And that is what is changing. The world is changing very rapidly. It is these institutions that are not changing rapidly. They are changing very, very slowly.
RT: You don’t see the BRICS becoming a fully-fledged negotiating bloc?
MW: Well, they are. But they are not negotiating very hard. From their own interest, they shouldn’t really contribute to what is going on in Europe. These countries are a lot poorer than Europe. They all have a fraction of the income that Europe has. For them to bail out Europe makes no sense at all. Europe can bail itself out, this is the richest economic region in the world. And they have a Central Bank and they can take care of themselves. The US took care of itself. Why can’t the Europeans?