Music. Progressive study find out more about it on steps mine is here. Hello my name is let's go under and the secretary-general of pets the foundation for European Progressive studies in Brussels. And I have the pleasure today to meet Professor Joseph stiglitz in Paris.
I don't think there's a need for the loom introduction of Professor stiglitz since his the winner of the Nobel prize in economics, he was Chief you going to get visor for President Clinton in the 1990s and was so cheesy Economist of the World Bank subsequently, and the author of many important books on globalization and market failures, US economic history during 90s I think it was a very interesting one today.
Is a book in which you recently published with fats and we are really I'm not that you contributed to the European debate, on the monetary Union and every related question of fat the functioning of the economy model, awesome Eddie you the title is rewriting the rules of the European economy which was. Innofa a continuation of your vet and rewriting the rules of the market economy a previous late in the American context.
And I'm 4 oz of course it's a crucial question have the money to the union can be reformed. And we believe that urine analysis of the functioning of the malfunctioning of the fiscal is very center, in this sad discussion would you like to explain what should be the direction, poverty for me the monetary Union and specifically. The idea of bringing the European countries closer together.
Which was the spirit of the creation of the Euro was a good idea but you have to get the details right, and that's where I think there's been a failure by the degree of solidarity that was president in 1992 when the, plans that Eurozone will wait out we're not sufficiently great to bring the kind of economic integration necessary to make a common currency work.
And the Hope was that somehow it would work well enough that it would bring the countries closer together and then that's they got closer together the project could be finished. Bad as it was this incomplete project actually led to poor economic performance. And rather than weeding the countries to get closer together together it led to Diversion, it undermined European solidarity so moved in exactly the wrong direction.
The economic reason for the failure is really easy to understand when you form a common currency you take away two of the key instruments of adjustment. The interest rate and exchange rate. And those are absolutely pivotal we're in different parts of a very diverse set of economies that constitutes the Eurozone, I already hit by a different kinds of shocks. And of course you might say you are pleased unlucky and 2008 by being hit by a very large shock coming from across the Atlantic.
The problems were exacerbated by. The growth and stability pact that have been adopted earlier that packed. Limited the deficit, that a country could have so now that hands were tied in three ways that was no exchange rate policy that was no interest rate policy. Precisely when help was needed through fiscal policy to stimulate the economy they said. You can't do that either because that would lead to deficits that are beyond the strictures of the growth and stability Pact.
So all the instruments have been taken away and the way, austerity these physical constraints were implemented meant for those countries suffering from the greatest sharks. The effects were devastating and then finally. When you have a currency Union. There is in the context of a single Market where money can flow easily from one country to another. There are severe consequences for the financial system for the banking system and.
What that meant was that the countries that were adversely affected by the crisis by the shocks. Have money leaving from those countries that meant their banking system was devastated. And that meant that they could not the banking system could not lend money. So you then were affected by no exchange rate policy no interest rate policy no fiscal policy and a contractionary banking system.
And what what is needed at that point was that a banking Union, the central ingredient of which is a common Deposit Insurance so people can be confident not, that's it. Delete their money within the country within the country's banking system and while there is now been an agreement in principle.
On a banking Union within that banking Union is, Deposit Insurance is it's a little bit like saying Augustine, save us from sin but not now we agree on the principle of common Deposit Insurance but not now, resize like Hamlet without the prince is not present in in in the play, add so I understand that we would need a whole set of YouTube,
as compared to the original Mystique model of the money to the union and what would it mean for the physical Fame but would you prefer to say no to the talk or refund, cuz some people say that the nationalization of the race, it would be the way forward States should take the risk if they want to, so that budget policy and the imbalances. Larger scope for sharing with in the Euros house.
Maybe I'm thinking a little bit at as an American but we have a single currency that works throughout the United States very diverse take. And what are some of the ingredients that make.
The single currency Market of the 50 states works one of them is a banking Union when Washington Mutual had a problem one of the big Banks it wasn't rescued by the state of Washington if the state of Washington that rescued it Washington would be in bankruptcy rather than one of the more prosperous takes, in the country we have, Deposit Insurance we have a banking Union so that was an important ingredient. But it's also case where a particular state has a high unemployment rate.
California had a very high unemployment rate after the end of the Cold War because it would have been a big state for Defence. Reduce their defense budget and. It would have been very greatly impacted in 2008 some states were impacted much more than others we had a national.
Unemployment insurance system we have a state but we also on top of the state we have a national, program especially when unemployment gets very high so these are all elements of national risk-sharing which I think is absolutely essential. For the workings of a of a common currency system.
I also think that the needs to be modifications changes in, the formulation of the Brockton stability back a minimum change that we talked about in the book rewriting the rules in the European economy a minimal change is to reinterpret, what it means with the growth and stability pact mean so you need to have flexibility to reflect.
The state of the business cycle so when the economy is down you have to have deficits it if we hadn't had a large deficits in 2009, United States we would have had another Great Depression we violated the structure so the 3%. But it was for the well-being of the country and I've worked so you have to have a cyclic adjusted you also have to recognize that if you are borrowing for investment.
The liability side of your balance sheet goes up but so does the asset if you borrow it is 0 interest rate. And you invested for something another high return the wealth of the country is higher, so there needs to be a redefinition of the growth of stability pack at a minimum. I'm glad you also mentioned unemployment insurance and which in the European contact is being discussed.
The pussy Burley Insurance scheme of the unemployment benefit systems of the member states When we arrive to this point. We also have to face the TV which is very difficult to pronounce in the European context answers. N n e u u s a company's and I think it is spiking that transfers are very obvious in the US because the US has been a political union for a very long time, wine on this side of the Atlantic of course it is still facing green difficulties.
And that somehow this area this is kind of a psychological barrier, which needs to be overcome and do you understand that these types of cancers minutes about this pairing shock absorption and and after the necessary, for the prosperity of the community as a whole.
In the framework of the EU there is a lot of, already going on the com- cultural policy was a kind of transfer program a very large transfer program the, when the new states were admitted into the EU, there were funds that were transfer payments that help them adapt to the you so there's actually a history of transfer payments, the interesting thing is where there seems to be a problem is Mutual Insurance,
give me Mutual Insurance seems to me even more reasonable it's not just that you're helping the poor you're helping yourself one year you may I needed another year, somebody else made it does that's the nature of a picture. And sometimes you hear the refrain in some parts of your we are not a transfer Union, in my mind you're not a union if you're not willing to have some degree of risk sharing and you certainly can't have a common currency.
You can't have you no whole principle of solidarity is about. Some kind of risk-sharing at a minimum to the problem of the Divergence and convergence, because I think it's fair to say that the European monetary Union is that focused on if not obsessed with nominal conversion. Why did leaves much of the responsibility for real convergence at the level of the member states and then this is a Christian.
Hey could help real conversions while this relatively rigid system of the fiscal rules, reminder traditional little bit was that that one of the arguments for the convergence criteria for why this was so important for the Euro Zone goes back to a, early Nobel Prize, early work by my colleague at Columbia by mundel and he wrote a very influential paper on, they called it optimal currency area but the question was when could a single currency system single currency work for a,
group of countries and the results of his analysis was that, it can work if the countries are similar enough and so it was very natural for Europe to say well let's try to make our countries. Similar enough would that mean that the economy's, had to converge enough no not perfect enough the problem was that well they understood what needed to be done. When actually came to the policies that they adopted. Or dented. They resulted it what happened was a creation of an economic framework.
That bad to real Divergence and what Bob Mandell talked about was not nominal conversions it was real conversions that was necessary for a single currency Market to work. So unfortunately the set of rules that were adopted. Have led to the rich getting richer the poor poor, and I'm making it more and more difficult for a single currency, system to work and creating a fundamental divide within Europe between the creditors and the debtor.
How Central in the, the process of rewriting the rules is am the reform of the taxation principle and approach the tanks specific member states is, is extremely important, while in the EU we also saved that even a modest at which is to establish a common Consolidated corporate tax base CCC TV, and just so difficult to pronounce, a politically let me first begin with a very abstract idea which is that when the countries came together in the Eurozone in the EU,
they were weird that they had to deal with externalities they had to deal with. Situations where one country could impose harms and others and they had to develop regulations to stop that. And that was part of the reasoning behind the fiscal constraints the limits on death. And deficits. Because they thought that if a country had too big of a deficit or dead it would export inflationary pressures to the rest of yours.
That idea turned out to be totally false that was not an important externality just like inflation was not an important problem and the 21st century. What they forgot was there was a much more important externality that arises through taxation. That is if you have tax competition. One country could try to steal companies away from others. And that is a much more important externality that was not dealt with.
The good news is that they're now trying to cooperate and the bad news is that it's being so hard and we seeing some aspects of the behavior of Europe. Some countries, good behavior has been particularly bad for my perspective Ireland has become in a Lexa Berg have become the poster child chocolate children over you might say countries that tried to take advantage of their neighbors other partners. Ireland. Offered secret deals with apple and some other cut companies where they could book.
Income that was generated in the rest of Europe in Ireland and not pay. Almost any taxes at all going to or .02% of profits. In a way they were taking away tax revenues that should have gone to the other countries.
Giving most of that tax revenues back to Apple and keeping just a miniscule amount, for themselves to me that was not a good behavior and the same thing, extreme form, the fact that they have there's been a race to the bottom in the corporate income tax 12 1/2 % you have a low corporate income tax you will get your business there and then, pay low taxes and then export to the rest of Europe and that's why there needs to be.
How to bring up with any work but they're also needs to be in a global agreement on multinational the taxation of Multinational Enterprises. The oecd is just recently come up with a proposal. Of how to deal with it which I think the consensus is.
Outside the business Community is totally inadequate some of the multinationals like it for exactly the reason why I think it's an adequate, it allows for the shifting of prophix to will tax jurisdiction for tax avoidance except that there have to be limits to text competition. I think we also have to accept that they have to be limits to reach competition.
And that's also something we so at the time of the Eurozone crisis in 2010 11 12 that I kind of competitive internal devaluation was unfolded and that was extremely, on that note and leave the incomes and living conditions of the people directly affected by this for the set but also the aggregate demand in the Eurozone SF.
What would be your assessment of this should we move for some kind of coordination of Rage negotiations, the underlying problem goes back to what happens when you can't adjust exchange rates, so the adjustment of exchange rates would have meant that the cost of production in a country that was adversely affected. Become lower and that helps restore the country. With a fixed exchange rate you can't do that there are two ways of adjusting real exchange rates.
For the successful countries they have a little bit of inflation to adjust up. Or divorce the countries that have a negative shock already having difficulties, to lower their wages and make the people who are already suffering from lack of jobs and from make them even worse off by lowering their wages. If people didn't have any decks or any other obligations you might say wouldn't make much difference. But people do have that and the decks are not indexed to prices.
The often they're linked to foreign prices but not the domestic prices so when the wages go down workers still owe money. Denominated in euros and that means. There were ordinary workers are worse and worse off. So internal devaluation is a recipe for hardship whereas. For the countries that are doing rather well for them to have increase in their wages. Make life even more easier for them to the real distribution consequences.
Internal devaluation versus slide inflationary pressures in the countries, that have experienced a relative Good Fortune, yes but unfortunately exactly is the countries we speak in Germany or the Netherlands which accumulated this, they may be I simply find that they simply didn't want to listen to the whole argument, in order to drop this very narrow focus with the budget deficit and the debt ceiling,
nevertheless in in practice it didn't work out and and and and and they were the encouragement to 2, in countries with do have the physical space for this was no really listened to, so the question is what will generate more investment, especially in the countries which can borrow at no price because at this time, show it to me yet it is observed that some of the countries that need more investment in infrastructure and Technology.
Even in education are not taking advantage of this, how much unique opportunity of borrowing at 0 negative interest real interest rates that would make their economy stronger. And help their neighbors by increasing. Economic strength aggregate demand in Europe as a whole.
And one of the points that we raised very strongly and rewriting the rules of European economy is, there have to be that kind of coordination there has to be a kind of understanding the that is you might say the moral and economic obligation. Of these countries. I'm a little bit hopeful but only a little bit hopeful that recently there's been a little bit of movement in this direction, Germany finally raised the minimum grade in the minimum wage and that is stimulating the German economy.
As German as German economy is facing a significant downturn with a weaknesses and shine on export markets that slow down the global economy. Finally a discussion of of maybe putting aside temporarily that the death rate and and. Now is the time for Germany to take advantage of these circumstances to have more expansionary fiscal policy. You know one could only hope that Germany will Netherland realize that if they want the.
Your Zone to work if they want the EU to work, they have to they have to adapt the policies that internal devaluation is a recipe for creating a strong anti, Euro anti-eu sentiment which you are already seeing in some parts of you are. And on this point I had to know that it took a Social Democratic minister of Labour in Germany to introduce the minimum wage and it took a Social Democrat,
Gaston reconsidering the physical plane. If they have been pursuing in the previous years that there has been in the past 5 years and experience.
Wade Hanna very limited flexibility regarding the physical rules, expecting a greater impact from the so-called public investment Banks, Whittington please bad west of the European Investment Bank taboos the capacity and allow for the greater role to play in terms of leveraging Public Radio Sol of private, envestnet do you see this as a kind of hopeful exercise I do investment Banks. Are a real real really important tool Europe has a very successful European Investment Bank.
There are now in United States we've been learning some of the lessons of you are and New York State, has started a what appears to be a very successful Green Bank within the state, and so the lesson that is come out of that is that actually these.
New investment Banks can be created at many different levels of government even smallest state in the United States North Dakota has no Investment Bank so I hope, but this is a kind of tool that the country's will see some on it is a way in a way that they can help. I stimulate the economy within the confines of the structures of the growth and stability pact but as I said before I think. That pact has to be reformulated right so there is no substitute for interpretation.
And design of a growth and stability pact would you assume and agree that these public investment banks are also the center, pillars of a climate agenda, to to to to to generate the necessary investment to tank climate change very much, the next that's where they've been focusing in the United States there is a green Banks aware that there needs to be a substantial sums of money going into, the green preposition one way I,
try to articulate this is that we have actually in our society box of long-term funds pension fund Sovereign wealth funds. These are long-term. We also have a lot of long-term investment needs to be for the green transition for infrastructure for technology. But standing between these long-term investors Savers and a long-term investment needs. Stan a lot of short-term financial institutions mismatch and the new public investment Banks.
Can play a big role in bridging that Gap and a neighboring are societies that have a longer-term perspective than the, Financial Private Financial Banks that $10 quarter to quarter. And I think this is a very important conclusion however I think we shouldn't an end a conversation today with that briefly reflecting on the new Venus of the Nobel Prize. Add because it's sweet the distinguished and economies who now received and particularly for studying poverty.
What is your view on it is well deserved that there be attention on poverty you know when you say, how well is the global economy doing it's not just GDP that matters. The living standards of ordinary people and if we live in a global economy of 7 billion people and there are several billion attack 7000000000 people who are in poverty. It says that our global economic system is not working at least it's not serving large parts of humanity.
And we have the resources we really important at the knowledge. That how to deal how to fight this poverty. And this Nobel Prize symbolizes the efforts of The Economist to understand better.
How we fight poverty kind of understanding is that professor, and of contribute to a Palatine change from previous macro approaches to Poverty reduction, towards and micro-level intervention, does that provide a kind of new orientation or so for the institutions and which are considered poverty reduction is the Monday, I feel very strongly that you have to balance micro and macro interventions. That's if you don't succeed and having the overall economy grow strongly.
You're not going to be able to have the resources to really fight. Poverty and that requires industrial policies macro policies monetary policy. A broadside of industrial policies investment banks are Economic Institutions, that promote economic growth the most successful countries in fighting poverty where those Anastasia. And key to their success we're.
For the most part macroeconomic policy self a kind that I've just described structural policies and they worked they were also accompanied by certain micro policies, what do we mean by that if you have macro policies.
GDP could grow but the benefits may not go to ordinary individuals so you have to have education policies, you have to have policies to make sure that people have adequate housing that people have adequate education that the benefits of growth are well distributed, you you have to think, how do you deliver Services Education Services down to the Grassroots down to the Village so you need to have very, carefully designed micro economic policies as well and I think you need a balance and,
the Nobel Prize symbolizes, both the emphasis on the micro which the World Bank has been focusing on quite honestly for decades not always with us but that issue was really where they at Focus to a very large extent. Are these random control rtc's but again, that's only one of several instruments for finding out about the world there are many instruments natural experiments policy experiments there many ways that we weren't make inferences.
About what works and what doesn't and again I think it's really important. To maintain balance so we have to be in balance between macro and micro we have to maintain balance. Within the various mechanism instruments, by which we learn about what are the best policies to advance the interests you just give you one example. I think I likes the point. The one of the most successful tools for addressing poverty. It's been microcredit started by the bra mean Bank.
There were a number of RTC experiments with those. Design of one aspect or another of the payments mechanism. But none of them got at the heart. What made for success or failure and because they didn't get if they really didn't. Prevent help us addressed and why are you spell Yer the microcredit when she was in India India. What was at the heart of the success it was institutional Arrangements making sure that they were not for profit.
So you could have a for-profit and experiment with one payment mechanism or another. But what really made it work and the gram meaning recognize this. When they wrote about it they said one of the reasons were successful is because we create a bond. With our borrowers they know we're not trying to take advantage of them in the way that a for-profit institution night. We are concerned not just with money but we are concerned with uplifting their lives.
We are concerned and making sure that we have women empowerment that girl is got education that they understand about an hour with that with that they have their legal rights the most water, thanks just money. And that was why I was so successful and Bangladesh and why I went into bankruptcy in India so those are the kinds of things very hard to do a random control. And I I just say that because it is really important to fight property but it's really important that we use old instruments.
From learning about how to do it and all the instruments for finding property that M promoting economic growth that we can. I think what you just kind recording Europe a socialist economy. A professor Joseph stiglitz thank you very much for this conversation and also I thank you for the long-standing commitment to the corporation which apps that give. Thank you for your attention if you found our conversation interesting do not hesitate to share it on social media with the hashtag fat stools.
Music.