Press TV
July 22, 2011

Debt-ridden EU countries need to pattern themselves after Iceland as the country decided to look after its own people rather than corporate banks, says an economist.

Press TV talks with Marco Pietropoli, an economist in London, who describes how European countries are ignoring the Iceland formula for success and instead allow banks to bleed them from their assets and sovereignty. Following is a transcription of the interview.

Press TV: Every other week it seems to be crunch time for the Euro Zone – What’s different this time around?

Pietropoli: It doesn’t seem to be particularly different this time in that there will be an attempt at another patch and continue to kick the can down the road. This is not about doing the best thing for the Greek or Portuguese people; it seems to be fundamentally about saving the German and French banks and the financial system if you like.

The situation is unsustainable. The way to think about it is that if you had a heavy indebted friend how can it be the right thing to do to lend them more money at a higher interest rate? It doesn’t solve the situation.

At some point in the not too distant future a certain amount of default has to be on the table for a certain number of European countries that are heavily indebted and that will be painful. It will be painful for other countries that own the debt, but especially for other banks – And of course if they have another financial crisis that will affect in many ways not only the European economy, but also the global economy.

I don’t think it will be sorted out in this session; what needs to happen is either further political and fiscal integration in Europe where it is accepted that the richer countries continue to subsidize the poorer countries, or, there needs to be a split up of the eurozone coupled with a certain amount of default.

Press TV: An analyst says Germany benefits from having the weaker economies stay weak because it keeps the Euro cheap for their export market and so they bleed these other countries to support the German welfare state – Is that the role or function Germany has when it comes to the eurozone?

Pietropoli: The first thing to say is that the Germans didn’t get a vote in terms of a referendum for losing the Deutschemark and many of them a still quite upset about that.

Whether the situation is benefiting Germany remains to be seen. I think in the short term a weaker Euro is obviously helping, but if you look at the structure of the eurozone as things stand I agree very much with Max your other guest.

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To keep the Euro together what is actually having to happen is that countries such as Greece, Portugal and Ireland are having to deflate their economy to remain competitiveness. Some have made studies that countries like Italy may have to deflate by 20% to 25% in living standards to regain competitiveness in the European economies and global economies.

The question is of course is how much can the European peripheral country’s populations take of a pounding of having their living standards reduced so that the Euro is continued to be supported? At what point do the Greek people, the Portuguese, the Spanish and the Italians say enough is enough because what we have at present is simply unsustainable.

Press TV: Concerning fallout from the eurozone and from the US – How is it going to affect world markets and each other in turn?

Pietropoli: I think we can keep patching things up, but we are due another financial crisis – the system is unsustainable. Many independent views would argue that we are coming to the end of a fifty-year debt cycle. There is too much debt in the world. There is too much personal debt especially in the US and the UK; and there’s far too much government debt.

Many Western countries have been living far beyond their means for a long time with an aging population; growing liability for health care and for pensions and the situation is unsustainable. And we have to deal with the pain. My view was to deal with the pain upfront – take the pain and then grow. What we’ve done is continue to patch things up.

Talking about credit default swaps – this has been an absolute gravy train for the banks over the last few years and in fact over many years. They’ve written loads of insurance policies that somehow they never have to pay out. And this idea that we have a completely unregulated credit default swap market, which is being protected by the sovereigns, somehow the banks and states – no one can default on their debts and it’s absolutely ludicrous and it’s an absolute gravy train. What this is about in many ways is saving the banks rather than actually looking after the real people.

Fundamentally, if we look at what everybody’s trying to avoid, which is doing an Iceland (as they say) – the Icelandic people took the right decision. They made the decision to look after their own people rather than look after the banks and they are in a far better position than most of Europe at present. At some point you have to bite the bullet and if you’ve got too much debt you have to write some of it off.

Press TV: I’d like to reflect on this Greece rescue Draft, the 14-point marshal plan or Merkel doctrine. One of the demands under fiscal consolidation and growth of the euro area are that deficits be brought below 3% by 2013 at the latest. We’re talking about a year and a half – is that possible to achieve?

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Pietropoli: Of course not. The 3% was the stability pact, which was meant to underwrite the whole Euro Zone and most countries have never stuck to that so… The situation is that the amount of debt keeps growing; the deficits are not really under control; any austerity measures may well drive many countries back into recession if they’re not already in to recession and may make the deficit worse.

Countries like Portugal, Greece, Ireland and now Italy and Spain are having to pay an ever increasing amount of interest to borrow money and the situation is getting worse. It will come to a head at some point … a crisis will happen… I don’t think the European people can bear the pain that is continuing.

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