The Spanish bank bailout is a positive development, but not a solution to Europe’s debt problems unless the eurozone unifies its fiscal policy, Nobel Prize-wining economist Eric Maskin said in Taipei yesterday.
Spain agreed on Saturday to accept a European bailout to help stabilize its cash-starved banks, following desperate calls from world leaders to accept the money before Greek elections on Sunday that could cause havoc in the markets.
“I think this is good news in the short run because it means worries about Spanish banks collapsing are temporarily postponed,” Maskin said after giving a speech on financial crises.
A systemic failure in Spanish banks would create unacceptable panic, the Nobel laureate said, but he cautioned against viewing the bailout as a permanent fix because it cannot work for very long.
What Europe really needs is to integrate its fiscal policy, an aspect that was left out of the design of the monetary union a decade ago and which has consequently led to one crisis after another — from Greece, Portugal, Ireland and Spain to Italy, Maskin said.
“Unless this design is in place, the debt problem will continue,” he said. “Things have been deteriorating fast for the past two years and the bailout is not a long-term remedy.”
The fiscal woes could be resolved if they were transferred from the level of individual European countries to the level of the eurozone as a whole, said Maskin, who was one of three people awarded the 2007 Nobel Prize in Economics for laying the foundations of mechanism design theory.
Fiscal integration is 10 years late, but remains the only way for the eurozone to survive the debt crisis, whether member states like it or not — because it entails surrender of control over their finances, the economist said.
If the eurozone cannot work out a regime to unify its fiscal policy, it might as well go back to the era before monetary union, Maskin said, adding that he is guardedly optimistic that unification of fiscal policy is possible.
Maskin said the US economy is improving, but the pace is painfully slow because the administration assigns too much importance to debt when the top priority should be to bring down unemployment.
The US government could spend more money employing workers to undertake public works, a measure that would eventually pay for itself because it helps put the economy back to normal and generates more tax revenue, he said.
To that end, the US government does not necessarily have to increase debt because it can finance job-creation programs by raising the tax burden on the rich, Maskin said.
“That may be difficult politically, but from an economic standpoint, it makes a lot of sense,” he said. It would take a few more years for US unemployment to drop to around 6 percent, from the current 8.2 percent, partly because of a political deadlock between the White House and the US Congress, Maskin estimated.
“Countries like Taiwan that rely heavily on international trade are vulnerable to external shocks,” he said. “While expanding trading partners is not going to solve the problem completely, it can help diversify the risks.”
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