Renowned professor of Public Policy and Economics at Harvard University, Kenneth Rogoff, served as an economist at the International Monetary Fund, and at the Board of Governors of the Federal Reserve System. He later served as Economic Counsellor and Director, Research Department of the International Monetary Fund from August 2001 to September 2003.
In the following interview given to the French newspaper Libération, Rogoff explains his perspective on the current global financial crisis. From the United States situation to the responsibility of the Rating Agencies, the economist answers all the most commonly asked questions about the unfolding Debt Crisis.
Here is the first part of the Interview:
Are we facing a new crash?
We are at a time of great nervousness when markets are adjusting to lower growth. The nervousness is also due to the lack of leadership: our political leaders have lost credibility. I would not be surprised if markets continued to fall. In a financial crisis like the one we are experiencing, it can take four or five years before unemployment stops worsening. We date the beginning of the crisis in the summer of 2007: it might take two or three more years before things return to normal. This does not mean that it will go from bad to worse, but it can mean a slow recovery, with a lot of volatility.
So what should we do?
First, we must stop thinking that we are in an ordinary recession. We are in what we have called a “great contraction”, which happens almost every seventy-five years. Both in the United States and Europe, the debt is the problem number 1, number 2 and number 3! It is the main obstacle to growth. The big mistake of the European leaders, and most analysts in Wall Street as well, was to believe that the recession would pass, and simply waiting for it to pass would be enough. What is needed is first to admit that all the accumulated debt will never be repaid. In Europe, it is necessary to largely reduce the debt of the peripheral countries of the Euro zone. I don’t discount the possibility that some countries may be forced to leave the euro in order for the Euro zone to regain it’s competitiveness. But in order to keep the euro alive, Germany and France will have to assume the debt of the other member states.
How can we save the Euro?
In Europe, the same as in the United States, the thing to do is to undertake enormous structural changes. We have seen that every time European leaders try to make changes, they only make the smallest adjustments possible, and so they only delay the real problem. The current economic structure is not stable, it is not robust enough. If we want to preserve the integrity of the euro, the only solution is to move quickly to a much greater tax policy and political integration. The EU needs a finance minister and a president of Europe. Meanwhile, Germany will have to cover the debt of Italy or Spain. Perhaps European countries will have to accept that Germany has more say as to what is going on, for example, in accepting that the first European President will be German.