Nov 19, 2010, 08.37 AM | Source: CNBC-TV18
Nobel Prize winner and renowned economist Joseph Stiglitz has been very pessimistic about the global economy in the new afterword to his book Freefall.
In an interview with CNBC-TV18’s Banking Editor Latha Venkatesh, Stiglitz gave his perspective on the sound round of quantitative easing and the outlook on the US and Eurozone economies going forward.
Below is a verbatim transcript. Also watch the accompanying video.
Q: Will the second round of Quantitative Easing ease the burden on the US economy or would it continue to labour under the pressure of high unemployment?
A: I think 2011 is likely to continue to be a high level of unemployment. Since I wrote the afterword to the book, things have become even more pessimistic. It is more likely that we will be moving into a political gridlock. Therefore, it is less likely that we are going to get any significant stimulus, more likely in fact that we will have cutbacks that will weaken the economy.
The Quantitative Easing will almost surely prove to be relatively ineffective. I had anticipated that there would be strong negative reactions around the world. But I didn’t anticipate probably how strong those negative reactions have been. The kind of strong actions, currency interventions, capital controls, taxes that one country turned out that have imposed and the strong condemnation that was expressed at the G20 meeting.
Q: Coming to the other issue that consults the global economy, the Eurozone, we are seeing a resurgence of sovereign debt crisis in that continent. Do you think that this moment will also pass and like in Greece or maybe with even less trouble Ireland will be helped out and you are going to see the Euro as a currency sail through or are you going to see this becoming a regular quarterly or even more frequent occurrence, sovereign debt recast?
A: The problems facing several of the countries in Europe are severe. They don't need to be severe. Let me put it like this that if interest rates were low, these countries could easily service their debt. Japan has a debt–GDP ratio of close to 200% and has absolutely no problem servicing its debt. Greece’s debt–GDP ratio is 113%.
But - and this is an important caveat - these countries are not facing low interest rates. Markets are demanding high interest rates. That is a self fulfilling vicious circle. Because of the high interest rates, their ability to service those debts are going to be impeded, their ability to raise capital is going to be impaired. Therefore, these problems are unfortunately not likely to go away.