Iceland just cut its interest rate, in your judgement, how bad is the low inflation situation in the European countries?
The low inflation situation in Europe is bad, very bad. Now, all the more optimistic commentators are becoming more realist in their forecasts. Deflation is not only the opposite of inflation, it’s much worst. You can cure inflation with monetary tools. German is very good at that. But the opposite does not cure deflation. Even if you put money in circulation, it is not automatic it will be invested. Fear plays a role. Expectations are pessimistic. In economic terms, “the horse does not drink”, even if you put a cheap, available, clean water. The goverments should do something, but in Europe they are divided and have different ambitions. Unity of Europe is a dream, sometimes is a nightmare
Germany was the economic powerhouse of Europe, at the same time, Greece, Spain and Italy have high youth unemployment rates, which one is more worrisome in terms of Europe’s economy future?
The unemployment. Europe is now under the economic control of Germany and its satellites. The old continent has already digested this new situation. Non one has the industrial capability to compete with Germany. The other countries, mainly from the South, fear the competition from China and the emerging markets; Germany takes advantage of these emerging markets. Why? Because those countries need exactly what Germany can provide them. I am rather pessimistic about unemployment, for 2 structural reasons: delocalization is now a sour reality, technical progress makes some jobs obsolete and unnecessary. Unemployment is inevitable, withe negative repercussions on the demand, unless the governments do something.
ECB’s balance sheet has shrunk since 2013, do you think ECB was too obsessed with its balance sheet size?
I think the ECB was too obsessed with rigour. We need more money, not less. Fear of inflation is an excuse. Stability of price is establish by ECB at 2% p.a. We are now well below. That’s why I am expecting 2 events. First, a mini quantitative easing in Europe; not exactly the American or Japanese style, but something more than a declaration like “we will do whatever it takes to save euro”. I am thinking of buying government bonds or something similar. The second event is related: tension within the ECB board between the majority in crisis and the minority lead by Germany
ECB has used stimulus package to stave off deflation and revive the euro zone economy, do you see all the efforts are a failure?what ECB could do to avoid Europe’s economy sliding into its third recession in six years?
These efforts were a failure because they were insufficient, a mere compromise for an exceptional situation. The ECB should be more courageous and pump more money. But this is possible only if Germani will agree. There is only a possibility this will happen: Germany should be convinced that its triumph cannot be sustained with a collapsing Europe. Who is going to buy the German products if the demand is stagnant? Who will provide political coverage if France (and partially Italy and Spain) are in a chronic recession? What is the sense of a common destiny (Europe) if egoism and nationalism prevail? Germany is right on many aspects. It has built a tremendous industrial capability, while the other countries indulged excessively on public debt. All is true. But Germany should look for solidarity, not revenge. At the end, this rigidity might turn back and hit also the powerful Germany.