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Carlo Panico: Most media pays no attention to scientific economic literature

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.

When the mainstream media covers the crisis in Europe, there’s sort of a truism underlying most of the reporting, and that is: overspending by governments, wages got too high, too much social safety net, all of these contributed to people, quote-unquote, living beyond their means, governments living beyond their means, and that’s the underlying reason for the crisis. Well, is that borne up by scientific research? If you actually do the numbers, is that really the cause of the crisis?

Well, our next guest suggests it’s not the case. Now joining us from Mexico City is professor Carlo Panico. He’s normally in Naples. He’s a visiting professor now in Mexico City. His full-time job: he’s professor of political economy at the University of Federico II in Naples. And he recently published a paper at the PERI institute called “The Role of Institutional and Political Factors in the European Debt Crisis”. Thanks very much for joining us, Carlo.


JAY: Alright. So, I mean, the gist of your paper, at least the beginning of it, of the gist of it, is that this idea that, you know, governments spending beyond their means and too much social safety net and all this, that this really isn’t the underlying cause of the crisis. So what did you find when you look into this issue?

PANICO: Well, what I find is that that is the rhetoric of the political economy which is presented by media, mainly, but you don’t find this sort of explanation in the scientific literature [incompr.] scientific literature there is—they are much more cautious and analytical, and they see that the problem comes from the way the European Monetary Union is organized.

The European Monetary Union’s organized in this way. I mean, we have 17 countries belonging to the—which have adopted the euro, this new currency, and they are within a larger area, which is called European Union, formed by 27 countries. Within the European Monetary Union, the 17 countries that have adopted the euro, they have one—but they have—the monetary policy is a single monetary policy. We have just one monetary policy, which is decided at the supranational level, at the European level. But then the fiscal policy is conducted national level. So you have this disparity, which is unusual in other countries. Normally you have the monetary authority and the fiscal authority, they are the same national level. But this does not happen in the European Monetary Union.

So what you need is a process of coordination between the supranational level (the European level) and the national level. And this cause a big problem, which is called the moral hazard problem, in the sense that the national government may misbehave with respect to the decisions taken at the European level. When the central banks stabilize the interest rate all over the 17 countries, I mean, the national government can use the funding coming from Europe, from the European level, to favor their own elections, so to increase the expenditure in favor of their own elections. And this increases finance by all the other elections of the European Monetary Union, the euro area, see. So you try to stabilize the interest rate at the European level, and then this cause an incentive for a national government to misbehave. And this is what is called the moral hazard problem, and this is the main cause of all this situation.

JAY: Now, when you say “misbehave”, there’s different definitions of what that is and who misbehave, in the sense that this structure had favored Germany for many years. They were able to export to the rest of Europe at a time when they didn’t mind that there was debt building up and such in these countries, ’cause it gave Germany a great market. Now that this thing is starting to go into crisis, now instead of sort of Germany willing to sort of pay the piper, if I understand it correctly, they want to shift this—consequences of this crisis back right into the countries that they were profiting from their exports. I mean, is this part of the question?

PANICO: It is part of the question, because all the country of the European Monetary Union have benefited enormously from the fact that they put together their countries here and participated in this new experience of a single currency, of the euro. So all the people, all the firms producing goods were—took advantage of the fact that they do not have to run the risk of the change. So there was no more risk that the exchange rate could change. So there was the huge increase of commercial integration within the euro area. You must consider that 70 percent of the international trade of these country are within the area. So they are all integrated.

But now there is a tendency to believe that there are [incompr.] problems to each country coming from the misbehavior of the other governments. And this is the source of all the difficulties.

JAY: Now, one of the points you make in your paper is that in ’07, ’08, when it came time to bail out the banks and the banks were in crisis, this structure had no problem responding very quickly to make sure the banks were saved. When it came time to deal with the sovereign debt crisis and the sort of sovereign Raiders that were, you know, forcing the interest rates up on the bond issues from the various countries, now all of sudden this structure doesn’t want to respond.

PANICO: Yes, you are exactly—you are right on this point. I mean, when there was the start of the financial crisis, both in 2007, in August, I mean, the European Central Bank responded immediately, in less than half an hour, by playing its role of lender of last resort to stabilize the interest rate into interbank markets. Then, I mean, the ECB has done it again, spending a huge amount of money to—I mean, always to play this role of lender of last resort for the banking system after the breakdown of the Lehman Brothers. What is happening now that seems—I mean, the attack, the speculative attacks have been against the government securities, the government bonds. The ECB is not acting in the same way. I mean, there is—the ECB is not playing the role of lender of last resort. It is not trying to stabilize the interest rate on these bonds. And this is its duty, because the central bank must operate in such a way as to avoid any disruption of the transmission mechanism of monetary policy. And the central bank, the European Central Bank, is not doing that.

JAY: Now, I take your point about the structural issue of, you know, this kind of supranational bank without actually being able to control individual countries’ monetary policy and such. But isn’t there something else happening here, which is that the European—or at least the majority of the European financial and political elite, they think it’s in their interest to drive these countries into crisis for some time. You know. And some people make the argument it’s about breaking the back of the sort of social safety net, the European welfare state, to develop the conditions for much more privatization, as what’s going on in Greece, that there’s an agenda here, that it’s not just a structural question.

PANICO: Listen, they think that [incompr.] but they are wrong, because, I mean, we have already seen this kind of experience. I mean, what is happening in Europe nowadays is exactly the same thing that happened in Latin America and East Asia during the ’80s and the ’90s. I mean, the government of Latin American countries were issuing their debt in a currency they could not control, like Greece, Spain, Portugal, Ireland are doing within the euro area. They issue bonds in the euro, and they do not control the issue of euro, because this is controlled not by their own national banks, it’s controlled by European central banks. So the European central banks must act in a way that—as any other national central banks in the world, like the Japanese central bank, like the Bank of England, like the Federal Reserve. I mean, Japan has got a ratio between government debt and the GDP which is over 200 percent, but they do not attack Japan, because, I mean, the financial speculators know that if they attack Japan, the national bank, the central bank of Japan, would react and stabilize the interest rate, whereas the European Central Bank is not doing that.

JAY: Well, if you listen to some—certainly you find Greeks that argue this, but other people in some of the other European countries are saying that what’s happening is primarily German national interest is being served through the European Central Bank, and I guess maybe to some extent France. But the other countries, it’s not their national interest that’s being served, and maybe—certainly this argument’s being made most powerfully in Greece—the answer is get out of the eurozone, because it’s never going to serve your national interests. What do you make of that?

PANICO: Well, I think it’s almost impossible to go out of the eurozone. And so we must all be to—inside it. And the interests of the Germans, the interests of the French is that we must grow all together. There is no way, there is no way of coming to have more stability, more growth in Europe without a policy which involve all together, all the country together. So if we keep having this attitude that every country want to punish the other because they do not have confidence in the other, this is not going to work. This is going to create more and more crisis. Like, I mean, the policy that we’re implementing in Latin America created huge problems, huge catastrophes, like in Argentina in 2001 and 2002. It’s exactly the same mechanism that is working there. We must understand in Europe that we must all grow together and avoid this conflict.

These conflict, these national conflict at present are paralyzing the European Central Bank, because they reflect inside the government bodies of the central bank, of the European Central Bank. And it’s happening—exactly the same thing that was happening in the United States in 1929. The Federal Reserve was paralyzed by the conflicts between the national interest inside the Federal Reserve. And then there was the tremendous collapse of Wall Street and the Great Depression that came out of that. This is exactly the same situation.

JAY: But you would think that’s rather obvious to the people controlling the European Central Bank, which—primarily the German elites. But they don’t want to change the course.

PANICO: They are right if they—if the situation, the institutional organization of the euro area keeps going like it is, because we have a problem with moral hazard, as I said at the beginning. We must make sure that if the European Central Bank stabilize the financial market and the security market, the sovereign security market, I mean, we must have a perfectly working, efficiently working system of coordination, of policy among different nation. This is possible. This can be done.

As a matter of fact, what we had in place, [incompr.] which was based on two different tools. On the one side, what are called the soft coordinating regimes are tools like multilateral surveillance, and on the other side, the Stability and Growth Pact. I mean, the multilateral surveillance was working and working well. What was not working well was the Stability and Growth Pact. We must reform the Stability and Growth Pact to create the condition of enforcement of the decision taken [snip] European level when they are—then could pass to national level.

JAY: But they seem more intent on creating conditions to drive down wages and have, you know, a race-to-the-bottom kind of competition between countries to see who can have the least wages and the weakest social safety net. That seems to be what they seem to want.

PANICO: Yes, but this is a great mistake. If they keep on going like that—I mean, there is a vicious circles, you know, circle that drives the economies down, not only the Greek economy, the Italian economy, the Spanish economy, but all the economy of the euro area. They’re integrated by the strong ties that they have [incompr.] exports among themselves. So this is already happening. As matter of fact, since the last trimester of 2011, even Germany is going into depression. And this is going to worsen.

The only solution is to grow. And to grow we must have—we must stabilize the security market, the government security market. And this is a task of the central bank, the European Central Bank. At the same time, you have to make sure that we are not going to have tricky behavior by the national authority, by the national government. There are tools. There is a way of doing that. We can implement it. As a matter of fact, the moral hazard problem exist also for the banking system, but they do not withdraw the function of lender of last resort.

JAY: Yeah, I mean, of course, yeah, the banks can misbehave all they want and they get bailed out. We’re going to have—. Yeah, go ahead. Just your final thought.

PANICO: Yes. I mean, the regulation system that we have for government, what is called the coordination—the policy coordination tools that we have, have worked well during the last 20 years. Government have been disciplined, whereas the banking [incompr.] of the managers of the [incompr.] have not been disciplined by the financial regulation during the last 20 years.

JAY: Yeah, the finance sector can misbehave, and then governments bail them out. And now the problem’s supposed to be the governments.

PANICO: Exactly.

JAY: Thanks very much for joining us, Carlo.

PANICO: Thank you, too. Bye-bye.

JAY: And thank you for joining us on The Real News Network.


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Born in Naples in 1952, graduated in 1976 at the University of Naples and Ph.D. at the University of Cambridge (UK) in 1983. Since 1990 he is full professor of Political Economy, first at the University of Catania and then at the University of Naples 'Federico II'. From 1990 he has been Chairman of the Institute of Economics and President of the Specialized Degree Committee of Political Economy at the University of Catania; Chairman of Department of Economic Theory and Application and of the Ph.D. program in Economics at the University ‘Federico II’ of Naples. His main scientific interests are on monetary theory, theory of value, growth and distribution, history of economic thought, institutional organization of the European Monetary Union. On these subjects he has published articles on scientific journals, like Economic Journal, Metroeconomica, Cambridge Journal of Economics, European History of Economic Thought, Contributions to Political Economy, and monographic and collective volumes with publishers, like Macmillan, Routledge, Elgar.