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Jayati Ghosh: The future of the eurozone itself is now at stake

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. At the beginning of this financial meltdown, there were a lot of people predicting the demise, crash of the US dollar. In fact what we’ve seen is somewhat a strengthening of the dollar, and everybody’s taking a run at the euro. Now joining us is Jayati Ghosh. She’s a professor of economics at the Center for Economic Studies and Planning at the School of Social Sciences at JNU [Jawaharlal Nehru University] in New Delhi. Her recent book is titled After Crisis. And she joins us from the PERI institute in Amherst, Massachusetts. Thanks for joining us again, Jayati.


JAY: So Greece is in the midst of meltdown, we’re hearing that Spain and Portugal may not be far away, and the euro is in trouble. So what do you make of this?

GHOSH: Well, you know, this is very interesting what’s happening to the euro, because in a sense it was always a very unlikely currency. You know, we have—many people have been arguing that you really cannot get a currency union without a political union. And there’s an important reason for this. It is that when you actually join your currencies and you integrate them into one, you are giving up the possibility of the exchange rate as a mechanism of adjustments, which means that when you have major changes across the regions, you actually have to force a massive deflation or you need federal transfers to help recovery. Now, if you don’t have political union, you don’t get federal transfers; you don’t get what is now being called a bailout, say, for Greece. And so that means massive adjustments, which are often actually impossible to achieve politically. The problem in Europe is actually not so much that Greece has been profligate or Spain is in a mess; the problem is that Germany is actually effectively playing the role that China is said to be playing in the global economy, which is to say it’s been running very large trade surpluses. It’s achieving productivity growth without real wage growth, which is making the rest of the euro zone uncompetitive, vis-à-vis Germany. And the rest of these economies cannot use the exchange rate to recover. So when people say, well, Greece has been profligate, one of the real reasons is because Greece got a lot of capital inflow, just like Spain got a lot of capital inflow. And partly it’s climate. You know, it’s like Florida gets a lot of capital inflow within the US. Okay? You have this money going in for construction, for all of this kind of thing, and that makes the real exchange-rate increase uncompetitive, not the nominal—there is no nominal exchange rate. But prices in Greece were rising faster than prices in, say, Germany. Now, this has made Greece uncompetitive. That’s the real problem. And the same problem is true for Spain, for Portugal, for Ireland. Unfortunately, they cannot devalue their way out of the mess. The United Kingdom has a very similar problem, but they could devalue. The pound sterling has really collapsed a lot in terms of value, and it’s in much less of a problem, therefore, today. Greece can’t do that, unfortunately. If Greece can’t do that, you have to do something to help Greece out, and that’s where the necessity for—you can call it “bailout”, or just “funds transfer”—is absolutely imperative. What’s so peculiar about the euro zone today is how reluctant Germany in particular seems to be to bail out Greece, and it really suggests that you don’t have the vision, the political vision that would make a currency union a viable thing.

JAY: Well, is it also that Germany, at least for a while, has a lot to gain from a devalued euro? They’re already such a powerful exporter. It just makes them even more powerful.

GHOSH: Well, yes, but remember that we’re now talking about the future of the euro zone. I think it is really under question. I think, you know, if you get to a point where Greece cannot meet its obligations and it is either forced to leave the euro zone or it is forced to go to the IMF and accept very damaging external conditions, that the euro zone itself is under threat. So it’s not clear to me what exactly they want in this.

JAY: What does the United States want in all this? Don’t they want a certain amount of stability? And don’t they want a euro zone that stays together? Or do they have anything to gain from its breakup?

GHOSH: I don’t think they have too much to lose from the breakup. I think that what the United States would want is a depreciation of the dollar, a sort of gentle depreciation, rather than a sharp one, which will make US exports competitive, reduce the US trade deficit, and all that. So I don’t think—the US would be quite happy with this situation, with the German currency, whatever it is, is appreciating relative to the US.

JAY: And how serious is it? I mean, you’re talking about the possible breakup of the euro zone. I mean, is that a real thing that we could be seeing in the short-term?

GHOSH: I would have said that it’s politically not possible, because my own feeling was that there is politically so much at stake that they’re not going to let this happen, they’re going to provide the resources. What is a surprise to me is how they’re still not doing that. And the bond markets have realized this. Just today there was a major attack on the Greek debt, you know, the Greek bond market. And that’s because the private markets are saying, well, wait a minute. You know, I mean, Brussels is not helping. Germany is not providing the resources that will actually ensure that Greece can repay it and meet its obligations. That’s unexpected. I think that, you know, the extent of political commitment, which is absolutely necessary to keep a currency union ongoing, if that’s not there, then anything can happen.

JAY: Now, a lot of people, as I said in the beginning, were predicting the demise of the US dollar, and there’s still a lot of talk about the fact that the stimulus money in the US has been kind of covering up some of the great underlying problems, that a lot of the big banking institutions are hiding the real losses on their books. One of the economists, Bill Black, said it’s like—when I asked him what’s another shoe to drop, he said it’s more like Imelda Marcos’s closet after an earthquake is what’s about to come. And how might that all affect the US dollar? Or do we still see, as crisis deepens, people run to the dollar?

GHOSH: Yes. You know, unfortunately there’s no alternative. I think that’s the issue. To talk about creating the SDR as an alternative for holding reserves is really—I mean, it’s not a resolution. Because money is all about power, international money is about international power. It’s true that US economic power is waning, US political power is waning, but it is still the only power available. And so globally really there is no choice, there’s no alternative to the dollar as the reserve currency, which is why countries will keep on holding it.

JAY: Which is, again, good for the speculators, because they know in the end the US dollar will always be there, where they can keep playing little games as things go up and down and they create these herds marching in various directions.

GHOSH: Well, when I say “always be there,” that’s not true, either, because, you know, historically we look at it, I mean, there was a period when pound sterling was the top currency and everybody just had to hold pound sterling. In the Bretton Woods, the US dollar was the top currency and everyone held it. But then in the ’70s there was some genuine period of uncertainty where you just didn’t know. It could have been some other currency that came up. It didn’t. We were back again with the dollar by the ’80s and ’90s as the major international reserve. But I think we’re entering another period of flux. We’re entering a transition period in which, yes, the dollar will remain dominant, but its future is not as clear as it was.

JAY: Thanks for joining us, Jayati.

GHOSH: Thank you.

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



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