Kenneth Rogoff: Some European Countries Are Fundamentally Bankrupt

US economist Kenneth Rogoff makes a clarifying interview with Der Spiegel, Monday, pointing out that several European countries are fundamentally – not just technically – bankrupt. According to Rogoff, Wall Street analysts and central banks have been plain wrong, over and over again, in their forecasts. He thinks it was a mistake to except the emerging southern economies into the euro zone, and believe the latest blunder by the US Congress have weakened the presidency.

“Policymakers have to get the idea out of their heads that there is going to be big rebound every time we see an uptick. That will not happen as long as debt levels are so high.”

Kenneth Rogoff

Now, we’re talking! Professor Rogoff nails several important facts to the wall in today’s interview with German Der Spiegel. Most important, in this bloggers opinion, is the need for a thorough reality check amongst analysts, bankers and politicians. The idea of a rapid recovery, and the return a pre-crisis economy,  has to be dismissed completely. The world has changed, and we have to change with it. A whole lot of debt has to be written off, losses has to be taken in full, before we can make a new fresh start. The longer we wait, the more painful it’ll get.

59-year old Kenneth Saul Rogoff  is currently professor of Public Policy and professor of Economics at Harvard University.

Between 2001 and 2003 he was chief economist at the International Monetary Fund (IMF).

He is an elected member of the American Academy of Arts and Science as well as a Fellow of the Econometric Society, and a former Guggenheim Fellow.

In October 2009 he published the book This Time Is Different: Eight Centuries of Financial Folly,” together with Carmen Reinhart, in were they make an analysis of all the financial crisis in world, dating back to the 1500’s.

Rogoff and Reinart document what they call the “This-Time-Is-Different Syndrome,” explaining:

“The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy.”

Sounds familiar?


Earlier this year professor Rogoff was awarded the Deutsche Bank Prize in Financial Economics.

Here’s some highlights from the interview with Der Spiegel:

“The markets are simply adjusting to the reality of a continuing slow and halting recovery. They realize there will be no boom anytime soon. Wall Street forecasters, and many central banks, had been starting to think that there was going to be a sharp uptick in the recovery. But they have got this wrong again and again because they keep wanting to use normal postwar recessions as a frame of reference. But this is a post-financial-crisis recovery, a rarer and very different animal.”

“The mentality that this is just a big recession, “the Great Recession,” has led to wrong policy decisions, such as the premature end of quantitative easing by the US, and the belief in Europe that there is a brisk recovery around the corner that will save the day and enable policymakers to avoid tough decisions on periphery country debt.”

“I believe that central banks should accept somewhat elevated core inflation for several years, higher than the normal 2 percent. Whereas I believe monetary stimulus is coming, I am worried that it will not be forceful enough to have any material effect on balance sheets.”

“Policymakers need to focus on relieving overextended private balance sheets in the short run, and stabilizing public debt in the long run. A fiscal stimulus cannot be the main solution. It may provide temporary relief, but there will be no traction without some normalization of private debt levels.”

“The stock markets had built-in pretty rapid growth. Now they see they were too optimistic. Wall Street, the Federal Reserve and others had all bet on pretty brisk growth and that was plain wrong. “

“I just cannot understand how President Obama made so many concessions in the latest negotiations over the debt ceiling. He was holding all the cards and he was still stared down by the Tea Party. He should have said: “I do not negotiate with terrorists.”

“Greece needs a massive restructuring plan, Portugal as well, probably Ireland, too. Ultimately, Germany has to guarantee all the central government debt in Spain and Italy, and that will be very painful.”

“Clearly it was a mistake to accept some of the southern countries prematurely into the euro zone, but there is now no other way to pay for their debt than through transfers.”

“Policymakers have to get the idea out of their heads that there is going to be big rebound every time we see an uptick. That will not happen as long as debt levels are so high.”

Read the full interview with Kenneth Rogoff, conducted by Gregor Peter Schmitz and Thomas Schulz, at SPIEGEL ONLINE.

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9 responses to “Kenneth Rogoff: Some European Countries Are Fundamentally Bankrupt

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