When it comes to the possibility of a repeat of the global financial crisis, never say never, advises Anne Krueger, a former chief economist of the World Bank, and first deputy managing director of the International Monetary Fund from 2001 to 2006.
While unlikely, an unforeseen geopolitical event could trigger another economic meltdown, she says. A more immediate concern is the need to deal with the ongoing uncertainty in the eurozone where three interrelated issues require resolution: restoring order to Greece’s public finances; the more widespread problem of eliminating outstanding debt; and figuring out how to stimulate economic growth.
Posing the greatest worry, Krueger tells Julian Lorkin of [email protected] School of Business, are the lengthy delays in reaching collective decisions to sort out the mess.
An edited transcript of the interview follows.
[email protected] School of Business: Anne Krueger, are we being too pessimistic about the world’s economies, in particular the crisis that’s happening in the eurozone?
Anne Krueger: It’s not a question of pessimism so much as there’s just a very great deal of uncertainty as to how it will resolve. And until we have some notion as to the outcome, people can imagine things are far worse than probably the worst possible outcome. There’s a concern there.
[email protected] School of Business: Yet, it seems this crisis has gone on for several years. It’s almost like people standing around a swimming pool while somebody’s drowning in the middle of it, but not actually coming to a solution.
Anne Krueger: Perhaps that’s a little too strong. It’s been too little, too late. Each time the Europeans in particular have looked at the situation and decided to take action, they’ve taken action that might have been OK six months ago, but it’s become more serious since then. Also, at the beginning, people did not realise exactly the depth of the problems that were there.
[email protected] School of Business: So what should they be doing?
Anne Krueger: They need somehow to resolve three interrelated issues. On the one hand, they need to get the Greeks to restore some kind of order in their public finances. The Greeks have made some progress, but they started in a very deep hole.
Second, they’ve probably got to do more than they’ve done so far on the issue of outstanding debt – because there’s a lot of that, and it’s in the banking system, both in Greece and in the rest of Europe, and that’s a major problem.
But for a long-term solution, the third thing they have to do is to get some economic growth. That takes structural reforms. And on that score, so far, the Greeks have not done terribly well.
[email protected] School of Business: If you look at how the world economies have been reacting to the European crisis, most have been fairly resilient. Certainly Chinese manufacturing has been keeping up strongly until fairly recently. Even the Asian financial markets didn’t seem to be too badly affected. But could the thing actually explode, so that we end up with a global financial crisis Mark II that’s far worse?
Anne Krueger: I think it’s unlikely. But of course, you can never say never with these kinds of unknowns going forward. It’s certainly imaginable, either there could be some kind of geopolitical event or something somewhere that would then trigger the worst. But I don’t think that’s likely.
The most worrisome outcome is simply that there is [such] delay in trying to reach decisions and in getting effective decisions by all 17 eurozone states – and then getting the agreement of the European Central Bank (ECB) and the International Monetary Fund (IMF) and so on – that at some point along the way, for whatever set of reasons and I can imagine several, the Greeks feel they are forced to take independent action and on some weekend close the markets, announce a new drachma, and go their own way.
[email protected] School of Business: So what would be the role of the IMF in this? Can it try to help the situation?
Anne Krueger: The IMF is already in there. The IMF was not in there from the beginning, because the Europeans thought they could handle it. But the IMF was brought in before the first program, and they referred to it as the troika – with the IMF, the ECB and the eurozone countries. And the IMF has been there ever since.
At this point, the IMF has said, “No more money”, because it doesn’t have any more to put into there, and it’s worried about who else it might have to help. But certainly there is an IMF program in place; the IMF has that money, so that’s been done.
[email protected] School of Business: But with the IMF helping out, is there a danger of moral hazard with other countries that may get into trouble thinking the IMF will come up with some money and help them out as well?
Anne Krueger: I don’t think so. I think the penalties that the Greeks have paid for getting into this mess are very, very strong. And nobody else wants to be in that situation. There are some really tough things that the Greeks have to do. It’s hard. On the other side, the decision-making process is very complicated and difficult when there are 17 countries that have to agree, along with the European Union and eurozone as a whole, plus the ECB and the IMF.
[email protected] School of Business: If we look at the history of world financial crises, they do seem to happen on a fairly regular basis. Look at the Asian financial crisis, which started in mid-1997 with a run on the currencies. It spiralled out of control and the IMF was asked to help. But it still took a long time to actually solve those problems.
Anne Krueger: Well, I don’t know [that it took so] long in the case of South Korea. The authorities said they did not wish any help from the IMF until December. The IMF came in, I think, on December 3. And by the end of January, the thing had stabilised. That’s not a terribly long time path.
So I think the stabilisation part is not hard. Getting the reforms so that you don’t do it again is harder and takes time. But I think Korea was back and growing within about seven or eight months. Very rapid when they downturned and came up again.
[email protected] School of Business: But it hit Indonesia much harder, if you look at the devaluation of their currency …
Anne Krueger: Sure. But Indonesia had major political problems – and some major other problems – that could not be addressed right away, which is why it took so long.
[email protected] School of Business: Looking back on the Asian financial crisis, could the IMF have done more?
Anne Krueger: So much of what has to be done, has to be done by the country, anyway. And many times, the authorities aren’t quite ready to accept that maybe they bear some responsibility for what happens. So I think the answer is that it’s hard. Yes, the IMF possibly could have said, “Look, you guys need to take more actions”. There would have been enough of a push-back on the part of the authorities that they probably wouldn’t have. So in that sense, I doubt [the IMF could have done more].
[email protected] School of Business: The IMF was set up as part of the Bretton Woods system. It was designed to be the additional – not quite a last – resort, but at least to help out when necessary. If you look at what happened in Argentina in 2002, at that point the IMF was almost like the creditor knocking on the door. Did it go too far?
Anne Krueger: What happened in Argentina is pure and simple. The Argentines adopted a quasi-currency board, which is very close to the [present] Greek situation with regard to the euro area. At the same time, Argentina did not undertake the other measures that were necessary to sustain it. It wanted to try and maintain what it could without doing the necessary steps. So it ended up with a big fiscal problem. In Argentina’s case, it had to do with the provinces being able to issue money, which the federal government could not control.
[email protected] School of Business: Hopefully the European crisis is going to solve itself, and yet there are now questions as to whether this is going to spill over into Asia. We’ve seen the slump in Chinese manufacturing during the past few months.
Anne Krueger: [Think back to] the 19th century when the fastest-growing country in the world was Great Britain. It grew in per capita terms at 1.5% a year. The rapidly growing countries of Asia – South Korea and now China – have been growing that fast in a decade. When you grow that rapidly, you confront problems much more quickly; the train is going so much faster and all these issues arise.
Asian countries are now having problems [that are comparable with those we had] at our stages of development. You can either confront them and address them and take action so that they’re not the road block to the next part of development, or you hit a crisis.
I’m reasonably confident that we will see some countries in the world that, once again, over some issue or other, fail to take the appropriate remedial actions before a crisis, and we’ll see other crises. But I don’t think that’s an argument for not growing.
[email protected] School of Business: Is it an argument for more regulation?
Anne Krueger: The question is how much is too much? And that’s not an easy one to answer. There are markers for it. The big problem then – and I think what you’re getting at – is when countries do borrow, to what extent is there any support for getting them out of there? That’s the harder question.
I would be very reluctant to say you can’t borrow more than so much. During their rapid growth phase, the South Koreans were growing 10% of GDP a year, and their debt to GDP ratio was going down because they were growing so fast. They used it all very productively; and if you borrow and you pay 7% to 8% on it, and you’re getting a 30% return, as they were, what’s the problem?
There’s good borrowing and bad borrowing, and sorting out which is which is hard.
[email protected] School of Business: How can you analyse what is good and bad borrowing?
Anne Krueger: If you’re borrowing a lot and you’re not getting any more output – growth is slow – then you’ve got a problem.
[email protected] School of Business: I’m sure many countries are looking at the lessons we can learn from the global financial crisis.
Anne Krueger: Don’t forget that we also want to distinguish between the cyclical phenomena, where everybody will borrow more or spend more in the downturn, and then get more tax receipts from the upturn. So cyclical is the longer-term trend, and cycles are different.
[email protected] School of Business: They certainly are. But again, countries don’t seem to always learn the lessons of that.
Anne Krueger: No.
[email protected] School of Business: They just hope things will get better.
Anne: Yes, that does happen.
[email protected] School of Business: In that case, I certainly hope things are going to get better for the global economy.
Anne Krueger: So do I.