How do you see where we are today, in terms of Europe’s debt crisis?
Europe has three problems, really, and none of them have been properly addressed. One is obviously the fiscal problem itself, the second is a banking problem, and the third is a growth and competitiveness problem. And unless you deal with each of these and deal with them as a group, you’re not going to get the recovery that’s necessary. Low growth will cause deficits to continue to be high.
So which problem should be the top priority?
You’ve got to deal with the three problems together. You need to have measures for growth that allow you to continue to reduce your deficits. One of the problems we face is that, with tough austerity in Greece and Spain and Portugal, growth is not recovering. Therefore, revenues become difficult to collect. We failed to understand that there’s a financial sector problem that’s got to be dealt with, and there’s a competitiveness problem. What should happen now is, first of all, the [European Financial Stability Facility] has got to be strengthened. You’ve got to send a message to the markets that Europe has come together to sort out this problem, and it’s going to create a firewall that is strong enough. You’ve then got to have a longer-term plan for reforming the euro.
Are you talking about the inflexibility of the euro?
[The U.S.] can print dollars, but you’ve also got wage flexibility that is greater than Europe’s. You’ve got greater interstate mobility. People are prepared to travel and migrate within America. And you’ve got a central budget of 25 percent of your GDP. So you’ve got a budget that can actually intervene when you’ve got problems in some of the poorer states and some of the most difficult areas. Europe’s budget is only 1 percent of GDP. And we have got far bigger differences between the states in Europe than you have in the U.S., where perhaps the gap between the poorer states and the richer states is about 1.5 to 1. In Europe, it could be as much as 4, 5, 6 to 1.
So how do you kick-start growth?
Part of it’s about the timing, but part of it’s about the way you do it. There’s no doubt that in Europe and America, a call is going to grow in the next few months for investment in infrastructure because it is one way that you can use an investment bank [strategy]. America’s created one, and Europe has one to invest in long-term projects that are of economic value and are job-creating, while at the same time you deal with the issues arising from the amount of consumption. We’re going to hear calls quite soon for greater investment in infrastructure on both continents.
You’ve been skeptical about the euro for a long time. How about now?
I think the euro itself has been found wanting as a currency, and they’re going to have to build a different kind of euro in the future. We’ve got to understand that a whole generation of political leaders, including those who have just taken over in Italy and Greece, have committed themselves to the preservation of the euro and will try everything in their power to stay within it. My worry is that you create 10 years of low growth and 10 years of high unemployment in Europe, and all the time Europe becomes marginalized in the world economy. I don’t want Europe to go the way that Japan went in the 1990s.
Mario Monti says he’s confident Italy can come through its current crisis unscathed. Would you agree?
The problem Italy has is it’s got to raise €200 billion to €300 billion from the markets in the next year. So Italy has a huge funding problem that is immediate because it happens every month. Monti needs, in my view, a European firewall that protects Italy when it makes the changes that will … take time to be fully implemented. It all makes the case for a strong European stability fund.
You said recently that France could be the next victim of the contagion.
The exposure of French banks to Italian debt has been very high. We’ve got to remember that we still have problems in Spain and Portugal, we’ve got the Greek problem, we’ve got the Italian problem. There is pressure on the whole European banking system. That’s why I’ve said all along that one of the mistakes that Europe made in 2008 was to think the banking problem was American or British and not to recognize that Europe’s banks—and France is part of this—have a banking model that has been shown to be vulnerable. They are highly leveraged, far more than American banks. You know, it’s 32 to 1 in Germany; it’s 10 to 1 in the U.S.