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June 14, 2012
Greenspan wants consolidation, not more bailouts, for Europe
Europe's financial problems can only truly be resolved with a political consolidation of its southern "welfare states," former U.S. Federal Reserve chairman Alan Greenspan said Wednesday.
"The (poorer countries) are borrowing money on Northern Europe's credit card," he said during a panel discussion at the International Economic Forum of the Americas.
The system is not viable and continuing to bail out countries like Greece, Portugal and Spain won't work because the competitive position of these members will continue to erode relative to Germany, Greenspan said.
"The only solution to this is political consolidation of Europe," said Greenspan, who led the U.S. central bank from 1987 to 2006.
Greenspan said the "noble experience" of the euro clearly demonstrates that culture really matters, pointing to the lower productivity in southern Europe compared with their northern neighbours.
He said these countries also have weaker savings rates, higher inflation and larger shadow economies that evade taxes.
Despite the additional costs of funding bailouts, Germany wants to preserve the euro because its low value ensures the country's exports are booming. But Greenspan isn't sure how long the central currency can last.
"Yes, (the euro) has failed. The question is what happens now and what do we do about it," he said.
He said the European Central Bank can't continue to print money to bail out weak banks because the countries have very large deficits relative to the GDP.
The former central bank chief also expects the United States will face another debt ceiling crisis before a solution is found.
"There is a rapidly growing understanding in the United States political system," he said, "that this is happening and it is a disaster for everybody, so I think we're going to get around that, but not without some pushing and shoving and some angst."
Greenspan rejected calls by those who want even more stimulus to help the struggling U.S. economy.
"In my judgment, what would stimulate would be to do less and calm the system down and get the activism that is involved in creating uncertainty at a lower level," he said.
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