Interview with World Bank President Robert Zoellick: 'Time Is of the Essence' in the Euro Crisis
World Bank President Robert Zoellick believes Europe needs to be more decisive in its response to the euro crisis. In an interview with SPIEGEL, he speaks of his sympathy for German reluctance to bail out its neighbors and explains why Chancellor Angela Merkel needs to take the lead.
SPIEGEL: Mr. Zoellick, as World Bank president your core mission is to promote developing nations. But currently we see developed nations in economic crisis while developing nations are booming. Has success in the global economy shifted?
SPIEGEL: We are currently witnessing an economic slowdown, even in India and China. But emerging nations seem to be much less affected by the aftermath of the global financial crisis that has hit Europe and the US so hard.
Zoellick: Developing countries have recovered better, but they recognize the need to continue to adjust. Look at China: This is a country that had grown 10 percent a year for 30 years and yet Chinese policy-makers are recognizing that the current model of growth will not work for the next 30 years. So the Chinese are starting to consider changes, such as opening up the service sector, changing the nature of the state-owned enterprises and launching fiscal reforms. When this global crisis hit, many developing countries were quicker than developed countries in understanding the need for structural reforms. There is an irony that the need for structural reforms is well understood in emerging markets, but in the US and Europe, people are not paying enough attention to the need for structural reforms for future productivity.
SPIEGEL: When representatives of developing nations meet European counterparts, they must think: "Oh, you were the countries lecturing us before, and now look what difficulties you are in."
Zoellick: As important as the economic challenges for Europe may be, the political stakes are even higher. For the past 60 years, the international order has been loosely guided by the trilateral system, consisting of the US, Europe and Japan. In the case of Europe, its influence and ability to shape ideas globally is at stake.
SPIEGEL: Has the global balance already shifted? The European Union has gone as far as to ask China for contributions to the Euro rescue fund.
Zoellick: I think that was a mistake. That is not how to work with China -- it showed weakness. Also, the average per capita income in China is about $5,000 a year. In Europe, it is close to $40,000 a year. So it would be hard for Chinese leaders to explain to their people why China is bailing out Europe when they still have about one-eighth the income. On the other hand, Chinese investments in the private sector could be of mutual benefit.
SPIEGEL: If the euro were to fail, could Europe remain an influential global player?
Zoellick: That would depend how it happened. Europe was a player on the international stage before it had a common currency. But having created a common currency, the spectacular failure of that project could significantly undermine the European project and lead to the re-nationalization of policies in Europe. That would be a big backward step and decrease the EU's global influence.
SPIEGEL: What impact would Greece's departure from the euro zone have?
Zoellick: Nobody knows. I wrote a piece suggesting it could be like a "Lehman moment." I meant that no one could have predicted in advance all the aftershocks of the failure of Lehman Brothers. Some countries in southeastern Europe have 30 percent of their deposits in Greek banks. However, the uncertainty does not mean other Europeans should give the Greeks whatever they want. If the Greek government threatens others with departure, the rest of the euro zone needs to have tools to be prepared to cope with the exit.
SPIEGEL: Legendary investor George Soros has warned that Europe has only three months window to overhaul its institutions. Would you agree?
Zoellick: I am uncomfortable with such predictions. But time is of the essence. I will give you examples: The European Commission is sitting on over 80 billion of cohesion and structural funds. If I were running the European Commission, I would have meetings every morning and every night, trying to figure out how I could move that money out more quickly to help people. Additional capital for the European Investment Bank could create demand and also political support for countries taking tough reform decisions. Deeper integration of the service sector markets could boost productivity and opportunities while strengthening the single market. The EU could make the movement of people easier. The EU is never going to have labor mobility like the United States because of language differences. But there are things the EU can do to help people to be able to move to where the jobs are.
SPIEGEL: In dealing with the euro crisis, the Europeans take many steps -- but most of them seem half-hearted.
Zoellick: They seem a day too late and a euro short. In general, the European response to this crisis has been to rely on additional liquidity when pushed to the brink. The ECB has bought time, but the time must be used. Countries have to address the underlying fundamental issues.
SPIEGEL: What else needs to be done?
Zoellick: If contagion strikes, euro-zone leaders need to be prepared - psychologically and through the European Stability Mechanism -- to recapitalize banks. Governments would have to guarantee bank deposits. They have to urge banks to make loans to business borrowers. It is far from clear that euro-zone leaders have steeled themselves for these steps if a crisis hits with full force.
SPIEGEL: It is hard to find quick, common solutions when one has to coordinate among 17 independent governments.
Zoellick: The European political process waits until pushed to the brink, and then Europe finds a partial solution. That is not sufficient. Time is now of the essence. The challenge in the euro crisis is not only Greece, but Spain and Italy. Spain and Italy are big. They are influential. Governments in both countries are trying to do the right things, but they are losing political support.
SPIEGEL: Meanwhile, support for further bailout measures is slipping in Germany. Half of Germans now think that the euro is more of a negative.
Zoellick: My own economic philosophy leads me to have very strong sympathies with the concerns in Germany. Frankly, if I were a German citizen, I would be very frustrated about other people that had not taken steps to reform their economies.
SPIEGEL: With that in mind, how would you go about convincing German voters to agree to more bailout money?
Zoellick: Germany has a strategic aim to deepen the integration of Europe with sound economic policies and the right disciplines going forward. Germany has to lead this process. For historical reasons, Germans are reluctant to do so. As soon as Germany leads, some people criticize Germany for being too pushy. But Berlin has to do it anyway. Polish Foreign Minister Radoslaw Sikorski gave a remarkable speech a few months ago. He said: "We have moved into a different era and a different phase. We need Germany to assume a leadership role."
SPIEGEL: Has Chancellor Angela Merkel been too reluctant to lead?
Zoellick: I have a lot of respect for Chancellor Merkel. I have known her since she was an opposition leader. I think she is highly intelligent. I also think she has been very effective as a politician in taking the pulse of the German public.
SPIEGEL: Are you trying to say she is a mere politician, not a leader?
Zoellick: I do not put down politicians. People who get elected take on responsibilities, and we need a mixture of policy and politics, as we have seen elsewhere in the world. Technocrats do not succeed without political skills. However, I think it is very important to speak up as a leader and to clearly explain what Germany's strategic aims are in the euro crisis.
SPIEGEL: And what should a German vision for Europe look like?
Zoellick: Germany needs to continue to emphasize fiscal and structural reforms. It can do so while fostering deeper integration. But Germany also needs to be clearer about how it will assist reforming countries as they take the necessary steps. Step-by-step, Germany is offering a lot. But it loses the political value by not getting ahead of the crisis and explaining what it will do if reforms are made.
SPIEGEL: Many Germans are concerned that the countries in crisis will simply take the aid money and postpone reforms indefinitely.
Zoellick: Spain and Italy are undertaking very difficult reforms. These are the types of reforms that German Finance Minister Wolfgang Schäuble and others have welcomed. These reforms will take time to show their benefits, because they involve both fiscal consolidation and structural reforms. So you need to balance these medium-term reforms with a medium-term assurance of finance.
SPIEGEL: A blank check from Germany can't be the solution. The worst case scenario could make Germany responsible for $500 billion in debt.
Zoellick: There are many options. I would not favor blanket euro bonds either, because then you lose the discipline of the market. However, there have been proposals to use euro bonds for debt up to 60 percent of GDP, so that any amount that countries borrow above that depends on national credit.
One could also draw from US history, the so-called Hamiltonian model. After our Revolutionary War, Alexander Hamilton, as the new Treasury Secretary, had the new United States assume the debts of the states once. Since then, our states have had to rely on their own credit. In the 19th century, we had states in the US that defaulted. Europe could introduce a similar system. I believe the Breugel Institute and the Chancellor have also suggested joint financing of states' debts above 60 percent of GDP, if countries make reforms. It does not so much matter which option one chooses. But choose one. And quickly. Don't be dragged grudgingly to the solution.
SPIEGEL: Germans still remember how they transferred massive amounts of money into former East Germany following reunification. These transfers failed to produce the "blooming landscapes" promised by the then Chancellor Helmut Kohl.
Zoellick: I think German unification was a historic success. One cannot view the world solely in economic terms; German unification was an achievement for freedom, democracy and the people of Germany. True, there are lessons to be learned from some costly economic steps taken during unification. One lesson is the need to increase productivity in countries, so that the investments will have a greater payoff.
SPIEGEL: A bailout for the rest of Europe would be much more expensive than German reunification.
Zoellick: Well, it is up for Germans to decide. It is not my place to decide this for Germans, but what I can say is that if one does not take the right steps, you run a serious risk for the future of Europe.
SPIEGEL: Who could be Angela Merkel's European ally in this process?
Zoellick: When Helmut Kohl and Francois Mitterrand worked together, they also worked through then-European Commission President Jaques Delors to shape the views of the other Europeans. Can the current EU Commission President José Manuel Barroso play the role that Delors played? I do not know. Also, French President Hollande is now walking a very fine line. On the one hand, he could be influential with Germany in coming up with a combination of actions that create the incentives and encouragement for the fundamental reforms that Germany seeks, but also assures economic support for the reformers. On the other hand, if President Hollande pursues economic policies that frighten businesses and investors, he will add France to the problem.
Zoellick: Australian Foreign Minister Robert Carr, a very good friend of America, visited me about 5 weeks ago. His main message was the United States is one budget agreement away from restoring its global preeminence. The president put the overhaul and expansion of the health care system as his number-one priority. Perhaps if his White House had known earlier more about the current challenges of the budget, they would have put some of these other fundamental economic issues first. I would have started with that as opposed to health care. So just as what goes on in Europe is important for Europe's role in the world, solving the United States' budget problem is important for the United States' ability to remain influential in the world.
SPIEGEL: Mr. Zoellick, we thank you for this interview.
Interview conducted by Marc Hujer and Gregor Peter Schmitz
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