Any quotes used must be attributed to Murnaghan, Sky News

DERMOT MURNAGHAN:
Well the 20 heads of the world’s richest nations meet in Cannes later this week and top of the agenda will of course be the faltering global economy. Despite the deal thrashed out by the eurozone members on Thursday, real concerns remain about the possibility of a double dip recession. Well joining me to discuss all of this is former Bank of the England Monetary Policy Committee member Andrew Sentance, Jacques Cailloux Chief Euro Area Economist at RBS and former economic advisor to George W Bush, Pippa Malmgrem, a very good morning to you all. We meet, as we have in previous weeks, in very dangerous economic times Andrew Sentance, do you think the G20 can come up with anything more than has already been done?

ANDREW SENTANCE:
I think there is a very important issue of confidence at the moment in terms of broader business confidence and broader consumer confidence and the way that’s affecting financial markets. I think there is an opportunity for the G20 to give much more confident signals about the progress of the global economy. A major driving force behind the growth that we’ve seen so far in the global economy has been Asia so what China and India and the other Asian economies have to say will be important. I think we also need to see continuing strong commitment from countries that have large deficits to get those deficits down, that’s also been a factor sort of undermining confidence.

DERMOT MURNAGHAN:
You mentioned there the economies in the Far East and there being much discussion, Jacques Cailloux, about what particularly the Chinese might do in the eurozone crisis.

JACQUES CAILLOUX:
Yes, I struggle to find an massive announcement out of the G20 this week and especially coming from Asia, I think Asia wants more clarity still about the direction that Europe wants to take and more clarity about the announcement which was made this week. It probably also wants access to European markets, it wants Europe probably to recognise China as a market economy and so on and so forth, so I think a lot of conditions on the table which are not accepted yet by Europe and so I don't think that Asia is ready to put huge sums of money on the table without enough clarity at this particular stage.

DERMOT MURNAGHAN:
Pippa Malmgren, are we forgetting in the euro area, when we look at the eurozone we look at the east of course, if America starts to grow again then perhaps not all the problems but it might begin to look a bit brighter, and America is showing perhaps not green shoots but showing the tiniest signs of going in that direction.

PIPPA MALMGREN:
Well I do think that people are underestimating the recovery process in the United States, the restructuring, the fact that manufacturing is moving from China back to the mid-west of the United States, we see many companies across many sectors doing that because the wage differential is narrowing so that is one bright spot but I have to say I agree, when we come back to the deal that has been put on the table at the Cannes meeting, the bottom line is the Europeans are paying their unemployed more than the Chinese pay their employed and we’re asking the Chinese to write a cheque, so that doesn’t really make sense, number one. Number two, even if you were Chinese, any investor is going to look at the current situation and say, well the Greeks just got a 50% haircut on the debt, that means they don’t have to pay half of what they owe, so why do we expect the Italians to say we are ready to pay 100% or the Irish or the Spanish or anyone else? So the risk is now very high of default in other countries, not because the political leadership asks for it but because the public will demand it.

DERMOT MURNAGHAN:
So it is the haircut domino effect?

JACQUES CAILLOUX:
Yes, absolutely. I think this is absolutely correct, I think the domino effect is still in there and the firepower that has been deployed or that is being tried to be deployed, it is not strong enough. At the end of the day I think it boils down to the European Central Bank unfortunately and their degrees of freedom are pretty limited. The rule book in the euro area forbids the ECB to intervene in a major way, the result of that, the impact of that is that the default rate in the system has to be higher because in other countries you have the central bank that can support their bond markets and we don’t have really in the euro area to the extent that you could have in the US for example so I think that makes a huge difference whether the ECB will end up backstopping the system in a much greater way. It has been backstopping the system, let’s not forget that, but it needs firepower to be able to …

DERMOT MURNAGHAN:
Is that still the key at the moment, the eurozone still faces danger from there?

ANDREW SENTANCE:
I think some of the pressures on the European Central Bank might be a bit unrealistic. It clearly has a remit to maintain a broader financial stability but there is nervousness in many countries including Germany about a European Central Bank that seems to get involved in directly financing government deficits and monetising government deficits and that’s an issue, but I would take a slightly more positive view just looking ahead at the next week. First of all, whichever way you look at it, one trillion euros is quite a lot of money and if it can be delivered – there is an issue about the structure of the scheme but Ronald Reagan used to say a billion here, a billion there, soon you’re talking real money. Well one trillion is a thousand billion and that is a lot of money so it is a substantial package. But the second thing is I think what is very important for the G20 and picking up on Pippa’s comments, if we get a G20 agreement where countries appear to be carping at each other, trying to blame each other for the problems of the world economy, I think that is bad news so I think there has to be a recognition of collective leadership, that we’re all in this together in terms of the global economy.

DERMOT MURNAGHAN:
I want to ask you all about this because it is a debate of course in this country, this issue of deficit reduction, the speed of it versus stimulus, which is something no doubt they are going to discuss at the G20 but are they all operating in the same direction of travel? Talking again about the United States, we’ve got the huge concerns about the deficit, we’ve had credit worthiness downgraded in some quarters of the United States, yet a stimulus package as well.

PIPPA MALMGREN:
Well that’s right and I think the key thing to understand is that all of these countries, all the European countries, the United States, Japan, the United Kingdom, all have the same basic problem which is the burden of debt is so great that it is causing enormous pain for human beings that live in these places so you have to decide, are you going to inflate your way out of it or are you going to tighten your belts and spend less, or what combination of the two. Each place is picking a different combination. Personally I think the Americans are going to have no austerity before their Presidential election but definitely leaning in the direction of inflation even if the Central Bank says no, we would never do that. Here the Central Bank says well actually we’re going to let the inflation rate drift up a bit and we’re going to tighten our belt simultaneously. In Europe they are saying we don’t want to do either, Germany definitely don’t want inflation and if the ECB goes in that direction we will have an environment where the Germans will increasingly find themselves forced to choose between remaining in the eurozone or leaving the eurozone.

DERMOT MURNAGHAN:
Is that the hidden agenda in this country, that we’re actually just inflating our way out of it all?

ANDREW SENTANCE:
Well I hope not, we have a central bank with a formal remit to keep inflation down and …

DERMOT MURNAGHAN:
Well you know what’s happened with that.

ANDREW SENTANCE:
But I think the problem with allowing inflation to creep up and dealing with issues that way is you then have to deal with the problems of inflation and that will cause some distress and some pain, it doesn’t actually solve the problem, it just delays it.

DERMOT MURNAGHAN:
But isn’t the problem with politicians sitting around the table and they know they are, to coin a phrase, here today and gone tomorrow, they listen to economists but they think politically.

PIPPA MALMGREN:
But they are letting inflation go from two and a half to five and a half in an year, that’s an unbelievable trajectory.

ANDREW SENTANCE:
Well I agree and I was asking for policies against that. We have to recognise that inflation is not some sort of pain free solution to these problems, there is a lot of distress caused by inflation. One of the big squeezes on consumers at the moment is the high rate of inflation, one of the big squeezes on elderly people on fixed incomes is inflation, so I think it is quite dangerous if countries are seeing inflation as a panacea. In this sense I am on the side of the Germans, I think they are quite right to emphasise that inflation has got to stay …

DERMOT MURNAGHAN:
I’ll come to Jacques Cailloux on this, is anything other than fine words and photo calls where they all look very confident together, is there anything more in terms of policy going to come out of the G20?

JACQUES CAILLOUX:
Well I think just on this point about inflation, inflating yourself out of debt versus restructuring debt, I think it is pretty clear that on the German school of thought it is accepted that the cost of losing credibility on the inflation front is higher than the one, of defaulting so the euro area seems to be institutionalising that restructuring and it is about providing some form of orderly debt work out mechanism that mitigates the fall out of the restructuring and Greece is the first step in potentially all the restructuring down the line, they are not accepting it, they are not telling it but it is put pretty clear that some other pockets of the region are pretty insolvent here.

DERMOT MURNAGHAN:
So where does the growth come from?

JACQUES CAILLOUX:
The growth comes from the countries … I mean the core is that the growth has to come from the excess countries, the countries that have excesses in terms of their surpluses so you are looking at Germany and the core is you go back to Germany, can you please support your domestic demand, this is like Obama where you can still expand domestic demand and that will help the euro area countries. You go to Asia and say please focus on your domestic demand, you have got the resources and that will help your …

DERMOT MURNAGHAN:
But that hasn’t changed in decades has it, it doesn’t change?

PIPPA MALMGREN:
Well now we have problem because the inflation that is tearing through China and the emerging markets is starting to diminish their growth potential as well and in fact they also have a debt problem, even though the country doesn’t have a debt problem internally the government basically can’t force the banks to lend to the domestic economy to keep the job creation going and those now seem to be non-performing loans and so you have a combination of a banking system that now the market is worried about even in China and an inflation rate that is picking up which is why I actually keep coming back to the US as the country that probably surprises us. Even though they are not addressing the debt problem at the national level they are addressing it at the local level and you are seeing local communities restructuring their debt very rapidly, you are seeing cities and states much more aggressive and that is most of our debt problem anyway, not nationally.

DERMOT MURNAGHAN:
I must end it there, thank you all very much indeed for your thoughts, Pippa Malmgren, Jacques Cailloux and Andrew Sentance there.