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What do you think of the European response to the crisis?
My argument against austerity policies is addressed to countries that still have the choice. Spain and Greece had no option but to comply with Germany’s demands or run the risk of running out of funds. But to my mind, the budgetary situation in France is not quite so critical, and there is not the same need for austerity.
However, market confidence will continue to be vitally important … How can it be sustained?
The answer is an appropriate monetary response from the European Central Bank. On the one hand, I think there should be massive purchases of Italian and Spanish debt to prevent an excessive rise in interest rates. On the other, we need to see signs of a more flexible ECB policy: a pledge not to raise rates at the slightest sign of inflation, and realistic medium targets for 2-3 per cent inflation instead of 0-1 per cent which is what we have today.
What about Greece?
I cannot see how this country can remain in the euro. It is practically impossible. However, if it leaves there will be a massive withdrawal of deposits from Spanish and Italian banks, and the ECB will most definitely have to respond by providing unlimited liquidity. If it does not, within two weeks, the Bundesbank will throw in the towel, and that will be end of the euro.
What would be the consequences of the disappearance of the single currency?
Imagine all of those debts drawn up in a currency that no longer exists... I think the eurozone would be plunged into a severe recession for a year while individual states find a means to continue trading, and countries like Spain and Italy recover some of their competitiveness. From a political point of view, it would be very serious: the failure of the biggest project in history would completely undermine the credibility of all of the leaders involved in the old regime and pave the way for populist and nationalist revolt.
So what future do you see for the eurozone?
If the ECB implements the right measures, things could start to improve three to five years down the line. But Europe will still be fragile. Its currency is built on shaky foundations, and that will continue to be the case until a common European bank guarantee scheme is established. In the meantime, the system can quite comfortably survive if it is treated to a sufficiently strong dose of inflation. Let’s not forget: Europe’s problem is not one of fundamental decline. It continues to be a productive and innovative continent. The difficulties that it faces have been prompted by inadequate governance and a failure on the part of the institutions that are supposed to exercise economic control.
All of this can be repaired.