Ten Questions

Guillermo Nielsen, former Argentine State Secretary of Finance, negotiator of the debt restructuring of 2005, former Argentine Ambassador in Germany.
El Economista–Buenos Aires,  15 th June, 2012.

1. Late in 2009, Europe was gradually recovering from the Great Recession and Greece faced an incipient debt crisis. Presently, the European economy has fallen back in recession and the debt crisis has extended to many other countries. Was this an inevitable outcome or is this a case of financial malpractice?

There was malpractice. At the end of 2009 and the beginning of 2010, I happened to live the Greek crisis from Berlin and interact with the most important German government officials, from the President of the Bundesbank to the Finance Minister. They had a completely naïve vision. They believed that Greece, because of being a European country, should not restructure. Besides, the role played by the IMF was quite unfortunate. During the Greek crisis, I remember attending a lunch together with many other ambassadors and the President of the Bundesbank, Axel Weber. He delivered an extremely hard and orthodox speech stating that the Greek financial rescue would amount to 32,000 million euros, which meant practically nothing. On leaving that lunch, press agencies reported that Dominique Strauss- Kahn (who was by then the Managing Director of the IMF) that was visiting Berlin, had said that the rescue would rise to 110,000 million euros. They were completely misguided.

2. Which was the malpractice of the IMF?

Strauss-Kahn’s objective was running to become the Socialist Party’s candidate for the French presidency in this year’s polls. He lacked the necessary professional objectivity and rigour. He wanted to look good but he failed to do his job as head of the fire-fighter brigade of world finance.

3. You were ambassador in Germany, a country whose role in the crisis has been highly criticized. What is their responsibility?

Germany should not be considered in isolation. The problem is the functioning of the Eurozone which – when in crisis or deceleration – works within a gold standard pattern. This means that the adjustment is discharged on the periphery. Germany is the great beneficiary of the Eurozone: 40% of the surplus comes from that area and having the euro as their currency becomes in fact a subsidy for their exports to third countries. The euro being an average of currencies and consequently undervalued, helps Germany to be the first or second world’s exporter depending on the year. They also benefit from attracting capital from the periphery which results in an extremely low interest rate for their debt. However, when the time comes to transfer funds to the Eurozone periphery, the German government faces significant political and electoral difficulties. The electorate cannot see the benefits derived from the euro; to them, this is an abstract concept. What is not an abstraction to their minds is when the time comes for them to pledge money for the Anti-crisis Funds or financial Firewalls. That means then trouble. Besides, due to Gerhard Schröder’s labour reforms, Angela Merkel benefits from a more productive and competitive nation than their neighbours. Having this into account, the issue is not whether Greece has to leave the Eurozone but whether Germany is the one that should do so. The contrast with the other countries, even with France, turns out to be brutal.

4. Do you agree with those stating that the idea of a single currency for a group of such heterogeneous economies was a mistake?

It was a risky project. It demanded a level of discipline and permanent monitoring which, as it usually happens, relaxed over time. It included a proposal for fiscal homogeneity which was never implemented. The Maastricht Treaty established the limits to fiscal deficit and a number of guidelines which, had they been respected, would have led to a different situation.

5. Greece is coming closer to leaving the euro while other countries experimenting difficulties see how the trade-off for remaining in the Monetary Union becomes higher. What will happen in your opinion?

I hope that Greece will not leave and can put up a good fight internally, but this is just expressing a wish. The real problem is not Greece, whose exit is already assumed by the markets. The real problem is Spain.

6. Does Spain require internal devaluation?

An internal devaluation is impossible. I have observed the remarkable efforts made by the Spanish but still that is not enough. They have lowered rents, increased unemployment and many other internal prices but it has not worked. Internal devaluation is a painful process and, in modern western societies, it results absolutely unviable.

7. What should those countries do then?

A deep analysis of the functioning of the Eurozone should be carried out. I am sure that, if performed, there is only one possible conclusion to be reached: Germany has to leave the euro, revalue and have a currency more in agreement with their productivity. If this happened, the rest of the countries would accommodate to some extent. If Germany stays, we will be soon discussing whether the market will sweep France away. Not to speak of Italy: this is a fact. Such situation should be avoided. A political solution should be found, which is not easy as Germany holds the power.

8. Hollande’s declarations seemed to be along those lines but eventually fell short.

We shouldn’t get anxious. In Europe, processes are slow but, in my opinion, things are moving in the right direction.

9. How could the continuity of this crisis impact on global economy?

The impact will be very strong. Actually, it is already being felt in the USA. Global economic rebalancing should be discussed. In the same manner in which the German surplus relates to the Eurozone’s crisis, the global crisis is tied to China’s surplus. The global economy must be rebalanced. The discussion will be difficult and a very bad period lies ahead.

10. What about Latin America?

In Latin America, the situation will vary from one country to the other. However, it is clear that the scenario will be worse on the whole.
(Printed edition)