We talked to Jacob Kirkegaard, the famous think tank, from the Peterson Institute. He says the US is in even worse shape compared to Europe. The problem there mid term is about getting enough revenue. It is not credible to have a government to have aging population and military. Fiscal sustainability is all about fixing health care costs. Federal government revenues last year were 16% of US GDP. That is 1/3 of the EU average.
Peter Zentai: Do you think that the zero interest rate policy can be held in the US?
Jacob Kirkegaard: Well, I think they will. I’m pessimistic about reducing the unemployment rate in the medium term. I think it will be difficult to deal with this. The US has never really had an unemployment problem like in Europe. This recession has now created a long term unemployment problem in the US because of automatization. Now that the fed signaled that it will keep the rate at 0 until unemployment is high. I believe it will take longer then many people think.
What’s your take on the ECB?
I think the situation the situation facing the ECB is similar but t is also different. Interest rates in the euro are are low not zero but low. I would expect them to remain very low also for the medium term.
Is the Euro overvalued?
In short run it would be beneficial to have a weak euro but t would not be costless. Inflation would go up because of higher energy prices. The real problem with competitiveness is not related to the euro exchange rate. It is related to lack of structural reforms, excessively rigid labor market and other types of issues. These take a while to have and effect. France is really the biggest question mark here. It is the major deficit country in the euro area.
Why is the World still focused on southern Europe and no on France? Is it a geopolitical issue?
If you talk to the market participants that I talk to they are increasingly focused on France. So this is changing. In the southern periphery you now have a number of countries that received international bailouts. The problem of Greece was more acute. I think in 2013 the focus will shift to France.
Do you think Southern European countries have done their homework? Are you optimistic about Greece?
No. I do no believe that they are done. What they have to deal with is both a fiscal crisis and a cumulative lack of serious reforms. These countries adopted the euro but did not reform their domestic economies. The issue here is credibility. If the markets believe that a country of credibly committed to reforms going forward then it is enough.