INTERVIEW: Still waiting for "radical reorientation" in eurozone

By Frank Brandmaier and Daniel Schnettler Dec 30, 2011, 12:06 GMT

New York - Jan Hatzius, 43, chief economist at New York investment banking and securities firm Goldman Sachs, discussed the direction of the economy in 2012, what went wrong in the eurozone, and how Europe can avoid a crash, in an interview with dpa.

Question: What are your expectations for the economy in 2012? Will there be a recession, and, if so, where?

Jan Hatzius: Our expectation is a recession in Europe, especially in the euro area, where our average forecast for the year is a contraction of 0.8 per cent. The recession should be a bit milder in Germany, but deeper in Spain and Italy. In the United States, we see more of the same: no big change compared to 2011, meaning 1.2 to 2 per cent growth, with a continued high unemployment rate around 9 per cent. In China, we project a weakening of growth in the course of 2012 to about 8.5 per cent, which remains much stronger than in other parts of the world.

Q: Why is your outlook for the eurozone significantly more pessimistic than other forecasters'?

Hatzius: We are seeing the recession already in economic indicators, for example, in business sentiment surveys. The conditions in capital markets are still tightening - added to that are fiscal policy headwinds from tax increases and spending cuts, especially in countries on the eurozone's periphery. That's why we think the recession will be deeper.

Q: Will the 2012 recession be worse than the 2009 recession?

Hatzius: Right now, we don't think so. Looking at the euro area, the economy shrank 4 per cent in 2009; now, we're expecting a contraction of nearly 1 per cent. If the debt crisis gets even worse and the eurozone threatens to break up, the economic crash could certainly be worse than two years ago.

Q: What has to go wrong to bring about this nightmare scenario?

Hatzius: The biggest risk lies in the multiplier effects between the sovereign debt, the financial markets and the real economy. Italy and Spain have to refinance a very high volume of government bonds in 2012. If these needs can't be met at manageable interest rates by the markets - or the European Central Bank, if necessary - then there is a danger of the crisis worsening and leading to an even deeper recession.

Q: What action is needed to prevent a crash in Europe?

Hatzius: Given the expected fiscal policy headwinds, the need for a more expansionary monetary policy from the European Central Bank is even greater. The US Federal Reserve has done much more in the area of monetary policy.

Q: In your outlook for 2012-13, you recommend two radical prescriptions that could be effective in combatting the crisis: a full-fledged European fiscal union and much stronger European Central Bank (ECB) support for bond markets. How likely is either to happen?

Hatzius: I consider a full-fledged fiscal union relatively unlikely, but I do believe that the ECB could do considerably more than it has thus far, and that could have a positive influence on financial conditions and the real economy.

Q: Comparing the crisis that arose from the US financial meltdown in 2008-09 and the euro debt crisis, and the way both have been addressed, what can Europe learn from the United States

Hatzius: When the various factors in a crisis - the real economy, the financial system and government policy - begin to really feed into each other, then you need a very strong effort to stabilize the system. That's what economy policymakers in the US were able to achieve, especially after the Lehman Brothers collapse. Until then it was patchwork; afterward, it was much more decisive. We don't yet have such a posture in Europe. We have not yet seen a radical reorientation of policies, especially monetary policy.

Q: How much can the ECB do? Doesn't the ECB have fewer options than the Fed?

Hatzius: Both central banks are in a position to do a lot. The ECB in some areas has more room to manoeuvre than the Fed. Of course, it's a complicated situation to serve as central bank for a currency area of 17 nations. Ultimately, though, the ECB has the task of looking after the economic and financial stability of the eurozone.

Q: Is there a cultural difference that the United States tolerates more drastic intervention through monetary policy?

Hatzius: In the United States, they have a more pragmatic view of monetary policy. For the Americans, it's ultimately a tool to not only keep inflation at about 2 per cent in the medium term, but also to stabilize growth in the short term. In Europe, there is less willingness to use monetary policy to regulate macroeconomic demand.

Q: What is the origin of the crisis in Europe?

Hatzius: The main cause is that mistakes were made in the construction of the European currency union. The economies in the individual countries develop very differently, there is only very limited labour mobility between the euro states, and fiscal transfer flows are limited.

Q: Have the Americans been quicker to draw lessons from the last economic crisis?

Hatzius: Yes. For example, capital reserve requirements for US banks are higher than for European banks.

Q: Why has Wall Street reacted so nervously to the debt crisis?

Hatzius: The Americans are especially worried because their own economic recovery is still very shaky. A hard shock in Europe could push the US back into recession, too.

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