- To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.
The European sovereign debt crisis is threatening to engulf Italy, Spain, and even France, while the recent U.S. credit downgrade has stirred severe market volatility (DeutscheWelle) throughout the continent. In an effort to tame skyrocketing borrowing costs, the European Central Bank (ECB) restarted its government bond purchase (Bloomberg) program. But to avoid the imminent demise of the euro, the EU will need to introduce a federal budget, euro bonds, and the strict coordination of nation-state budgets, says Jacques Attali, the founder and first president of the European Bank for Reconstruction and Development. Still, Attali argues, the U.S. economic situation is far more severe than that of Europe, and riskier for the global economy. "We have a lot more room to maneuver than the United States.," Attali explains, because the EU does not have any federal debt.
What is the best way for the EU to thwart sovereign debt contagion to weaker eurozone states?
If Europe is not able to go forward with the creation of a federation, it’s clear that the euro will disappear and collapse. And when the Soviet Union disappeared, the ruble as a global currency disappeared. It’s clear that even the United States as a nation, when it was created at the end of the eighteenth century, had no chance to survive without a currency, a federal budget.
We are exactly at that moment in Europe where we need to go from a confederation to a federation by the process of the creation of a federal budget, exactly as the United States did. Therefore, while we may discuss each of the different crises - in Italy, Portugal, wherever - the question is much simpler: If there is not in due time, in the next twelve months, real progress [with creating a] federal budget, euro bonds, and strict coordination of nation-state budgets, the euro will disappear; Germany will get out.
We are in the process of seeing a global market without a global rule of law.
What can the EU do to implement a federal budget ?
It has to first speed up the process of creating a [permanent] European fund, which has just been decided by the [European] heads of state, which is a real starting point for such a federation [EU decided to expand the existing European Financial Stability Mechanism and to give the fund the authority to intervene in the secondary markets; this will become the European Stability Mechanism in 2013]. When this is in place, [it will] enlarge the capacity of this fund; allow this fund to buy back the debts of different nations; allow this fund to raise new funding for the launching of euro bonds; and to use a certain amount of these euro bonds not to finance debt, but to finance new, growth-oriented investments in Europe. It’s [like the U.S.] treasury. [In the meantime], it’s clear that the central bank [ECB] should play that role [buying government bonds].
What does the sovereign debt crisis mean for the fate of the single currency zone?
We in Europe have always faced those kinds of situations. When we created a single common market, we knew that the common market cannot work without harmonization of technical norms and we created the single market. When we created the single market in 1984, we knew that single market would not work without a single currency, and we created a single currency. And when we created a single currency, we knew that the single currency will not survive without a federal budget.
How does the ongoing European sovereign debt crisis compare with that of the United States?
If the United States was one of the members of the European Union, in terms of ranking, the United States would be worse than Italy.
We should put that within the framework of a global crisis. Europe is not the main one; the United States is in a worse situation than Europe in terms of the deficit, in terms of debt. If the United States was one of the members of the European Union, in terms of ranking, the United States would be worse than Italy, between Italy and Greece. The United States has the worst economic situation in the developed world, even worse than Japan. We should not forget that Europe as a union has zero debt, while the United States has debt at the level of each of the fifty states. There are many PIIGS [term used for indebted states in the eurozone periphery: Portugal, Italy, Ireland, Greece, and Spain] within the fifty states of the United States, and there is a federal debt. While we have some PIIGS in Europe , we have zero federal debt. Therefore, we have a lot more room to maneuver than the United States.
How does the U.S. situation impact the European situation?
No one in Europe has an interest in the collapse of the United States. Bad news in the United States is bad news for Europe. If everyone succeeds, everyone has a better chance to survive. The consequence of the U.S. crisis in Europe is mainly linked to a lack of growth. When there is no growth in the United States, there is no growth in the most important worldwide economy, and that has consequence everywhere in the world.
What are the implications of the European sovereign debt crisis for the U.S. economy and the larger global situation?
The European sovereign debt crisis was triggered by the U.S. economic crisis [which in turn triggered the 2007-2009 global financial crisis], by the crazy management of the housing loans in the United States, by the crazy management of the regulators of the banks. [Mis]management by the Reagan, Bush, Clinton, and Bush administrations led to the global crisis and to the fact that the United States pushed the rest of the world into a huge financial crisis. [This] pushed the United States, Europe and Japan to have a huge increase of their public debt , by transferring private debt to public debt. We must be more concerned about what the United States [does] to put its house in order, because the new crisis that we are living in now was clearly triggered by the disastrous and appalling show given by the administration and the Congress in its mismanagement of the debt issue and the debt ceiling.
When we created a single currency, we knew that the single currency will not survive without a federal budget.
What does the U.S. credit downgrade mean for the global economy?
We are in the process of seeing a global market without a global rule of law. We need a [global] rule of law and we are not even able to put in place a local rule of law [in Europe and the United States]. And that means that the markets will win. The markets without that rule of law are not able to reach equilibrium, contrary to what the neoclassical economists were saying.
Minimum rule of law would be control of speculation by banks. The second dimension of a global rule of law would be to have a new international monetary system where the burden of cash [reserve] currency would be shared between the United States, Japan, China, and Europe.
How is the global economic order shifting, particularly in light of the U.S. credit downgrade?
The economy [is] shifting from the West, from the Atlantic to the Pacific. It’s not a new trend. I don’t think that China will become number one [ever]. The United States will stay for a long period of time as number one, even if it’s in a relative decline. But U.S. governance is appalling, and no company would survive with a conflict between the CEO and the board, as we have seen between the president and the Congress. One of the most important problems that has been highlighted by the downgrade is a need for a change in American governance.