Eurozone in fiscal crisis

With Italian financial markets being buffeted by the latest bout of instability in the Eurozone, on the back of debt concerns, Business RT spoke with Steen Jakobsen, Chief Economist at Saxo Bank, about the outlook for the Euro.

RT:  How likely is it that Italy could request funds from the EU?SJ:  “I think we have to make a clear distinction between Greece and Italy, in the case that Greece effectively needed funding.  They needed funds to get through the budget, whereas Italy is in a totally different position.  It doesn’t mean, however, that the situation is not quite dire, they have a political inability to move forward with austerity.  So, different starting point, but a crisis.”RT:  How do you think Italy has come to this situation, where it actually has very high risks right now, of insuring state bonds?SJ: “Well part of the reasoning is that Italy has failed to migrate into a totally industrial nation – the first and most exported commodity remains agriculture.  On top of this Italy has the highest unit labour cost in Europe.  Meanwhile they have the lowest productivity – not exactly the cocktail that makes for a good drink.  And then they have failed to implement austerity in due course.  So actually they have been 120% debt to GDP for a long time.  But the starting point is not as weak and domestic savings is extremely high in Italy vis a vis other European countries.  But what we could be seeing right now is the first steps of a crisis in the Eurozone.”RT:  All these situations with Greece, with Spain, with Italy, demonstrate a huge imbalance between the different members of the Eurozone.  What do you think should be done in this respect?SJ: “Absolutely.  In rough estimates there has been 20% competitiveness difference between Germany and peripheral countries like Italy.  I think the long term solution is very clear, there is only one solution on the table, which is politically not very viable.  It is the establishment of a Ministry of Finance for Europe.  Europe was started without a Ministry of Finance, that is the reason why we are in the mess we are in today, because the local governments went amok in terms of spending money, so that’s where we are today.  The immediate way would be to offer bonds by the ESFM and ESSF and the funds which will almost force the European politicians to accept more coordination.”RT:  What can the ECB do?SJ: “ECB cannot really do anything.  ECB is monitoring the monetary policy and then acting on that.  I think that part of the battle we have now is that the ECB has backed down.  The interest rate hike in Europe, from the ECB, being detailed by the fact that they are saying to politicians ‘look guys, we will not do your fiscal policy for you any more, so we are not going to give you very low interest rates for  very much longer, you need to address the austerity,’ and hence we are now at the table and the difficulties reaching an agreement.”RT:  We saw yesterday that Eurozone financial chiefs which were gathered for a meeting did not take any action at all.  They said that they would but what are they doing?SJ:“You sounds surprised.  The politicians will always try to buy more time.  I have this premise of the politicians being that if the opportunity cost of doing nothing is zero they will do nothing.  But I think we have come to a time where the opportunity cost is becoming too big.  The problem however is that you are the Germans going into these types of negotiations you need to make absolutely sure that you are not in violation of the constitutional court in Karlsruhe, which is actually sitting these days and coming up with a memo of whether the so-called bailout is legal.  So you can say that the problem being that these governments are lawyered up, they are trying to stay inside the EU treaty, which they are clearly not in terms of practical development.  But I think the problem is that it is very difficult to strike a balance between doing something constructive and staying inside the EU treaty.”RT:  How long do you think it will take for all these problems to be resolved?SJ:“I think, ironically, we need a crisis. We need to create the political legacy accepting a fiscal union, so a crisis is not necessarily a negative.  You have seen it in Russia, you have seen it in Finland.  You can come back from crisis and I think people tend to forget that two generations ago they were fighting two world wars, they were seeing many crises, and still they created the best growth the world has seen.”