“They throw good money after bad money”

Johan Norberg is a Swedish classical liberal thinker and a freelance writer as well as the author of several books. Recently, he has been active in the debate over Europe’s economic crisis. Utrikesperspektiv met him to ask about the crisis in Europe and the banking system.

What is the biggest problem in terms of Eurocrisis 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.

You have mentioned that rescue packages for the crisis-affected countries are
fruitless. What solution would you like 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 would a Greek state bankruptcy affect the rest of Europe?

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 there something you believe is responsible for the crisis in Europe?

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.

You recently held a seminar on Kompetensmässan in Stockholm, where
you talked about why financial crises occur. Why do they happen and how
do you protect yourself against 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


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