So I thought first of all, we could just go through the timeline of the Euro Zone crisis. How did this start? Maybe you could walk us through some of the high points here.
The Euro Zone crisis exists because you have a single common currency; you do not have a common fiscal policy. So everyone was borrowing at the same rate; and yet some countries had capacity to pay it off, others didn’t. Some kept within their budgets, others spent with reckless abandon. Some were productive, some were not. In the United States you have very different levels of productivity between New York and Alabama; but you’re within one system of governance. You have not only one currency, but you have one national budget, one fiscal deficit. In Europe that was never true, and compounded by the 2008 financial crisis you not only had these countries that were continuing to spend well beyond their capacity to pay back, you had banks that were prepared to lend to them despite the fact that they couldn’t pay back. What does that sound like? It sounds like all those American banks that were providing mortgages to people that clearly never had the capacity to buy that house or pay back those loans. The same thing happened at a nationwide level in Europe. And then the 2008 financial crisis came along and it compounded it because there was an enormous amount of economic pressure, downward global economic growth, and the markets were spooked. So they were putting more pressure to make sure that they will get any of their risky money out. So you have bank runs, you have pressure against all of the sovereign bonds in these European states; and that created a crisis. It meant that these countries – Greece, and Portugal, and Spain, and Italy and even Ireland – were, for very different reasons, no longer were able to manage their national economies without some form of European intervention. And that’s where you have a problem. Because, unless you get the intervention, unless you get the bailout; you can’t fix the problem. But the countries that are going to provide the money want to make sure that it can’t happen again. Now for that to occur, you need a political fix. In the United States we had an economic crisis. And we resolved the economic crisis; we bailed out the banks. We didn’t resolve the underlying political problem. In Europe the Germans are saying if you want to fix the economic crisis you’ve got to fix the political problem. In the United States again, in the U.S. no one was prepared. Simpson Bowles: big, fundamental “Let’s address the deficit!” And what did we do instead? We said: “Eh, later.” In Europe they’re actually trying not to waste the crisis because, frankly, the stakes are higher; there’s much more urgency and less time. And so, as a consequence, while everyone is telling the Germans, “Bail these guys out now;” the Germans are saying, “If we’re going to bail them out, we want to fix the political crisis.” And because a lot of the leaders, the political leaders in these peripheral states, don’t want to do that because it’s painful, this crisis gets worse. The Germans are using the economic pain of the crisis to force a political solution at the same time as the bailout. And that means it is a longer, deeper recession; it is a longer, more painful crisis, than you would otherwise see.
So to achieve both of those two objectives that you mentioned, the political and the economic, what are we looking at in terms of a time frame here? Is this short term or long term?
Well it’s not a few months. One of the reasons why, for example, the Greek elections were so important — even though you didn’t resolve anything by ensuring that there was still a Greek government that would still negotiate with the Troika, still negotiate with the European Central Bank, still negotiate with the Germans — is because buying time matters. You need time to create a fiscal union. You need time to create a banking union. You need time to allow the European heads of state to get together and create a road map for what kind of regulatory and constitutional changes you will need to get to the point that you actually have greater integration of European economic governance. And once you have that then it’s not as dangerous, even if Greece leaves, because the rest of Europe is integrated. And it’s much more politically palatable for the core European states to provide more bailout funds because they know they won’t have to keep doing it. So there is a definable end point on the horizon, but it’s not another 3 or 6 months. We’re going to be talking about this in another year.
And bringing this a little bit closer to home, and something I’m sure many Americans and our viewers care about, is what the impact on the U.S. economy would be. We’ve interviewed a number of people and we’ve heard a lot about the interconnectedness of economies and what not — but what does that actually mean in real terms for an average American?
The Euro Zone is, of course, America’s leading trade partner and as a consequence if the Euro Zone has very anemic growth, everyone that we want to export to in Europe is going to buy less of our stuff. Our ability to have our multinationals and have large manufacturing bases in Europe, and there are many of them, are going to be producing less. They’re going to be less profitable. They’ll be laying people off. This is the danger. It’s the world’s largest common economic space, the Euro Zone. It’s larger than the United States when you add it all together. It’s larger than China. We have a lot of exposure, it’s stable, we’ve done business there for a long time and we know it. We feel comfortable there, and yet they’re growing at effectively 0% and large pieces of it are actually contracted. There’s not a lot of social instability there and that’s a promising thing. But certainly a deep hit to Euro Zone growth has much more of an impact at the United States than a big problem in the Middle East. And so, if you’re Obama running for re-election and you see there is a potential for a Euro Zone break up, which is very low likelihood, but they’re covering their bases; they understand that that’s the kind of thing the voters will punish them for, because they’ll feel it. They’ll feel it in their pensions, they’ll feel it in stock market, and they’ll feel it just on a day-to-day basis with economic growth and employment in the United States. Our economies are tightly interlinked.
What are our policy options here to affect a positive outcome?
The United States has made it clear, as has China and many other countries, that we are not writing checks. Whatever your view of the United States being in decline or not, there’s nobody that supports a marshal plan for Europe. There’s nobody that supports America leading a bailout; not the Republicans, not the Democrats, no one remotely electable. What we’re doing is providing the Europeans with a lot of advice. That may sound cheap, but the reality is: we actually are trusted by the Europeans. Our institutions work closely together. That’s particularly true for the Fed and the European Central Bank. It’s particularly true for our Secretary of Treasury and the ministers of finance in Europe. And we are providing them with data, we’re providing them with insight, we have some of the world’s smartest bureaucrats that are working together with the Europeans to help. So even if Obama or Romney makes a statement and says, “You should do this,” and Merkel reacts in a bit prickly fashion; behind the scenes, the much more boring technocratic stuff where our bureaucrats are working to try to help the Europeans, bilaterally and multilaterally — that’s actually has been quite constructive and it’s not the sort of thing that will make headlines.
I thought it was interesting in the first round, the Greek bailout, that a lot of the money that was raised by the IMF (International Monetary Fund) came from emerging economies, from Brazil and from China as well. What’s the role of the emerging economies in helping rescue Europe?
The role of the emerging economies is very limited in the bailout. When the IMF is providing support, keep in mind that’s money that’s guaranteed that they’re going to get back. They’re making an investment. They’re not providing aid; they’re not simply writing a check for a bailout. It’s very different. When Sarkozy, then president of France, went to Hu Jin Tau in China and said, “How about helping us out?” the response was no. That’s been the response of the emerging markets across the board. These are the countries that are fundamentally concerned with their own domestic politics and economics, much more so than the Europeans or the United States. They are countries that are less politically stable, they are countries that have much greater vulnerability to market shifts, they are countries that are much more consumed with their own domestic economies, and they are countries that don’t have much international experience. In that regard if you don’t see much happening from the U.S., you are going to see even less happening from the emerging markets. And that’s very important to understand when you think about the disposition of the Euro Zone.
Maybe you could talk about the Chinese strategy in Africa and Latin America. Do you think it’s a good thing for those countries that they’re engaging?
Look, the Chinese are the world’s second largest economy. At some point they will be the largest economy; ten years, twenty years. They will still be a poor country, but they will be the largest economy. They are a surplus economy; they have a lot of money. They have 1.3, almost 1.4 billion people and their middle class is expanding very quickly. They need resources. They need to build their infrastructure and to accomplish that they’ll need energy. They’re much more reliant on the Middle East and Africa than the United States is. They’ll need food, and as a consequence they’ll buy land. They’ll need sources of water. They’ll need every commodity that the world can provide and then some. As a consequence the Chinese right now are more interested than any country in the world in ensuring that they can secure sources that will allow them to maintain that level of domestic growth and therefore political stability. And that of course brings them into Africa. It brings them into our backyard, Latin America. China is now Brazil’s largest trading partner. They’re Chile’s largest trading partner. These countries benefit from Chinese investment, its money. But let’s keep in mind that China also frequently wishes to export labor, and when they export labor that means that the unemployment levels in a country like Kenya are not going to be improved by Chinese direct foreign investments, the way that they might be if another country comes in. Frequently the Chinese don’t have the best management practices. They don’t have rule of law. It’s hard to have legal recourse against the Chinese state owned enterprise in the way that in a western multinational, it’ll be easier for you. The technology isn’t always advanced. So there are tradeoffs with the easy money that comes from China. And if you are a country in Sub-Saharan Africa or Latin America what you really want is not China coming in; what you really want is everyone coming in. You want options. You want to have good relationship with China, but you also want a good relationship with Europeans, with Japanese, with the Americans, with the Canadians; so you can choose. Because when you can allow competition from different countries around the world, you can then make a tougher deal. You can say, “Ok, we’re going to accept your investment for this mining operation, but you’re going to have to ensure there’s a lot of local content. You’re going to have to make sure that some of the technology stays with us so that we can improve and build up our own domestic center. You have to employ our people. You have to build some infrastructure,” those sorts of things. One other point, or course, about Chinese investments is that they don’t have Foreign Corrupt Practices Act in China; which means that it’s easy for China, compared to other countries, to do to business in some of the world’s most authoritarian states. And that’s problematic because these are countries where there are often sanctions regimes against other countries, even if they’re not sanctions regimes, other companies will be reluctant to go in. Those are countries where the Chinese can come in and really capture a lot of market share. You look at a country like Zimbabwe, you look at a country like DRC (the Democratic Republic of Congo), and you look at a country like Sudan before the break up of Sudan and South Sudan. And the Chinese play dominant roles in these countries. And they play dominant roles because they could go to the dictator and say “You let us in and here’s the quid pro quo; we’ll give you some military support, or we’ll build you a soccer stadium, or we’ll send your kids to Disneyland.” Doesn’t matter! The point is this isn’t corruption. These are two governments that are cutting a deal between two governments. It’s not a free market system. That of course not only is problematic in terms of allowing these authoritarian leaders to stay in power — because otherwise sanctions would squeeze them more strongly — it’s also problematic because you don’t get competition and western multinational corporations can be squeezed out because the Chinese will have cheap capital and they’ll have cheap labor that they can take advantage of when they get into these countries.
Well the next question I wanted to ask is about that competition with the U.S. I mean, you mentioned China in being in Latin America, our backyard. A lot of people have been critical of the US for not engaging with Africa in the way that China is. Is this something that we’re not doing right?
The question is: Who is we? When the Chinese engage, it’s usually the Chinese government or someone close to the Chinese government. America engages in lots of ways. I mean, our government can ignore a country, but if Bill Gates is in there with his foundation that can make a really big difference. Coca Cola is doing more in Africa right now than almost any multi-national corporation or government in terms of providing water for all of these folks; who then can become consumers that then can become more educated, that then can improve their lot. Coca Cola is doing it in a self interested way, as would the U.S. government. But the point is that is still American influence. So actually, American influence is much more diffused, is much more complicated, and even if the U.S. government gets it wrong, we still have influence in these countries. Generally speaking, as the African governments become more developed and as their people get more urbanized — 50% of Sub-Saharan Africa is living in cities right now; they are getting wealthier; they are getting more educated, women are getting more educated, which is massively important for sustainable development in smaller sized families. As that happens, these countries are moving towards better, more transparent governments; and along with that is more of an inclination to work with the advanced, industrialized democracies and not just work with China. That’s a very important and promising development. Latin American is less of a problem, and it’s less of a problem because it’s culturally very simpatico with the U.S. You know, region does matter. You live in Latin America, your banking industry; your financial sector largely is populated by ex-Wall Street guys. You work with each other very closely. You’re in Latin America; you travel to the U.S. a lot more. If you’re wealthy you probably have a property in the United States. You probably send your kids to the United States for school in a way you are much less likely to do if you live in Africa. So we look at the trade patterns between China and Latin America and we say, “Oh my god these guys are dominant.” However, you can’t just be an economist and look at one dollar as equivalent to one dollar everywhere else. The softer side, which can be very insidious — the cultural connections, the political connections, the regional, and the geographic connections –actually also matters. America’s influence in Latin America as a consequence remains much greater than that of China.
Should the US continue to use NATO as a forum for global stability and US interests?
NATO is very relevant. There are still significant conventional warfare conflicts around the world, not only directly in the Europe/ Eurasian space but more broadly, where NATO can play a role. Clearly the Europeans are going spend less money on defense then they have historically. The U.S. will spend not the same trajectory of positive increases in defense then we have historically. It’s not as if anyone would suggest disbanding NATO, it plays a useful role. But the United States is pivoting towards Asia. It’s pivoting towards Asia because the rise of China is the greatest potential competitor to American strategic interests over the long term. And the challenge that China poses is largely not a conventional security challenge. It’s largely an economic challenge and for us to deal with that we don’t need NATO; for us to deal with that we actually need to focus on economic state craft and we need to focus on industrial policy. Our special relationship in NATO, of course, has been with Great Britain, which has been one of the best countries in the world to work with in terms of nation building and state building, global strategy on the military; and diplomacy in their foreign office. They are great at this stuff. They don’t do industrial policy, they don’t do economic state craft; they are irrelevant at that. Actually, the country that does that well is Japan. You look at Japan, the world’s third largest economy, and here is a country the U.S. has done all of their defense for them after World War II and we’ve done most of the global diplomacy that’s relevant for them and they have come along and supported us. The one thing the Japanese do really well, better than anyone in the world, better than us, is industrial policy. That’s what they have focused on: METI, the Ministry of Economy Trade and Industry; the Keidanren which is sort of their Chambers of Commerce which is juiced up; and their multi-national corporations are more integrated with what the state does. And the Japanese are right there in Asia, knowing that they have to get Asia right; they have to get China right. They are more aligned with the U.S. than anyone else. What we need is not just NATO on the conventional defense side. We need a NATO alliance for economic state craft that’s actually led by the Americans and Japanese. It’s critical, and no one is focusing on that yet.
Is there a template that we can use, a la Libya, for future potential conflicts?
The United States, the bar for humanitarian intervention is going up. The reason why Libya worked is because Gaddafi was hated by everyone, everyone. I mean, the Saudis and the Iranians hated Gaddafi. It’s like the one thing they agree on in the entire region. That’s actually difficult to pull off. Even then we only removed Gaddafi after the Gulf Cooperation Council and the Arab League said, “Let’s do it.” And the British and the French said, “Come on, let’s do it.” And the U.S. said, “Okay, but no ground troops, only from the air, and only for a limited amount of time.” We didn’t lose a single troop in removing Gaddafi from power in Libya. You’re not going to find many of those. The point is that the American appetite for global intervention is going to decrease. There aren’t many Americans that want to keep going in Afghanistan after 2014. There aren’t many Americans who want to go into Iraq, even given its importance in terms of global energy and oil. Now that they’re out, if Iraq falls apart that is a problem for the U.S., sure it is. It’s a bigger problem for the Middle East, and for Europeans, and for the Asians who get more of their energy from that part of the world. If Afghanistan falls apart, falls apart worse after the U.S. leaves in 2014, that’s a problem for the U.S.; more terrorism. But it’s a much bigger problem for Afghanistan, for Pakistan, for China, and India. Basher al-Assad in Syria is still there. If the United States doesn’t lead a group to remove him, and the Russians are doing their damndest to block the U.S. from doing precisely that, that’s a problem for the U.S. It’s a bigger problem for Lebanon, for Saudi Arabia and for Turkey. What we are looking at is an environment where the world’s policeman for many decades, getting all of our allies with us, is suddenly just not willing to be the traffic cop on every beat. We are going to really pick our neighborhood much more carefully. That will lead to more conflict. It will lead to deterioration of the ability to safeguard human rights globally. And that’s unfortunate, but there isn’t another country on the horizon that is going to do it. There will be some countries that will take a much greater interest locally, in their own neighborhoods. When the Maldives fell to a coup, India actually played a fairly significant role. But you can still count the number of those activities on one or two hands. Over time, Nigeria, I believe, is one of the world’s largest providers of peace keeping forces anywhere in the world. We never talk about this because they’re all in Africa, but it’s a reality. And increasingly, Nigerians will play a bigger role in helping to provide peace keeping for their own region. Will they do it as effectively as the Americans and the Brits have historically? Probably not, they haven’t done it as much. They don’t have as much money. They just aren’t as good at it. So this is a suboptimal outcome. But let’s not allow the great be the enemy of the good. That’s one of the things we need to learn in what I call a, ‘g-zero world,’ where there isn’t a single global leader. You have to accept coalitions of the willing. And in peace keeping, a coalition of the willing is probably the best you are going to get.