Wisdom from the Graybeards: Hannes Androsch, Former Austrian Finance Minister and Head of Creditanstalt-Bankverein, and Now Industrialist and Entrepreneur, Tells It as Only a Wily European Policy Veteran Can. A TIE Exclusive Interview
TIE: Let's start with the macro picture. Eurozone inflation appears to be dropping. The U.S. economy is OK but hardly overheated. And the price of oil has dropped, lessening the European Central Bank's ability to use that as an excuse for tightening. One would think a pause in the ECB's tightening should be a certainty, but it's not. Any comments?
Androsch: Over the last couple of years we observed the most dynamic economic development in the world economy in quite a few decades. Yet Europe and the eurozone specifically did not fully participate in that development. The consequence is enormously high unemployment and the deteriorating fiscal position of many countries-Germany, Italy, and France, to name a few. The ECB is obliged to focus on fighting inflation, not promoting general economic development, and they are overdoing it. Having avoided the mild recession in 2000-01, they contributed to the sluggish growth we witness in Europe this year. Things are a little bit neutral. But we are not fully using the growth potential I think Europe has in order to reduce the unemployment situation and in addition improve the fiscal situation. Although the ECB has lately been increasing interest rates, I would suggest, along with many others in the economic policy field, that they should stop.
TIE: Is there confusion about the significance of the drop in the price of oil? For instance, some within the ECB say that rising oil prices are dangerous because they contribute to headline inflation, and eventually core inflation tracks headline inflation. On the other hand, when oil prices drop---while the natural conclusion would be less pressure to raise short-term rates--the ECB's argument becomes, "No, the price drop will stimulate the economy too much so it moves closer to full capacity and an overheating situation." There doesn't appear to be a clear consensus yet on what happens particularly if the price were to drop another $5-$10, particularly as the world economy is slowing.
Androsch: Given the fact that you have a demand debt, there's no reason to be concerned an increase on the demand side is dangerous. We like the old price system sureties, but the world economy has changed. Both China and India--the two most important emerging economies--play an increasingly important role, and of course also on the demand side they're thirsty for oil and they're hungry for raw materials. On the other hand, China has added an additional 1.5 billion workers to the world labor market, putting strong pressure on the work side. In many areas the extra workers see very little increase in terms of real income. And on the other hand, the surplus countries--oil-exporting countries specifically--have increased their absorption capacity so there is not the danger of global demand debt to the same extent as we observed in the 1970s. We are facing the huge disequilibrium between the United States and the Far East, while Europe has a more balanced external situation. It is fair to say that the establishment of the monetary union and the introduction of the euro was indeed a success, but the situation is unbalanced. We are focusing on monetary policy, but we are still fragmented in the area of economic policy. That has to be changed.
TIE: How sustainable is the monetary union? If you compare the balance sheets of the Club Med countries--Portugal, Greece, and Italy--to the balance sheet of a Latin American country, the Latin American country looks significantly better these days. Italy, for instance, has fallen so far behind its largest trading partner Germany in the last five years that in the past the Italians would have obviously devalued their currency in response. But they've lost that ability by being part of the Eurozone. It was assumed that lower bond rates would compensate for the lack of ability to devalue. How sustainable is this situation?
Androsch: In the decades after the Second World War, the custom was to make the necessary adjustments by the exchange rate. …