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<div style="margin-bottom:11.0pt;"><b><a name="fn"></a>Viv Davies</b>: &nbsp;Hello, and Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I'm Viv Davies from the Centre for Economic Policy Research. It's the 8th of December 2011, and I'm speaking to Professor Charles Wyplosz of the Graduate Institute, Geneva, about the crisis in the Eurozone. Today's EU summit in Brussels is being described by many as a defining moment in the future of the Eurozone. Professor Wyplosz is of the opinion that the political leaders should agree a decentralized fiscal discipline for the Eurozone countries and allow the European Central Bank to play a more effective role. He also dismisses the recent suggestion that the crisis is simply about balance-of-payments issues.</div>
<div style="margin-bottom:11.0pt;">I began the interview by asking Charles whether, in light of recent announcements, he was still optimistic about the prospects of an emerging solution for the Eurozone.</div>
<div style="margin-bottom:11.0pt;"><b>Charles Wyplosz</b>: &nbsp;A bit less. I was doing my best to be optimistic, because I have been so worried for so long. I thought there was a glimmer of hope, and I still think there is. I thought that the ECB was opening up to the possibility of doing what they should do, namely, being lender of last resort in some way or another. And they were looking for a pretext to do that, and they were essentially asking the governments to come up with some great commitment to future fiscal discipline.</div>
<div style="margin-bottom:11.0pt;">So, I thought, now there is the plays on their way, the show is on the way, and the actors know how they should play it. And that went in this direction for a few days, and now what we saw yesterday is Chancellor Merkel, come in with ridiculous requests one more time, and the thing could collapse.</div>
<div style="margin-bottom:11.0pt;">I think what the ECB needs at that stage is a grand statement, which looks reasonably acceptable to all member countries. And then, the ECB says, &quot;Oh, we'll say, OK. Governments are doing their job and we'll do ours.&quot; But if the Germans keep insisting on doing silly things, then we may not have a serious agreement, and that would be very bad.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;Do you think, then, that Merkel may have missed the point in dividing the Eurozone into fiscal saints and fiscal sinners?</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;Yeah, I mean, that's been the case for a long time. And that's not wrong, actually. I'm not sure we would put Germany in the fiscal saints. Cerainly Finland belongs to the fiscal saints, certainly Netherlands belongs there. But Germany has a very patchy record, so, that's another story. But what's wrong with the German view? There are two things which are wrong. One, there is this saints/sinners view and the idea that people who have sinned have to atone and do all sorts of terrible things, you know, whip their backs.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;Self‑flagellation.</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;Yeah, until it bleeds, and all of that, which is a moral view, which you may or may not agree with. But in economic terms, it makes no sense. So, that's number one. Number two is we need to have fiscal discipline in the monetary units being the missing piece of the Maastricht treaty. It was not missing, it was badly treatied. But we need to do it in a smart way.</div>
<div style="margin-bottom:11.0pt;">And the problem is that the Germans have one model, which is the German federal system, where the centre, essentially, controls the sub‑federal levels, the lender. And that's the way Germany runs. And it doesn't work too well. Now and then you have lenders that fold, and the federal government has to bail them out. So, it's not a great system.</div>
<div style="margin-bottom:11.0pt;">There is another system, which is the US system, where the federal government has no control, really, over what&rsquo;s happening at the state level. But all states, somehow, manage to take care of their budgets, they have fiscal discipline, even if they cheat a little bit with their own rules. But it works very well. And it's more respectful of the sub‑federal level.</div>
<div style="margin-bottom:11.0pt;">Now, given that we, Europe, we don't even have a federal state, and we don't have sub‑federal states, we just have nation states, which are very jealous of their sovereignty in fiscal matters, the German model cannot work. It's lost even before you imagine it. And that's what the Germans keep wanting, because that's what they know within their own country, and that's a terrible misunderstanding, and that's one of the key problems we are facing now.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;So, this is what you're suggesting should be a decentralized fiscal discipline.</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;Totally. And that's why a number of us have been arguing for years that the stability part with the subtle punishment will not work. And that you have to cull, each country has to do what it has to do, do their fiscal discipline, and somehow the system, the Eurozone, should provide incentives for countries, one, to adopt these things, and two, to respect these arrangements when they adopt them. But not punishing, not controlling, not denting sovereignty, which is impossible.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;Martin Wolf suggested yesterday, in the FT, that the Eurozone crisis is a balance-of-payments crisis. And that ultimately, external adjustment is far more important than fiscal austerity. Would you agree with that?</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;Yes, I know what Martin has been talking and writing about for the last month. I think it's not right. I think it's wrong. I think there is no serious competitiveness problem within the Eurozone. Everybody's looking at data which is wrong, the way they are presented. Everybody was worried about current account deficit in parts of the zone and surpluses in the other, but this has nothing to do with competitiveness, it's exactly like China. Everybody wants the Chinese to revalue because they have a current account surplus. The Chinese have a surplus because they save too much. Or they save a lot, not too much, that&rsquo;s their decision.</div>
<div style="margin-bottom:11.0pt;">The Germans are savers, and the Greeks&hellip; the Greek private sector is not desaving, it's the government that has been borrowing. And the Spanish private sector has been desaving because they borrowed to have their bubble, pretty much like in the US.</div>
<div style="margin-bottom:11.0pt;">So, you have all sorts of reasons why we had these diverging current accounts that fascinate, apparently, Martin Wolf. But it's nothing to do with a exchange rates, or prices or all of that. That's a total misreading of the situation.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;OK. And what about Standard and Poor's recent threat to downgrade the Eurozone countries? Is that a real threat to the potential of the EFSF and the bailout facility?</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;Well, as usual, the rating agencies are behind the curve. And it's been a while that some countries, in particular, France, have faced a serious risk premium, which means that it's not a triple A. So, I'm not surprised about that. The truth of the story is that part of what's going to happen in the weeks or months that come, is that the number of important countries will default, partially, on their public debts, which means that the banks, in most countries, will have a very serious bank crisis, and the governments will have to do something about their bank crisis, which means they're not triple A anymore. They have unsafe banks, and they cannot be considered triple A, and that's true of Germany, and that's true of France.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;How important, do you think, is tomorrow's summit for the Eurozone, for the future of the Euro?</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;It's like the last 20 years' summit we've had since the beginning of the crisis. Ex ante, everybody's very excited and say it's going to be the final comprehensive solution. And ex post we'll discover they made silly decisions, and they made the situation worse.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;What do you think the possibility is of a Eurozone collapse? Is there such a thing as an orderly collapse?</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;No, there is no orderly collapse, and I don't think there will be a collapse. It's in the economic interest of no country to leave. And the country can very well default on part of its debts without leaving the Euro area. There is no connect there. A number of people make this connection, but they don't see why. So, I see no reason for any country to leave. Now, political conditions may develop in this or that country that will lead to departure from the Eurozone. But not yet, and hopefully, never, because it would be a total disaster.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;And the other thing that's being pronounced today is the requirement to change the European treaties. Is that going to be a hindrance to development?</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;Well, it depends on what you change them for. If it's to change them for the madness that Chancellor Merkel is proposing, the European Court of Justice deciding what is an excessive budget deficit, then it would not be a good thing. If we change the treaty to impose smart fiscal discipline in every single country, that would be a welcome change. But I don't think that's what they are up to, that's why I don&rsquo;t expect that this summit will bring us a solution.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;So, in summary, Charles, what would you suggest to the Eurozone leaders meeting tomorrow as being a way out of the crisis, and how best to create a more stable economy going forward?</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;Well, the first task is they will decide to decentralize fiscal discipline and, two, as part of a discussion, will require that every single member of the Eurozone adopt some sort of the German debt brake solution, which is a good solution that's, it's actually, it's borrowed from the Swiss. And it's worked pretty well in Switzerland. So, that would be the only change I would require, and I'm not sure we need the treaty for that, it could be enforced in other ways. But if they were to decide that and nothing else, that would be the beginning of the end of the crisis. Then the ECB would have to do its part.</div>
<div style="margin-bottom:11.0pt;">Second best, for me, is that there would make a solemn promise, we don't have any summit for the next two years. Because each summit is creating terrible problems and generating enormous instability. So, I'd rather have them stop meeting and let the ECB take the key of their house and do the cleaning up.</div>
<div style="margin-bottom:11.0pt;"><b>Viv</b>: &nbsp;Charles Wyplosz, thanks very much for talking to us today.</div>
<div style="margin-bottom:11.0pt;"><b>Charles</b>: &nbsp;You're very welcome.</div>
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