CONFERINȚA "Viitorul pieței de capital românești" - Ediția a VI-a
BURSA 21.05.2012

Alexandru Sârbu (translated by Cosmin Ghidoveanu)
 
       The measures stipulated in the Treaty concerning the Stability, Coordination and Governance in the European Economic and Monetary Union will not prevent the rise of the sovereign debt, if a financial crisis like the one of October 2008 were to begin, considers Jörg Guido Hülsmann, economics professor at the University of Angers, France, and Senior Fellow off the Ludwig von Mises Institute of the United States.
       The interventions of the governments which have prevented defaults in the financial sector have created a moral hazard, as the banks will expect to be bailed out again if they were to face difficulties in the future, he considers.
       A potential exit of Greece from the Eurozone from the Eurozone would lead to the bankruptcy of the Greek banks and to serious problems for their creditors, but a collapse of the financial system can be avoided, given the determination of the Central European Bank to inject liquidity in the market, according to Jörg Guido Hülsmann.

 
     Reporter: How efficient do you consider are the measures taken to solve the problem of the sovereign debt in Europe?
     Jörg Guido Hülsmann: The measures are not essentially mandatory. Even if they are not complied with, there are no clear sanctions. So, there is no clear price to pay for the countries that break them. This would be the first observation. The second would be that these measures were designed with "normal" times in mind. What will happen if a crisis like the one that happened in October 2008 or the one that is being hinted at now? In this case the Central Banks may wish to stabilize the financial markets, which would involve greatly increasing the money supply. How do the Central Banks do that? By providing liquidity in the market. But, during a financial crisis, it is difficult for a Central Bank to find someone who would be willing to leverage even further. The only ones willing to do that, over the past few years, were the governments. I expect this to happen in the future as well. Thus, in spite of the Stability Pact, I think that if a major financial crisis were to occur, the governments will once again increase the public debt, significantly so.
     Reporter: In order to balance the public budgets, some of the countries have imposed austerity measures and there is talk of other countries following suit. But, considering the data on the economic growth in Europe, it would seem that these measures have affected the economic growth. Can the countries "mend" their public finances in the circumstances of a tepid or even missing economic growth?
     Jörg Guido Hülsmann: The austerity measures, if applied consistently and rigorously, which hasn't happened so far, can deteriorate the short term economic situation, by reducing the growth pace of the Gross Domestic Product (GDP), in nominal as well as in real economic terms. This is unavoidable. The markets may collapse, and a deflationary process may occur, which would eliminate all those who are overleveraged. But this would be beneficial over the long term, because it would put the economy on a more solid foundation. Our problem, at the moment, consists in the excessive debt which exists in the public and in the private sector alike. This problem can only be fixed through large scale bankruptcies.
     Reporter: Romania has succeeded in weathering the financial crisis without any lender in Romania going bankrupt, which was emphasized by the representatives of the International Monetary Fund (IMF). Is this a positive aspect or should we treat them more carefully?
     Jörg Guido Hülsmann: For me this raises some questions. Market economy is one of profit and loss. It is not a static landscape where there are only profits and all the market participants remain here forever. A healthy market is one in which exists what Joseph Schumpeter called "creative destruction", which consists of new companies replacing old companies which went bankrupt. A sign that the financial sector isn't a very vibrant part of the market economy is the absence of any structural changes. The banks are rescued from bankruptcy, whereas in the other economic sectors new market participants are appearing, and others are constantly disappearing from the market. I don't think we are dealing with a very healthy state of things, but rather with a total dependence on the support of the authorities.
     Reporter: After almost three decades of market liberalization and privatization of state owned companies, we are witnessing a new wave of regulations concerning economic activities, in particular financial activities, and the nationalization of some companies, particularly in the financial sector. How do you view the evolution of the world's economy in this context?
     Jörg Guido Hülsmann: The long term trend is to create a heavily politicized financial sector. And such a system is usually accompanied by inefficiency and corruption. This will cause companies, as well as the population, to constantly avoid the financial markets, because their services are unsatisfactory, and to find other ways to finance their operations. Therefore I am expecting a change in the structure of the financial sector, and I see it becoming less formal. People will resort less to the regulated markets and more to the networks made up of relatives, friends, acquaintances and so on.
     Reporter: The message which the authorities have conveyed is that the financial institutions will be privatized once they are healthy again...
     Jörg Guido Hülsmann: This idea is found in some of the economic theories. You save banks from bankruptcy, you improve their operations, and then you sell them. The problem is that through these measures, you are creating a moral hazard for banks, because they will feel that if they get in trouble again, the government will intervene in the just like it did before to save them. In doing this, you are maintaining the structural deficiencies of the current system, by keeping the profits in private hands, while at the same time having the population bear the losses. The best way to make the banks accountable is to leave the option of bankruptcy on the table. If you eliminate the risk of bankruptcy, you no longer have a market in the true sense of the word.
     Reporter: What would be the consequences of a Greek exit from the Eurozone?
     Jörg Guido Hülsmann: First of all, it would lead to a default of the Greek banks. Then, it would lead to the default of their main creditors. It is difficult to estimate the amounts which would be required to save the creditors of the Greek banks, but it is possible to reach a few hundred billion Euros. It is a big amount, but it is not impossible to obtain, considering that the European Central Bank has increased the liquidity supply by 1,000 billion Euros over the last few months.
     A potential exit of Greece could cause other countries do the same in the future, which would increase the costs of covering the generated losses. But as long as there is the possibility of using the "printer" to rescue the possibly affected losses, we have the possibility to prevent a potential collapse of the financial system. And even if many of the financial institutions of the countries which would stay in the Eurozone were to collapse, that would necessarily amount to the end of the Euro or of the European Union. Over the next five years at least, I am not seeing any threat to the integrity of the EU which would come from a possible collapse of the financial sector. Not even if a major crisis were to occur, this doesn't necessarily mean that the EU would break apart. It depends on how the people will interpret it. If they will blame the European Commission for it, then they may want to exit the Union. But no one is viewing the problem like that.
     Reporter: Thank you! 
 

 
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