Johan Norberg is a Swedish classical liberal thinker and a freelance writer as well as the author of several books. Recently,he hasbeen active in the debate overEurope’seconomiccrisis.Utrikesperspektiv methimto askabout the crisis in Europe and the banking system.
Whatis the biggest problemin terms ofEuro–crisis today?
The problem is that three countries are bankrupt and two can’t borrow and the Southern European banking system has collapsed. Everybody is on life-support from other governments and the European Central Banks. And in the long run that will not work. The only result is that they throw good money after bad money and undermine their own financial situation. And now we are all in this together. The governments are in a bad situation, and then, so are then banks, because they lent the money. And then governments look even worse, because they might have to support those bankrupt banks, and so on. It’s a very negative spiral.
Youhave mentioned thatrescue packagesforthe crisis-affected countries are fruitless. What solutionwouldyoulike to see?
We need clarity; investors have to know what is going to happen, and what rules we abide by. We have to acknowledge that Greece is bankrupt. We should have done that two years ago, instead of destroying capital by sending it into that black hole. So we restructure their debt – and probably Portugal’s and Ireland’s as well. And if this means that banks begin to fall because they make big losses on those government bonds, France and Germany should use its resources to take stakes in them rather than by funding public consumption in Greece. At the same time, Spain and Italy should stop relying on the ECB to lend to them, and instead have to accept serious long-term commitments to financial stability, specifically through an increase in the retirement age, that convinces investors that they are not going bankrupt.
Why is this solution a better one?
Because government bankruptcies are coming in any case, sooner or later. The only question is if they come before or after France and Germany have exhausted their resources and abilities to borrow. And all the ideas about euro bonds and ECB guarantees only make the problem worse by undermining fiscal discipline.
How woulda Greekstate bankruptcyaffect the rest ofEurope?
It depends. In itself it is not so dramatic. It is a tiny economy. The bigger question is the knock-on effects. Will investors then begin to guess about which country will be the next and stop lending to everybody? That is why it was such a terrible mistake not to allow them to default early on. Now the EU has lied for such a long time about Greece’s health that no one believes them when they say that “Italy is not Greece”. I think it depends on how Spain and Italy react. If they commit to long-term fiscal discipline, they would not have to go down.
Is theresomething youbelieveis responsiblefor the crisis inEurope?
Yes, lots of people. But most of those all those who built a Euro project and let countries like Greece and Italy in even though they were not ready, and countries like Germany and France that broke the budget rules in the Stability Pact in 2003 and so opened the floodgates, and the Euro architects and the banks and investors who based all their assumptions and transactions on the idea that Germany will always save everybody, which meant that they made awful investment decisions based on the idea of privatising gains and sending losses to German taxpayers.
Yourecently helda seminaronKompetensmässan inStockholm, where youtalkedabout whyfinancial crisesoccur. Whydo they happenand how do you protect yourselfagainst them?
I think Warren Buffet said it best when he explained financial bubbles with three I’s: Innovators who come up with the next big idea, Imitators who see that they can make a buck by joining them, and the Idiots, who have no idea what is going on, but only see the rise in asset prices and want to join in. It is often a result of easy money, often because central banks have held interest rates too low, so you borrow a lot and so increase risk in the system, and it is also often based on the idea that someone out there will save us if things go wrong – governments, central banks, Germany – so you can just increase the stakes. How do you protect yourself? Well, by not being tempted by quick money and by not leveraging your positions with a lot of loans. If it sound too good to be true, it always is, at least in the long run. And I know it sounds like a cliché, but never, ever put all your eggs in one basket.