Eurozone to Bail Greece out or Disintegrate?

The financial crisis in Greece has demonstrated the limitations of Eurozone as it exists today. Newsclick speaks to Professor Jayati Ghosh analysing the possibilities ahead. 'Things have gone worse from bad', says Prof. Ghosh, "since I spoke to you (Newsclick) a year ago"

Rough Transcript

Prabir Purkayastha (PP): Hello and welcome to Newsclick. Today we have with us Prof. Jayati Ghosh from Jawaharlal Nehru University to discuss again the Greek Crisis. Jayati, we have discussed this one year back. What has changed one year because as we see the crisis was as bad it was. The Greek government seems to be on a verge of a default and people have at least started to protest vigorously at the kind of attack it is taking place. What do you think is offering in the immediate future.

Jayati Ghosh (JG): First you asked me what is the immediate changed. What is changed is not as bad as it was. It is significantly worse. Stakes are now much higher for Greece, for Europe and for all the peripheral countries and for the financial markets. So everything is significantly worse. The other thing that is changed is the scale or rather the pace of change has accelerated. So I think a year ago, I had said it we would three or four years. Now, we are talking in months. Everything has changed so the speed of every these movements is so much faster I would say we are approaching the end game.

PP: Do you think Greece is in the verge of default as it stands today.

JG: Greece is defaulting. I don't think it is on the verge. It is really now technicality what you call it market have decided that the Greece is defaulting. They have decided the fact that in. The credit rating agencies which were very slow to pick up were now were being ahead of the game. Now they have announced anything restructuring is going to be classified as default .

PP: The private banks are rolled over. The debts are rolled over, their private debts are rolled over. This will be considered as default.

JG: Specially, it is revalued which is what is going to happen. Now the question is not how or whether Greece will default. It will definitely default. The question now is what that default means for the rest of the Euro Zone and the peripheral countries in particularly and what the last one month has shown the possibilities of cotagent are immense. They are much much much greater than it was anticipated. The thing that has concentrated in everybody's mind was the attack on the bond markets in Italy. Because once that has lined up if you like against the war the next in firing line is really Portugal, Ireland and may be Spain. Italy was really way back in list. Italy to be in the financial market firing line I think that was a little bit of shock. That shows, the possibilities of contagent are much greater than everyone thinks.

PP: To think that if for instance the European Banks and of course Germany and France will be two financial powers in Europe don't bail these out. It would be like Lehman brothers in United States though it will be 2.5 percent of the Euro Zone economy but it can actually can unravel the whole Euro Zone.

JG: Oh yes. Definitely because they are not going to stop there. The markets will sense and they will move on to next country, the next country which is why it is no longer a matter of Greece and resolving the Greek problem is no longer in fact the issue because let's face it, OK you can resolve Greece, you can resolve Portugal and Ireland It's just expensive but just about manage to cover all of those debts. If you tend to Spain or Italy, we are talking big buck here. So once Spain or Italy enter this process, we are talking at entirely different level. The European commercial bank can not really manage if they have even huge funds at their disposal to cover all those debts. So there is now only one solution. Earlier, you could have had smaller solutions. The solution today is Euro bond. There is no other solution if you want to keep the Euro zone intact.

PP: But do you think the time has come to think the unthinkable. Actually, the Euro zone should be dissolved over the period of time. You don't know it's no longer unthinkable. People are no longer thinking it, they are saying it. The financial press is full of talking about when it will actually break up. I think it's still though open. I remember a year ago telling it will really depend on the politics which you can not have economic union without fiscal federalism and so Europe has to make a choice or rather larger countries of Europe have to make up choice essentially Germany and France. Do we go for fiscal federalism or do we not have Euro Zone basically. That's still the case.

PP: That's also very clear that the prevailing opinion in Germany less so in France but certainly in Germany it's unwillingness to bail out any other country and therefore, the pressure from the right in that sense is actually increasing. Whlie the people are on the move in d Spain and Greece particularly the indignant move, the indignato whatever it is called very clear that the people seem to be moving in a very different directions. So do you think political legitimacy of Europe is actually going to be achieved.

JG: That's again is very interesting. I completely agree with you. The current politics is such that and a lot of that is driven by the media by the way. In both these sets of countries which is that indignaty in Greece or completely valid popular uprising in Spain or elsewhere which says this is not our debt. We did not benefit from it. There is no reason to close down our schools and hospitals and throw our workers out of jobs for this. That's completely valid. The popular media in Germany, in France and Finland, in Norway and Denmark, in all of these countries feeding a completely false notion that this is a huge burden that has been put tax payers in this country because of profligate Southerners. This is completely false. Germany is the single greatest beneficiary of the Euro Zone. Germany prosperity results from it's ability to export to these countries to lend the money to import from them. This is completely misplaced way of doing it. However, a crisis has a way of forcing a different kinds of change. To me it's still not clear whether the leadership in Europe is willing to sacrifice the Euro Zone. It may well be, they may use the potential of this Lehman type trigger which will actually lead to a global financial mess there is no question about it to justify a very significant fiscal shift towards greater federalism in the form of Euro bond. What does Euro bond mean, it mean one bond per any country. So it is no longer the Greek bond or the Spanish bond. It is one Euro zone bond.

PP: Which is effectively surrendering a part of surrendering the financial independence which they already have in terms of currency but further surrender in that sense.

JG: Yes, it's partly it's a further surrender but you know the peripheral countries for those who are not source of it, it's actually a massive improvement from the current position.

PP: If you look it in other way. Do you think it is actually restructuring this countries in favour of finance capital in a much larger sense. European Union is forcing effectively Greece to sell all it's assets all the public sector, the electricity, power plants all these on the block for sale. Don't you think it's huge opportunity for financial capital to restructure itself and actually buy all these assets and bargain basement price. But it's an old story for us in the developing world. Every financial crisis is meant for the liberalisation further reduction of the role of the state and massive privatisation. This is an old story. We are seeing it played in the developed world now but this is something we are already familiar with. Certainly this is the case, remember also that the Europe within the developed world is still has the role of the state in the public sector. So there is much greater potential for hacking up the state, generating the private asset out of the public wealth which is also true in Germany, France, Austria and many other countries. So yes, there is further potential for destroying the public sector and privatising these assets. There is a political limit to these things, I think. I think we are seeing the limits emerge on both sides quite clearly.

PP: So again for what you are saying the jury is still open whether actually the Euro Zone will actually disintegrate or will it find instruments to hold together and also generate some kind of legitimacy for seventeen state financial union without a political union.

JG: The jury is open but we are ending the game. So what I was earlier describing as time period of several years is now really several months. This is going to happen before our eyes. The European Union as we know it will not exist at the end of this year. It will either be a completely different and much more integrated physical union or it will have dismembered in parts.

PP: And the second happens the global financial prices would be far more intense then what it is today.

JG: I believe that's true.

PP: Thank you I think this is been a very interesting discussion and to the next two to three we will be following what happens to the crisis in Greece and what happens to the European Union.