Rob Johnson: European adjustments are not the product of a mistake, but a design to break down some
of the leftover architecture of the Cold War, which might be called the insurance premium that was paid
against conversion to communism. - June 12, 2012
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Rob Johnson is President of the Institute for New Economic Thinking. He was previously Director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and is a regular contributor to the Institute's blog NewDeal 2.0. He serves on the UN Commission of Experts on Finance and International Monetary Reform.
Dr. Johnson was also a Managing Director at Soros Fund Management where he managed a global currency, bond and equity portfolio specializing in emerging markets. He was also a Managing Director at the Bankers Trust Company. Dr. Johnson has served as Chief Economist of the US Senate Banking Committee under the leadership of Chairman William Proxmire and was Senior Economist of the US Senate Budget Committee under the leadership of Chairman Pete Domenici. Dr. Johnson was an Executive Producer of Taxi to the Dark Side, an Oscar Winning documentary produced and directed by Alex Gibney.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.In Europe, Spain made a deal on Saturday, $125 billion to recapitalize their banks, without any onerous conditions, at least not too onerous. Well, days later, interest rates on Spanish bonds are going up almost 7 percent, and now the talk is the deal might be unraveling. Now joining us to talk about Spain and the whole euro crisis is Rob Johnson. Rob is a senior fellow and director of the Global Finance Project for Financial Reform at the Roosevelt Institute. He joins us from New York. Thanks for joining us again, Rob.ROBERT JOHNSON, SENIOR FELLOW, ROOSEVELT INSTITUTE: My pleasure.JAY: So what do you make of what's happening as we speak with the Spanish deal? And then let's dig into, kind of more broadly, what's going on with the euro crisis.JOHNSON: I think we're a little too little and a little to late. And every move over the last two years in Europe, starting in May 2010, they could have done a lot vis-Ã -vis Greece to preempt, and as things started to unravel in Greece, created the fears that the contagion [incompr.] problem caused interest rates to rise in Portugal, Ireland, Spain, and Italy. That in turn slows down the economies, causes loss of revenue, a rise in the dole for unemployed, which all exacerbate the deficit. And that makes people more afraid. And it's a downward spiral unless the ECB would come in and preemptively buy the bonds, which they've been reluctant to do under German guidance, or the watchful eye of German people are skeptical of monetizing debt.So we got to this bailout where we never needed to be, and it probably, to use Hank Paulson's old term, wasn't a big enough bazooka [to] calm everyone's nerves about Spain, Italy, and the system as a whole. And the markets are acting as though it was almost inconsequential. A hundred and twenty-five billion dollars is a large amount of money for a country the size of Spain. But it's not satisfying people's anxiety, which is now in a fever pitch.JAY: So is part of what's happening here is that the bondholdersâsometimes some people are calling them sovereign raidersâyou know, they take advantage of these crises? They drive interest rates up, and that also creates a situation where they get to push austerity measures. And they kind of go back and forth between making even more money on the bonds because of the high interest rates and shoving economic social policies down the throats of populations that don't really want them.JOHNSON: Oh, and they push pressure on for austerity, the latter part of what you described. They do have some success. But the danger for the bond speculator is that if he pushes the pressure on the interest rate and a successful austerity program is forthcoming, then he's caught short and loses money, or, alternatively, if somebody believes in things and gets long on the bond market too soon and the public rebels against the austerity program, not just its announcement but its actual implementation, then the interest rates go higher and the bond speculator loses. So it's not a one-way bet for a bond speculator. But the question really, I think, is: should bond speculators be making social policy for the developed countries of Europe?JAY: Which is what's happened, even to the point of to some extent appointing leaders of governments in Italy and Greece.JOHNSON: Yes, people who have the technocratic skills to beâyou might say, earn the confidence of the markets, that these people understand that feedback loop and that dance between the structure of state budgets and how the credit markets will respond. But I must say, even among trained economists in the aftermath of 2008 the idea that markets are a rational arbiter of, what you might say, balance in the future, that's a bit of a long shot. I don't think anybody really gives markets that much credit for clairvoyance. They give them credit for pressure. And in this case they're creating what the economist from Belgium Paul De Grauwe calls a self-fulfilling spiral.That needn't be the case, but it's really because the European countries have ceded control of their monetary policy to the ECB. But they're essentially now borrowing in the equivalent of a foreign currency. They're not borrowing in a domestic currency like the British are. Look at the British. Their debt ratios are higher than the Spain's, and yet their interest rates are much lower. But the markets know that the Bank of England controls monetary policy and can stop a bear raid of the bond market in ways that the Spanish or the Italian authorities cannot do.JAY: So, Rob, you've been traveling around the world. You've been in Europe, you've been in Asia, you've been in financial centers, you've been talking to economists. How dangerous a moment do you think we are in?JOHNSON: Well, I think the ship's taking on water for the second time. Two thousand and eight was a debacle. The balance sheets have not been strengthened, the structure of the financial sector. The ability for crises to propagate around the world has not been diminished, because financial reform was woefully inadequate. The financial sector was too powerful and obstructed proper reforms, and prime ministers and presidents didn't stand up to them.At the present time, the European adjustments are not the product of a mistake, but in fact they're the product of a vision or design among some, what you might call the elites in Europe, that a single market is needed to break down some of the leftover architecture of the Cold War, which [incompr.] might be called the insurance premium that was paid against conversion to communism.The state structure that [incompr.] livelihood-supporting structure that was part of Southern European civilization, particularly in the Catholic nations, is now being destroyed. I don't think that's happening coincidentally or randomly. I think that is part of design that the single market was supposed to achieve. It's not happening slowly. It's happening on the grounds that we can't afford it, probably happening because Central Europe, former Eastern European countries, and Asia are all low-cost production centers, and the German manufacturer is no longer interested in foreign direct investment in Southern Europe with these social conditions when he can go into Asia or Central Europe and probably operate for two-thirds or half the cost.So I think these pressures, these economic pressures and the social pressures, are not coincidental, but it is the cancerous, dysfunctional structure of finance that sits on top. And it'sâcoping with these debt overhangs is the danger that everyone's worried about.JAY: So drive down wages, break down the social safety net, and create a bigger force of low-wage labor, but within the borders of the euro zone.JOHNSON: It's not unlike the United States, where state municipal governments, police, firemen, and teachers are being laid off, pensions are being canceled and restructured, and unemployment is rising, union income is falling, the what you may call globalization's and technological arbritrage taking place in all the developed countries throughout the planet.JAY: So what are the political consequences of this? Let's particularly start within Europe.JOHNSON: Political consequences in Europe are very interesting, because [incompr.] Germany in Europe, as the Germans play the disciplinarian and break down these societies through the process of, you know, bond selloff and market pressures, the question is: will they be invited in for foreign direct investment in the rebuilding of Southern Europe at the end of this period of disintegration? The technocratic governments like Monti or Lucas Papademos in Greece may have reached just about the end of their tether. And you're seeing a lot of evidence of fighting back and old left and right coalitions replacing the center. So I don't think it portends for much political stability in any of those regions for the foreseeable future.JAY: Rob, what are the political consequences of this? In a previous interview, we talked about the rise and potential strengthening of the far right in Europe. Are we seeing that? And what else are we seeing?JOHNSON: Well, we're seeing what I call barbells emerging, with strengthening in Greece of both the far left and the far right. But we're also seeing a nationalistic sentiment both on the left and right that's particularly anti-German in the case of Greece. And I would imagine if Germany is continued to be viewed as the disciplinarian and will not compromise, we will run into further problems. Mario Monti said that he felt that he had done as much as he could do, and to reward the austerity measures that Italy had passed, he needs a reciprocal [inaud.] Europe. And thus far he hasn't gotten that. And I think that will increasingly embitter Italians, and they'll direct it not only at the northern core but focally at GermanyJAY: And what do you make of the politics in Greece? There's going to be an election coming soon. The left-wing party apparently isâmay win. It's doing very well. And they've said they're not going to accept this Greek bailout austerity deal.JOHNSON: Oh, I think there are some interesting dimensions that have just emerged, 'cause in Spain they got a $120 billion bailout with no additional austerity. So the question will be for the Greeks: do they have the leverage vis-Ã -vis Europe? You know, Spain was considered almost like a firewall to prevent propagation to Italy and the destruction of all of Europe. Will they start at this point with Greece and say they need to be conserved on the same terms, or would they dare Greece to leave and see what happens?JAY: Now, some people are suggesting that the U.S. cannot afford a further unraveling of Europe. And one of the things that could be done is the Fed could go in and buy Spanish bonds and kind of stem the tide, even if the European Central Bank doesn't seem to want to do that. What do you make of that proposal?JOHNSON: Well, first of all, the U.S. real economy could bear a downturn in Europe because it's a relatively small proportion of our trading exposure. It would slow our growth down here 1 percent or so, which is not helpful given the fragileness of this economy or the fragileness of housing values and what have you. But the real fragileness is the Obama administration doesn't want to see the deceleration of growth or another financial crisis in the fall right on the cusp of their reelection. And I think that has something to do with the urgency that Secretary Geithner and the Americans put forward.Vis-Ã -vis the Fed, I would be very surprised if the Fed unilaterally went in and bought European bonds without the support of the ECB. But they might do it jointly with ECB. But I could be surprised. I think Americans will do whatâhow would I sayâstabilizes our financial system. And Lord only knows what kind of credit default swap exposures the top American banks have, 'cause we have nothing like transparency of our large too-big-to-fail financial firms in the aftermath of DoddâFrank.JAY: And this sort of actions of the Fed buying bonds, even the ECB, if it were to step in and buy some Spanish bonds and lower the rates, is there a sort of papering over of a more profound underlying problem when that happens? 'Cause it seems thisâthese happens. Like, you have QE1 and quantitative easing 2 and so on, and it lasts for a while, and then it's back to crisis again.JOHNSON: Well, I think what's really lacking is demand in the real economy. If I were a leader of economic policy and not contending with vested interests, I would recommend a very, very broad-based growth, infrastructure rebuilding, both in the United States and Europe. In the United States, our airports are rather embarrassing. Our highways, our schools, our roads, all could use a lot of those unemployed construction workers. And we can rebuild a tremendous amount, as well is what they call green architecture. And I think you could see a green New Deal, as well as some infrastructure repair in Europe, though many countries are in much better shape than the United States in that regard. But we need demand in the real economy, not more pumping out of monetary base and building up of excess reserves at the Fed. The old saying you can't push on a string is really relevant here. We need real activity.And at some level [incompr.] of these countries, we have to stop pretending that we're in the throes of a default crisis. The British Empire ran with a debt-to-GDP ratio of over 200 percent for many, many years when it was the center of the world system. Why the United States has to go into a devastating crisis when we're at about 60 percent debt-to-GDP seems to me to be a marketing scare on the part of elites more than it is what you might call arithmetically inevitable.JAY: Thanks for joining us, Rob.JOHNSON: My pleasure.JAY: And thank you for joining us on The Real News Network.
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