I am pessimistic on Eurozone, IMF optimistic: Stiglitz

Q&A with Nobel laureate Joseph E Stiglitz

Europe is struggling to find ways to put Euro zone in order. However, Nobel laureate Joseph E Stiglitz assesses that Europe's diagnoses of its problems are wrong.

In India to take part in OECD World Forum, he tells Dilasha Seth and Indivjal Dhasmana that austerity is wrongly taken as a cure for Euro zone's problems which has driven Spain and Greece into depression. Edited interview:

The world economic recovery still seems to be fragile, particularly in the Euro zone and the United States. What is your assessment?

The IMF global forecast at the Tokyo meeting is accurate, reflecting the weaknesses in US, Euro and slowdown in China, India and everywhere. Basically, IMF was perhaps a little optimistic about Europe. I think there is more significant risk of continuing turmoil in Eurozone. They were not optimistic, let me say, I am more pessimistic than they are.

What makes you pessimistic vis-a-vis optimism of IMF?

I think the kind of unravelling of the banking system that you are seeing in Spain. If this money leaves Spain, weakening their banking system and weakening, therefore, the Spanish economy and it's a dynamic situation. If that happens, debts of the banking system increase. The bank gets weaker, the government gets weaker and more money leaves.

I have seen no real evidence that European leaders are yet ready to do anything other than taking temporary measures even if at a grand scale. Even at a mass scale of $ 1 trillion of Long Term Refinancing Option (LTRO), the effects would have lasted for only a few couple of months. Even massive amounts of money don’t have the effect and their diagnoses of the problems have consistently been wrong.

What is wrong with their diagnoses?

The underlying problem of Europe’s diagnosis by Germany is excessive spending, but in fact Spain and Ireland had surplus before the crisis. In fact, austerity is weighing the countries down making things more worse. You need to have a common banking system, and that means not just a common supervision but common deposit insurance by resolution and mutualisation of that. Those seem to be things that if they are done are done in a time span.

Austerity is very clearly a wrong measure. I think the evidence is overwhelming that it is one of the causes of recession. Spain and Greece are in depression and not recession and that was brought by austerity.

How do you see the precarious global economic situation impacting India's growth story?

Impact on India is both through financial markets and trade. India is part of the global economy and you cannot have the kind of magnitude of weakness in global economy without having some repercussions on India. But India’s problems are not completely easy to understand because India is not like China’s export driven economy. It has more domestic demand. So some other things are going on in India, some of that may in fact be a part of the global economy, investors confidence in general in the world is weak, and that spills over.

Will FDI reforms and fuel price corrections announced by India boost investors confidence?

I think a lot of people put excessive weight on investors confidence as a factor in economic activity. Can’t be ignored, but it isn’t the only factor and in the debate in US, the people who support austerity say that austerity will work through restoration of investor confidence. For US we know that is nonsense and has never worked as you cut back spending, your economy gets weaker and investor confidence erodes. And the benefits on the fiscal side, is more than overwhelmed by the fact that the real economy is weaker.