Wednesday, February 29, 2012

Fred Bergsten: will the euro survive?

Fred Bergsten is the founder of the world’s most influential think tank on international economics, the Peterson Institute. Fred recently announced that he would be stepping down as the Institute’s director. My interview with him covers Fred’s views on whether the euro will survive, but other topics as well—his proposal for a G-2 (a tacit economic club of the U.S. and China to go alongside the G-20), his early work predicting the rise and success of OPEC, and his Cold War with Henry Kissinger. Not many people would have the courage, as Fred did at the age of 30, to quit working for Kissinger telling him: “Henry, you do not seem to need—or deserve—the quality of the advice I am giving you.”

Photo: Michael Spilotro/IMF

Bergsten on the Euro crisis

The adoption of the euro was a singular event in world monetary history. But most U.S. economists have been skeptical of the euro’s success. Two U.S. economists have bucked the trend: Robert Mundell and Fred Bergsten. Has the euro crisis led Bergsten to change his mind about the euro’s successt?

BERGSTEN: Mundell actually waxed and waned. Sometimes he’s a fixed rate guy. Sometimes he’s a floating rate guy. Anyway, maybe with him as the other exception, I was about the only other American economist that really supported the euro right from the start.

The difference was methodological. The other American economists, including Mundell, based their views on optimal currency areas. They all concluded that Europe was not an optimal currency area and, therefore, the euro was a bad idea.

I came at it with a totally different perspective. This was a political economy perspective. In my jobs in government, but also from outside, I had been actually quite close to the European integration exercise really from the start. And what deeply impressed me was that every time Europe had a crisis, they not only overcame it, they came out stronger. As Monnet said impressively way back at the start, “Europe will be built by crises and it will move forward through crises, but it will always move forward.” And so far he’s been proven right.

And so when you get into this crisis, my mantra is “Watch what they do, not what they say.” And at every stage of this crisis, they have done enough to avoid a collapse -- not enough to sway the market, but mind you that’s because they can’t say to the markets what they are going to do, because then that would take all the pressure off the other countries and it would be a moral hazard.

So they’re playing a risky game, but again, based on this political kind of motive, I say very strongly Germany will pay whatever it has to pay, both because of that continuing geo-strategic imperative, but also now because the euro is so hugely important to Germany’s economy. The ECB will discount to whatever extent it has to to avoid a collapse even though they can’t say that they’ll do it and, therefore, can’t give the markets the assurance they want.

So I’m actually quite confident still, despite all the rumor mills, that the euro will survive. There will be no widespread defaults. The Greeks might have to, but you might say they’ve already defaulted a lot.

And, even more importantly I’m convinced Europe will come out of it stronger When they created the so-called economic and monetary union they were pretty complete with the monetary union, but there was no economic union. So it was a half-way house, it had to be reconciled sometime. Either you had to forget about the euro or you had to create an economic union. And I’m convinced they will never, never, never let the euro just fail.

Therefore, they have to create an economic union, and I’m convinced that all the steps that they’re taking now -- the EFSF, the successor mechanism, the economic governing systems they’re setting up, Merkel’s calls for a political union -- I think all that’s leading toward a full economic union. And five years from now -- I think it will take years and it it’ll take key Constitutional amendments -- they’ll have it. 

Photo: Michael Spilotro/IMF

Read the full interview here. The interview was conducted on December 22, 2011 for a profile of Fred that just appeared in the IMF’s magazine Finance & Development.