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DERMOT MURNAGHAN:
Now then, David Cameron’s decision to veto the eurozone’s Stability Union Treaty, means the UK can now only observe crucial decisions being made in Brussels. 26 EU members agreed to a tax and budget tax to tackle their debt crises but will these measures actually be enough to save the euro and prevent countries like Italy and Spain from defaulting on their debts? Well I’m joined now by former Chief Economist to the IMF, Ken Rogoff, who is now a professor at Harvard University. A very good morning to you Professor Rogoff. In Britain we seem to have been discussing, and I’ve been on this programme discussing that euro summit through the prism of what went on in terms of Britain’s relations with it, but looking at the mechanics of the deal that those eurozone members came up with, and others, does it looks as if they significantly advanced the mission to protect and ensure the euro’s survival?

KEN ROGOFF:
Well everybody has used the phrase over these last many summits of kicking the can down the road and this time they kicked it a little harder but they certainly didn’t solve it. Basically they are providing cover for the European Central Bank to print money and temporarily solve the problem and I say temporarily because ultimately if these countries debts still don’t pay back, the European Central Bank has to finance this and it will either have to have inflation or it will have to go on its hands and knees to be given the money and those are ugly things, so they just pushed it back. This wasn’t a … it is stabilising for now but it doesn’t solve the root problem.

DERMOT MURNAGHAN:
Of course politics is a huge element in all of this but are they in a sense then delaying the inevitable? If you want the euro to survive given that the wolf is at the door at the moment, do you have to say the European Central Bank is the lender of last resort and we will print bonds backed by the Central Bank which are worth the money they’re written on?

KEN ROGOFF:
Well yes and no. I mean the European Central Bank has to give in, it keeps saying we’re tough, we just care about inflation, we’re not going to get forced to finance junk government deficits, we’re not going to do this but at the end of the day what are they going to do? Go out of business having said that they never had high inflation? They have to give in. But the problem is there really are some countries here where they don’t belong in the euro in its current form. You need to change things pretty substantially so certainly Greece and Portugal, even some of the star performers like Ireland are barely marginal, Spain has problems. They can’t afford to let the big countries go, I want to be clear, but they need to go to something much more than they talked about. They talked about monitoring each other, they need a government that taxes, maybe half the taxes in the European Union, if they don’t move to that this thing is going to continue to become more and more unstable.

DERMOT MURNAGHAN:
And Professor Rogoff, you touched on it in your first answer there, this issue of inflation here, I mean in this country here it’s around 5%, I mean is there almost a tacit, a subtle element of using the economic policy that dare not speak its name, inflation, to erode the debt and given that experience of the 1970s especially, no government is going to say we’re going to let inflation take up but it is a useful tool in the short term is it not?

KEN ROGOFF:
Well it is very controversial and it is very different what the United Kingdom’s doing and what Europe’s doing but one way or the other, not all the debts are going to get paid whether you are talking about the mortgages in the United States, you are talking about the periphery country debts in Europe, some of these banking debts, they are not all going to get paid and the question, can you work it out with bankruptcy politically restructuring? If you can’t, inflation does help but central bankers, you are right, they are loathe to say we’re going to do this with inflation because if people start thinking that, then interest rates start going up, especially long term interest rates. I don’t want to have my wealth deflated down so they try to tell you they are never going to do it but I do think we are going to see it a little bit everywhere.

DERMOT MURNAGHAN:
And is Britain looking, not just politically isolated within Europe but also economically isolated as well or could it be the other way round, given the events that happened on Thursday night, Friday morning, I’m sure you’ll be aware, with Mr Cameron vetoing that deal? Could he turn out to be the one who can say well look, I told you so, this thing is heading for the rocks and we don’t want to be any part of it?

KEN ROGOFF:
Well this is a very delicate political dance and we’re in the middle of it. First of all this thing is far, far from over, there are many summits left, there are many decisions and this Treaty is the first of half a dozen steps like this they are going to have to take. I’d also say I don't know anything about the particulars of the negotiations but if you are never prepared to walk away from the table, you have no negotiating power. The Europeans are very desperate right now, France losing its triple A rating, several of the countries losing their single A rating practically, I mean they are in a lot of trouble, they are desperate, they are talking about desperate measures. Particularly disconcerting is this financial transactions tax which just is bad policy frankly, there are things they should do with the banks but not that and Britain needs to look out after its interests so I don't know what all the negotiating is but this this is not won and done, this is going to go on for years and years.

DERMOT MURNAGHAN:
Do you see, not just in terms of Europe states but indeed in the United States as well, do you see the advancement of the developing and developed world almost, in terms of China, do you see that shift that we’ve been describing as taking place, as being accelerated?

KEN ROGOFF:
Yes, a bit. I mean there is no question that before the financial crisis, emerging markets, China especially, they were growing faster and now they are still growing fast and we’re growing slower. I wouldn’t overstate it but it has accelerated things, but they do play an important role here because they are doing a lot of things pumping money out into the world, that’s keeping interest rates down. If they ever figure out a way to use more of it at home, interest rates would go up for everyone and these fragile countries would really go bust quickly, I mean that would happen faster than you can blink so this low interest rate environment keeps this thing going and China has been a part of that.

DERMOT MURNAGHAN:
So the low interest rate environment, is it almost a form of life support? That is the crucial thing is it because if interest rates go up then you get the situation all over again where mortgage holders cannot service the debt, the housing market will …

KEN ROGOFF:
Germany and the United States would have trouble if interest rates went up to five or six percent suddenly and they were starting to have to refinance at much higher rates. I’m not saying they would go bankrupt but that would be quite a change, given the size of their debts now.
 

DERMOT MURNAGHAN:
Cast your mind to Britain’s deficit reduction strategy – and it is a political question as well, as to whether you can cut too far, too fast and therefore affect growth, it is the ability of governments I suppose to foster growth by public spending.

KEN ROGOFF:
Well yes, by public spending but ultimately the private sector is the engine of growth in all modern economies and the public sector can build roads, you can build ports, you can have education, there are many, many roles for the government and you want to be careful about not borrowing too much along the way and there is no question, everyone in the world is over extended. We are still in a debt crisis so to just say oh, we’re in a debt crisis, let’s borrow more is a very, very incautious statement. You’ve got Ireland hanging over you, very high household and public debt here.

DERMOT MURNAGHAN:
Professor Rogoff, thank you very much indeed for your time. Professor Ken Rogoff there, of Harvard University.