© Laurence Copeland
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Not only it has deteriorated, it is still deteriorating. That is particularly true in the Northern Europe, in the core countries like Germany etc. Nevertheless, the situation might begin to improve in some of the Southern European counties, but if we consider the Eurozone as a whole, the situation is certainly worsening.
The recent data pointed out that inflation in the Eurozone fell to the lowest level in three years. Do you see a risk of deflation looming in?
It seems to me that deflation is unlikely but possible for a variety of reasons, mostly due to the fact that the ECB is still printing a vast amount of Euros. In addition to that, I would like to highlight that deflation would be catastrophic in many respects, as it would make the burden of debt for the Southern European regions even greater. Thus, what the Eurozone and the ECB would like to see is probably a more rapid growth of inflation than they have got today. Hence, I do not think that the officials would allow deflation to occur in the Euro bloc. I expect that they would print Euro at a certain velocity to ensure there is no deflation.
Recently the ECB chief Mario Draghi hinted at the possibility of a negative interest rate on deposits held at the bank. How effective do you think this measure might be in order boost growth in the Euro bloc?
Precisely because the officials are willing or considering going to such a drastic length, I do not believe that they will get deflation. If they are willing to introduce negative interest rates on deposits so that get things moving, then I cannot see they are going to have deflation. I do not actually think it enough to boost growth. Moreover, they have not decided on negative growth yet. It was just a proposal from a couple of people to have negative interest rates. However, even if they do, I do not think it would boost growth at all in Euro block. What it might do in fact, it might raise the inflation rate slightly but I cannot see it doing anything to boost real growth.
Newly elected Italian Prime Minister Enrico Letta is strongly opposing to the idea of austerity measures. Instead he believes that a change of course is needed and growth should be the top priority. What alternatives to belt-tightening does Mr. Letta have?
There are lots of structural reforms needed in Italy as in other South European countries, Spain and Greece notably. Thus, the sure answer to the question I think is – yes, if he goes for drastic, dramatic structural reforms and deregulation, increasing competition, privatization and so and so for, then maybe they would not need austerity measures, that could be true, at least to some extent. Particularly as Italy did not have a very big budget deficit and they did not have that sort of problem, there is to some extent a trade-off between them two.
However, I do not see any sign that Italy is poised for major structural reforms either. It didn't seem to me that the people, who are fighting against austerity in Italy, are more willing to contemplate structural reform than austerity. It appears to me that they are opposed to both. Italy has not had structural reforms for a very long time. Thus, I think there are alternatives to belt tightening, but they are probably ones that political colleagues and population would find even less palatable and attracted.
There is a suggestion that Italy should use its gold reserves to raise funds on the capital markets and thus get free from the European officials' austerity dictates. Do you think it is a feasible alternative for Italy?
At the moment there is no big Italian gold reserve. I doubt whether they are anywhere near enough to buy Italy out of the EU austerity dictates. There would need to be enough to pay down the debt way dramatically. Even then the problem arises that Italy has to pay higher interest rates on its debt. It still is going to have to cut its spending enough to pay the interest on the existing debt. Thus, I am not sure whether this is an alternative. Italy still has a budget deficit, and considering that it is not big, Italy still has a primary deficit. Thus, that would not resolve that problem either. Moreover, if Italy tries to sell its gold reserves, there is no clear indication how much it would get, since gold prices have been volatile lately. Hence, I am not sure that it is an alternative, which can buy some time for Italy.Where do you see the growth engine for the Eurozone and how will the situation in the Euro area unravel in the next 5 years?
Frankly speaking, I do not see any growth engine in the Eurozone. The German economy is quite capable of growing as it stands, without any reforms. However, it will not be able to expand if Germany has to carry the debts of the South European countries as well as France, which currently represents a serious threat to the Eurozone's stability. Therefore, Germany is strong enough to carry itself and perhaps some of the smallest countries, but not France, Spain and Italy.
I believe there is a variety of scenarios how the situation in the Eurozone might unravel in the next five years. One scenario is that Eurozone stays unreformed and unchanged, in which case eventually the Germans will have to start spending and then the effect would be accelerating inflation, and a collapse of the Euro down the road. Another possibility is that the Germans would work out the reforms, possibly before the elections. They might decide on reforms secretly and then announce them only when things are in place. The third possibility is the officials will expel some of the South European countries, but I doubt it. Hence, it seems to me that the first two are the most likely scenarios.