VIDEO INTERVIEW with Christopher Pissarides, Nobel Prize Winner: The gap between Germany and the rest of Europe is dangerous. EU needs stronger central bank supervision and closer fiscal coordination
Present at the VI Astana Economic Forum, Christopher Pissarides, winner of the Nobel Prize in economics, offered an interview to caleaeuropeana.ro. The main topics discussed were the global economy, China’s and Europe’s role in it, Italy’s And Cyprus’ difficult situation and the solutions he thinks would get Europe out of the crisis.
Christopher Pissarides thinks that the EU institutions are not efficient and pleas for stronger central bank supervision and closer fiscal coordination, asking the governments to add vision to their decisions.
Q: We saw this morning that the Tokyo stock market fell down and even the European markets were affected because of China. (disappointing Chinese manufacturing data and signals that the U.S. Federal Reserve may cut bond purchases sent the Japanese market into full retreat, dragging down global stocks) What’s going on? There was no exit strategy for getting out so that it would not expand.
Christopher Pissarides: The main point is that there is alot of uncertainty in the world economy, still. The main reason for the uncertainty is Europe, I think the Europeans problems have not been solved yet. People are looking towards US to provide leadership to the emergent markets like China. And then, the slight negative news about recovering the expansion coming out those countries causes all this volatility in stock markets. I think this will continue until there is a new international order. We are still relying on the IMF too much, I think, even to what it can do and Europe doesn’t seem to have the political will to solve our problems so that small changes in the area of growth of China do not affect international stock markets.
Q: Do not affect?
Christopher Pissarides: if we sort out our problems within Europe, then, I think it will not affect international stock markets because the United Stated are on their way to recovery, which I believe will be robust. There shouldn’t be such a big reaction to what Bernanke said (US Federal Reserve chairman, Ben Bernanke). The main problem remains Europe. We are relying too much on Chinese growth in the world economy, which is dangerous to rely on a single country, especially on one that is growing for so long.
Q: So Europe should be more independent?
Christopher Pissarides: Yes, it should solve its own problems.
Q: Do you agree with the point of which states that there is not a debt problem, but a political one?
Christopher Pissarides: Yes, I think that is a symptom the political problems that we have in Europe, in the absence of having enough institutions that are needed to make a single currency area succeed and grow. We need to have stronger central bank supervision and we need to have closer fiscal coordination.
Q: So the economic problems in Europe seem to be more and more present in our lives and the unemployment rate is higher, especially in Southern Europe. How long do you think the society from this part of Europe is going to last? everybody is waiting for decisions to be made.
Christopher Pissarides: You have identified the most serious problems that Europe is facing on the medium-term and the unemployment is so high in the southern countries. So far, there’s been a lot of patience, waiting for progress from European institutions so that we can push forward on economy and growth, but now are dragging our feet in the delays. The longer the delays last , the more risks that the patience will run out. The EU will break on its own, will distorter, which is the worst possible outcome, so the European leaders need to come together and act quickly in setting up institutions that are needed for the economy of Europe to recover.
Q: the problem is that we have to be confident in these institutions that are not efficient and the political decisions that until now couldn’t get us out of the crisis.
Christopher Pissarides: The institutions we have now are not efficient because they are not enough, we need a common eurosupervisor in euro, we need common bonds, we need a institution who is able to dissolve a European bank, to capitalise them, we need to set up the European Stability Mechanism, all those decisions need European politicians that will care about the EU as a whole, or at least Euro zone as a whole in addition to their own countries, and this is what we don’t currently have in Europe. But we need it. If we don’t get it, we are in the risk of having several more years of recession, of high unemployment and the potential of strikes, demonstrations and social unrest.
Q: As an effect, the left parties are starting to win elections all over Europe. What about the courageous measures?
Christopher Pissarides: It’s true, they don’t have these measures. For example, France didn’t have major ideas for Europe as a whole, maybe in France they are doing things that would benefit them, but Europe needs decision makers as well, and they had great politicians interested in Europe as a whole, pushing the EU towards closer and closer cooperation. But now, if anything, European politicians are pulling them apart.
Q: are you afraid that it may not be a matter of decision, but a matter of lacking vision from the European leaders?
Christopher Pissarides: I think that is the key, in fact. They do not have Europe wide visions, where to go next. And therefore, they don’t take the political courage, the potential political costs within their country to do anything at a European level. We see the policies that Germany is following now are apparently very popular with the German voters, but they are not anywhere outside Germany and this is adding to a gap between Germany and the rest, which is very dangerous for the future of Europe as a whole.
About Cyprus’ bailout:
Christopher Pissarides: The only source of savings that Cyprus had were where they put their money, the deposits in the major banks. So most of the holders of those big accounts were retired or close to retiring, and they suddenly take all their money from them except the 100.000 euro to recapitalise, but it doesn’t also have a system of comprehensive pension coverage so how will these people cover their consumption in retirement? The lifetime savings which you had there to finance your retirement are now going to recapitalise banks and you are left with nothing to spend but 100.000 €. So we have a lot of social problems produced from that policy, apart from that, I think, because of the bad economic policy. When banks do very well the shareholders and managers will take the extra profit and do well, not depositors, but when the banks are doing very badly, the depositors have to pay. So there is a reverse moral hazard. This discourages people to invest in the future in big sums of money because you know that if the times are good you are not going to benefit from it but in times of bad, you will suffer .
Q: I also wanted to ask you about your great scientific career. You are one of the youngest Nobel prize winners, I think. What are you must proud of from your scientific work?
Christopher Pissarides: The big concern I had throughout my career was the big unemployment, how we can deal with it and I realised that when I started there was no theoretical foundation, no framework in which to think about unemployment and what I am most proud of is that most people in the profession are using the framework that I developed sometimes in collaboration with my colleagues. We studied unemployment and tried to come up with good policies to fight it. Unfortunately the current policies are not following exactly what we said they could be doing. If you ask me about my scientific activity, what makes me most proud is providing this framework very spread used in dealing with the unemployment problem.
Q: Can it be used in this current situation?
Christopher Pissarides: It can be used at anytime.
Q: How has the way you do research changed? The economics have developed a lot nowadays and some people say the reason why we got lost is because we only look at the numbers. How do you see this change?
Christopher Pissarides: The change is good, actually in many ways because quantity is important in a complicated economic world. Both in the economy models, and also in the economy as a whole they become too complicated to be solved piece by piece. It is good to have the whole picture.
About the political and economic situation in Italy:
Christopher Pissarides: The government can’t do very much, Europe has to coordinate it and they really have to come together and say that this situation cannot continue. It’s been five years since it started, the rest of the world are coming out of it, especially the US, in Europe they say maybe 2 years, maybe 3 years. There has to be coordinated action, a single country cannot do it, even if we’re talking about Italy. And Germany is the leader, the key country that should coordinate and if we put pressure on them, they would have to do it. We need to get France, Italy and Spain together, also. If those three countries put pressure on Germany to sit down around the table and discuss what should be done, then there must be some kind of improvement, much better than Germany deciding on their own.
Christopher Antoniou Pissarides is a Cypriot economist. He is the Norman Sosnow Professor of Economics at the London School of Economics. His research interests focus on several topics of macroeconomics, notably labor, economic growth, and economic policy. In 2010, he was awarded the Nobel Prize in economics, jointly with Peter A. Diamond and Dale Mortensen, for his contributions to the theory of search frictions and macroeconomics.