United States and the European Union “are using the same recipe that the IMF applied on Argentina” to address the current global financial crisis and this only leads to “stagnation” said Nobel laureate Joseph Stiglitz attending a gathering of Nobel Prize recipients and young economists in Lindau, Germany.
“The best way to address the debt problem in the central economies is not with savings but with more spending; austerity travels in the opposite direction; it’s the wrong approach, the same recipe that IMF applied on Argentina” in the late nineties which ended with the 2001/02 default.
Stiglitz said it is quite clear what happens: “the economy slows down, then comes recession and finally it all end in depression. Without growth it is not possible to climb out of the crisis. The more time political decisions take, greater will be instability and costs”, emphasized the Nobel laureate.
“The only people benefiting from the delay are speculators -- the very people who European politicians tend to blame for their problems. Europe is providing the framework for the volatility off which they live” Stiglitz said.
Meanwhile “Argentina now ranks among the worlds’ fastest growing economies, thanks to the global boom in commodities. There is a bit of luck in that, and the pain the country suffered after the collapse of the peso at the beginning of the last decade shouldn’t be forgotten” said Stiglitz, but “ask yourself how strong Argentina would be now if its debt crisis had been better managed in the nineties”.
However he also pointed out that emerging economies “must diversify their productive structure and strengthen domestic demand”, to defend themselves from central countries’ crises.
Stiglitz praised Argentina for the right things it has been doing in recent years to guarantee strong sustained growth at high rates.
“Countries such as Argentina, Brazil and China displayed good macroeconomic policies; they understood the importance of a well designed Keynes stimulus to prop the economy and ensure that unemployment does not balloon”.
As to the future Stiglitz said that “if recession worsens in the US and the EU, emerging economies will have difficulties; I think they will be able to absorb a drop in exports but it is essential for them to strengthen domestic demand”.
“Even when a drop in Chinese growth would press commodities prices down, and that would affect Argentina and Brazil, I believe that China will be able to overcome the crisis and sustain demand for products such as grains, oilseeds, minerals”, added the Nobel laureate.
More specifically regarding Germany Stiglitz again criticized the austerity strategies telling German newspaper Frankfurter Allgemeine Zeitung on Sunday that Germany should spend more to help boost the European Union's economy.
Saving doesn't help, said Stiglitz. The [German] government can still loan out more money. Germany's growth would then boost the Euro zone's economy.
Of course it will cost money to preserve [the Euro]. But it will cost even more money if it falls apart, he said, adding that a German currency would rise in value, making business more difficult for German industry and trade.
Stiglitz said the decision by the European Central Bank to buy sovereign debt of Euro zone countries was not bad, but challenged overall European financial regulations.
Stupidly, European laws aren't flexible enough. Consequently, you can interpret them relatively broadly. And when you see how complicated the political process is and how little time remains to make decisions, that's totally feasible, he concluded.