Christoph M. Schmidt, member of the Economists Advisory Council of the German government known in their country as the ‘five wise men’, recently granted an interview to the magazine Consejeros. Below, we summarise some of his more interesting statements.
How do you interpret the present market craziness? Will it be the markets who decide for our democracies? There has never been such instability in the markets… The financial instability has its roots in the public debt crisis of the euro zone. The main reason, of course, is the unsustainable high debt of certain countries of the EU. In this sense, we cannot say that the markets are imposing themselves on politics but rather they are reacting to budget policies of the countries that are in crisis. However, it can’t be denied that the markets sometimes overreact so this implies that it is not possible to extrapolate experience from previous crisis to the present situation. But the situation will only go back to normalcy when the politicians in charge in the European Union develop a credible common plan to reduce the high debt level and they implement it.
In Spain, we have the feeling that things are moving backwards despite trying to do things properly. In the present economic situation, a country could become insolvent in seconds. What can the new Spanish government improve on? Our historic experience has shown us that recessions that occur after a crisis in the real estate market last for quite a long time. Also, even after the recession phase, we see that the economic recovery does not evolve as dynamically as we would like it to. The same is happening right now in the US. Moreover, the structural reforms require time to develop their positive effects. A new government can do nothing other than to continue consequently with the reform programmes to improve competition and public finances. What would be counter-productive now would be to deviate from this fiscal consolidation policy. This would generate, again, insecurity among the financial actors and provoke an increase in the interest rates and the risk premiums.
Is it possible that we suffer a global setback? Since last summer, a clear deceleration has been taking place worldwide. And all the regions of the world are being affected by this economic weakening, although not all of them to the same degree. The growth deceleration of the emerging countries, especially China and Brazil, is a welcomed process by the respective governments that are seeking to cool down their economies’ tendency to overheat. Nevertheless, we cannot discard that this process could produce a weakening greater than the desired one. Yet, according to our estimates, we do not believe that this is very likely. However, the current cycle dynamics are also slowing down in the industrialised countries… But, outside of Europe they will not go into recession. Not in the US either…
You propose a joint pact and a common European fund to amortise the debt of each participant country the moment it goes beyond 60% of its GDP. So, what is the purpose of the European Financial Stability Fund (EFSF)? The great disadvantage of the EFSF rescue fund is that it only helps specific and isolated cases. The countries that agree to this kind of help, because they cannot finance themselves on the market, are in turn stigmatised as countries that are in crisis. Thus, a vicious cycle is created by the high risk premiums they must pay. This then creates an even greater solvency problem. The joint European fund proposed by our council would avoid this problem because all the EU countries would transfer the debt that goes beyond the 60% limit of their respective GDPs to the proposed amortisation fund. This way, we could avoid at the same time that a new country becomes the focus of the markets’ attention. Besides, with the amortisation fund that we propose, we could effectively face the elevated public debt in the European Union countries and solve it within an acceptable lapse of time.
What would be the debt refinancing costs for Spain with the amortisation pact that you propose? The pact that we proposed to chancellor Angela Merkel recommends that all the euro zone member countries be responsible for all the debts of the amortisation fund. Thus, the interest rates that the Spanish government would have to pay for its debts would be considerably lower than the ones it has to pay at present. Spain would benefit from this type of model.