Matthew Bishop

Matthew Bishop is the U.S. Business Editor and New York Bureau Chief of The Economist. He is the author of several books including The Road from Ruin.

Matthew Bishop is the U.S. Business Editor and New York Bureau Chief of The Economist. He is the author of several books including The Road from Ruin.


I thought it would be good to start with the timeline of the euro zone crisis. What were the key points on the timeline that brought us up to where we are today?

Well, you probably have to go back to, in a way, 1992 and the crisis of the exchange rate mechanism that was the predecessor that Europe had to the euro. It was this attempt to kind of anchor all of the different European currencies together at a firmly fixed exchange rate and it blew up spectacularly. You remember George Soros paid a lot of money pushing the pound out of the exchange rate mechanism. Out of that came the decision by the leaders of many of the European countries, although not Britain, to create the euro. But the way they created the euro, I think most experts at the time, including many of the people who created it, knew was unstable. It threw together a whole lot of economies that are very different from each other and gave them a single interest rate policy; but didn’t put in place any of the political institutions that would be necessary to help countries that feel the pain of an interest rate policy that is not appropriate to their own economic situation. And so I think many people knew there would be a crisis all along, at some point, because it was only when you had a crisis that you would have the political impetus to actually put in place the political institutions that a single currency needs. And so I think we now have a crisis that, in a sense, was baked in to the original design of the euro as kind of the way they got to phase two; the full, grown up, complete euro.

When exactly did the euro zone crisis start, and what were some of the events that triggered it?

Well I mean, I think, you know obviously the financial crisis that hit most directly in America in summer 2007, spreading through to Lehman Brothers blowing up in 2008; had a big effect on Europe because the banking systems are so integrated and because the shock to the world economy forced every government to spend, to borrow a lot of money to pump up their own economy. And that’s true of the European economies as it is in America. And it was only then after, about a year or so after, it became clear that America’s banking system would survive and the American economy wasn’t going to go into the Great Depression. That people in the markets started to say, “Hang on, these European countries like Greece and Ireland; particularly Ireland and Spain have real-estate boom bubbles like in America.” That those economies were unstable and the governments may not be able to afford to repay their debt. And that’s when you start to get this phrase thrown around, the PIIGS economies. The PIIGS economies: Portugal, Italy, Ireland, Greece and Spain. And you use to have these bond market vigilantes sort of attack the; short the bonds of the government driving down their prices. And more and more there was this debate about: Can those governments avoid default? What will be the implications of a euro zone government defaulting for the other members of the euro zone? And will it be necessary for the rich euro zone countries like Germany and France to bail out the poor, deeply indebted ones like Greece, Ireland, Spain and Italy?

Who are the key players and what are their various interests? In terms of the economies; so say the PIIGS, we’ve also got Germany that has a very specific role.

So Germany, you know, is the richest economy in Europe by far. It’s actually had a pretty good time of it in the last ten years. It ultimately designed the framework that the euro operates under because Germany had the strongest currency, the Deutsche Mark, before the euro was created. And so they wanted to replicate the rules of the Deutsche Mark, particularly its commitment to being a low inflation currency, when they designed the euro. So a lot of the debate we’ve seen since has been: Will Germany give up some of that toughness, the hard money rules of the Deutsche Mark that it had imposed on the euro, to make life easier for the other countries? Then you have Ireland which had probably the biggest real-estate bubble, the most damaged banking sector initially, that came to everyone’s attention. And the way the government of Ireland bailed out the banking system – after Lehman Brothers went down of course the whole global banking system to go into a crisis – was particularly generous to the bank debtors. And so the government basically absorbed all of the financial exposure of the banking system, and then suddenly realized that it was now insolvent. So it became the first government, I think, to really have to do some pretty tough stuff under pressure from the other euro zone governments. Then you have Greece, which has probably the economy that everyone likes to demonize most, because Germans in particular  like to think about Greece being full of people who basically work about an hour a week, get a huge pay raise from the government every time they ask for one, are terribly union dominated in a very bad way, are very corrupt, and so forth. Greece got very high government debt, but is actually a very tiny economy. And so much of the excitement about: Will Greece default and what’s the implication of that for the euro? I think people feel, you know, it’s like a tiny part; it’s like two percent of the overall European economy and so it’s far too small for the other European economies to allow it to fail because of the cost of what an economy failing would be. Then you have Italy, which is a seriously big, powerful economy; although one that people have never really trusted any of the data about it because there is also a lot of weakness in government, a lot of people who don’t pay tax, or a lot of people who clearly have. There is an informal economy that is very big, but it’s probably the third biggest economy of the euro zone. Then you have Spain, which had seemed to come through the crisis quite well, but definitely had a very big real-estate crisis. It has a very weak banking sector in parts; particularly regional banks which have some exposure to the government. And there is a real feeling that a Greek default – a Greek government default – would immediately lead to a lot of tension on Spain and Portugal -which is a smaller version of Spain in many respects – being next on the agenda. And then you get the risk of a domino effect; that the markets would feel they’ve got one victim, that’s created a whole lot of other ones, and maybe the entire PIIGS group would go down. At that point there is a real question about: What’s the solvency of the European banking system? Would that have to be bailed out again? Does the European Central Bank, which was created when they launched the euro, does that have the power of say, the Federal Reserve in America, to come in, buy up all the debt, pump a lot of money into the banking sector to keep the whole economy going along? Or doesn’t it?

So we started talking a little bit about some of the potential solutions here, and whether or not the European policy makers will be able to resolve a future crisis from happening. Could you tell us a little bit about the menu of options they’re looking at right now; both in the short term and in the long term?

Well, I mean, there are two sets of options that get talked about. The first set is the set whereby all of the existing euro zone members remain in the euro zone and you have to create a set of intuitions that reduce the political risks associated with the euro zone. And so that probably means a set of intuitions that can transfer resources form rich countries to poor countries, to sort of act as sort of stabilizers, when there’s economic turbulence. It may mean, it would almost certainly mean, a set of rules that limited how the governments that got help from the rich countries; how they spent the money to make sure it wasn’t all wasted on high pay rates and good deals for the lazy workers, but will actually lead to structural reform in those economies. And then there is sort of a whole set of issues about whether you would have a common bank regulator; so that all the euro zone member governments effectively stood behind all the banks in the euro zone. And similarly whether there would be also be the issue of, say, euro bonds. So that instead of each government issuing its own bonds in euros, any government bond issued by any European nation would be basically underwritten by all of the euro zone governments, which would clearly move; all of those things would move massively in the direction of a centralized fiscal policy for Europe, which is something that they always said wouldn’t happen throughout the history of the European Union. So this would be a big, big shift towards a centralized euro zone. And there would be a question about would the European Union members, like Britain, that aren’t part of the euro zone; would they get sucked in in any way? Would they have to make a contribution? Or would they in some way be marginalized from the European Union if they didn’t join that set of intuitions? Would there be a core Europe and a fringe Europe, and what would be the relationship between the core and the fringe? Then there is a second set of options which is, I think are much less likely, which are about throwing out members of the existing euro or existing members of the euro leaving. And currently the way the euro was designed, specifically in response to the failure of the European Exchange rate mechanism, was to make it unbreakable; to make it impossible for anyone to leave. So once you’re in, you’re in forever. So the only way you change it is through some kind of treaty, which is something that will take a long time and would require probably referendums of many European countries which have not been necessarily good at voting for more European Centralization. The throwing out strategy would throw out Greece, throw out maybe some of the other PIIGS, and then you would leave the euro essentially being a series of big strong economies with fairly similar economic exposures. And you could see how that could make some sense if it were simple to do, but it’s not simple to do. There is also some talk that you would create kind of two euros; that say, Germany, France, and maybe one or two other economies would leave the euro to create a new, sort of super euro, which would be a way they could leave.

So jumping now to the impact on the U.S. economy, we’ve heard a lot in the press about how this could spell disaster for Obama in the fall, and the U.S. economy could slow growth even more based on what’s happening in Europe. What is the connection there, and could you explain how that works?

Well, I think if the euro were to break up, in some way that would have a disastrous impact on the European economy, which would affect demand for exports from America to Europe. It would have a disastrous affect on the European banking system, which is still very interconnected in ways that we really don’t know with the U.S. banking system. So there would be a danger of a, as with Lehman Brothers collapse that affected banks all around the world. So it is possible that there would be major bank failure in Europe that would have major consequences around the world. I think that as long as the euro hangs together, the effects will be fairly limited on the U.S. I think every time there is a little crisis in Europe you see business in America hold back on investing a bit, so that impacts the path of recovery. And I think, while uncertainty about the euro remains within Europe, the European economies are going to remain sort of not growing, or not growing very fast, or maybe even in recession; and that clearly effects America at the margin. But I think the thing that I would worry about if I was Obama would be the extreme scenario – the crisis of the collapse of the euro – and I think that’s actually become less and less likely.

Is there anything that U.S. policy makers can do, aside from sort of whispering; are there actual tools that we can use to assist with the outcome that we’re looking for?

Well, I think in many ways the policy change that would help everybody would be to have free trade negations between the European Union and America. But I don’t see any chance of that coming on the agenda before the presidential election; but clearly that would add a lot to GDP for both economies if you actually have them integrated in a way that it isn’t at the moment.  Beyond that, America has influence of the IMF; the IMF is clearly a big player in trying to pressurize the euro zone to get on with sorting out the euro mess as quickly as possible. I think in particular there’s pressure on Germany to adopt policies of stimulus, rather than the austerity which is so fashionable in Europe at the moment, and I think that America is pushing as hard as it can on that front. But again there really are limits because Germany is such a powerful country with a long historical commitment to hard money. That is really where America’s ability to change German policy is pretty limited. It has to be, I think, internal to Germany; feeling that it has to do this in order to keep the European Dream alive, and that’s going to be the process by which Germany changes. And I think that ultimately Germany will change, because I think if it doesn’t do some more pro-stimulus, pro- helping the poor countries adjust to the euro, then I think the euro will come apart and that could blow the European Union apart.

China’s role on Africa has obviously grown quite significantly right along African economic growth in the past few years. What exactly is China’s strategy in Africa?

I think China’s straightly is very simple. It wants access to commodities, raw materials; it wants access to land. And it’s willing to do deals with all sorts of people, including some quite unsavory governments, in order to get that stuff out. And in that respect it’s probably no different to anyone else in Africa at the moment. India, Russia, the United States and others are all perusing this great war over: How do you get as much out of Africa to put into your own manufacturing process as you possibly can?

And what about the impact on the African countries that China’s investing? A lot of the folks that we’ve been speaking with have been saying that it’s, generally speaking, it’s a good thing to help develop these countries. Not just in Africa, but in Latin America too. Is that something you agree with?

Well, I think one of the things that the Chinese are doing is going in and building infrastructure. So there is less, although there is hardly none, of the money going straight into the governments and straight into their Swiss bank accounts. So it’s not as bad as some form of aid from the West in the past has been. So they are building roads, they are typically bringing Chinese workers in; so there is a real question about how many jobs they are creating for local Africans. And so far they have really not put a lot of energy into thinking about development in those countries. It’s been very much: we’ll just do what we have to do to efficiently get out and we’ll have a deal we can strike with the government in place. I think that over the last two or three years, you’ve started to see China change and realize that firstly it doesn’t necessarily make sense to do deals with a bad government that might get thrown out by its people, because then you have to go back to the drawing board again and you will do so from having been in a position of having been seen as a supporter of the old, bad regime. And secondly I think there is starting to be a realization that actually they can play a constructive role in the economic development of those countries and that that may be a win-win. And so they don’t want to be seen as just a selfish force on the world stage, they want to be seen as a constructive super power and in that sense they want to have policies that they can sell to the west as being evidence of their new enlightened approach to global affairs. So I think we are in a period when China is potentially changing quite quickly. And as the government of China changes, by the end of 2013 we may see a new team in place that wants to be much more proactive place on the global stage and realizes that it needs to have policies that it can be proud of, rather than just this sort of simple mercantilist get the stuff out of the ground as quickly as you can.

And is there any reason for the U.S. to feel like it’s behind the ball, particularly in Africa, but then as China comes into our own backyard in Latin America?

Well I think the challenge for America is, having spent all these years doing a lot of aid work, in particular helping on the battle against HIV/AIDS and having done a lot of work with countries like Liberia and so forth; that America’s aid budget is going to be under a lot of attack domestically in congress. And there is a real question about whether the historic role American has played in aid and development is going to be able to be sustained in the future. And so ironically, just at the moment where China is expanding and increasing its influence in Africa and just at the moment when Africa is starting to reform its self and to become a serious economy, America may be backing away because of its own domestic fiscal issues.

What role are philanthro-capitalists playing in dealing with some of the major global health challenges of our times?

Well I think Bill Gates is probably the poster child for philanthro-capitalism, because he really wants to solve big problems using business-like entrepreneurial approaches. And the thing that he got excited about and that got him into philanthropy ten or fifteen years ago, was reading about how lots of people are dying needlessly in Africa due to diseases that we can cure. And so he has taken on malaria, tuberculosis, HIV/AIDS; and now a whole series of other diseases such as diarrhea and all sorts of smaller diseases, that are still none the less deadly. And the effect of what he’s been doing is being to take a whole area, where I think the world had kind of given up on ever really eradicating diseases, and created a tremendous excitement that we can end malaria, we can end TB, we can actually save all those millions and millions of lives. And so it’s been transformational and I think people now regard getting a job in global public health as an exciting job; whereas ten or fifteen years ago no one was going into that area. So it’s become one of the hot sectors in medical science. And I think if you look just at the malaria campaign in the last ten years, it’s dramatically reducing the number of deaths already. And so I think that within five years we’re going to be able to say it’s only a tiny number of people who are dying each year from malaria. And I think as that happens people will say, “Let’s do the same for other diseases.” I think we could see, over the course of twenty years, dramatic improvement across Africa and across other poor parts of the world, where we just see levels of health comparable to what we now have in America and Europe.