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Zoellick: Eurozone’s Fate Immediately at Stake; U.S. Needs to Address Spending

September 19, 2011 at 12:00 AM EST
Markets on Monday continued to show anxiety over the European debt crisis as Greece held an emergency conference with creditors, trying to calm fears of default. Speaking with Judy Woodruff, World Bank President Robert Zoellick urged eurozone nations to make some hard decisions and the U.S. to slow the growth of entitlements.
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JUDY WOODRUFF: Anxiety over the European debt crisis sent new tremors around the globe today, as you just heard, shaking up financial markets again, the most immediate worry: Greece.

Its creditors are threatening to withhold the latest installment of a $150 billion rescue package. Lenders are worried the government will not follow through on politically unpopular cuts. That prompted new fears today that the country may default on its debt in a matter of weeks, triggering big problems across the continent and elsewhere.

Well, those developments served as a backdrop to our interview with Robert Zoellick, the president of the World Bank. The bank provides loans and assistance to developing countries. Along with the IMF, it is a critical player in global economics and politics.

We met at the World Bank’s headquarters here in Washington.

Robert Zoellick, president of the World Bank, thank you for talking with us.

ROBERT ZOELLICK, President, World Bank: Pleased to be with you.

JUDY WOODRUFF: As we sit here today, a lot of worry out there about Greece. You have said yourself in the last few days you think the world economy is entering a danger zone. Do you worry more about the European debt crisis or about slow growth here in the United States?

ROBERT ZOELLICK: Well, I don’t think it’s an either/or. We’re in a world economy, and both of them matter.

But I think the Eurozone right now presents a more imminent issue. And that’s what we’re seeing in the markets.

JUDY WOODRUFF: Given what’s happened with the Eurozone, is it better if this has to be the choice for the Greeks to default, if that is the only choice, rather than to continue to muddle along, which is what has been happening?

ROBERT ZOELLICK: Yes, well, so far what the Europeans have done, whether it’s Greece or some of the other countries, is to provide various types of liquidity support, meaning they’re making sure that money is available for banks or for the country’s bonds.

And that’s important, but it buys time. And it only buys time. And there are some more fundamental decisions, whether it’s Greece or any others. And so the point that I have been making is, is that Europe really is approaching a key decision point here, just like it did in 1989 or ’90.

And it needs to think of three issues in an interconnected fashion. One is the sovereign debt and for some countries, like Greece, in a very, very heavy load; B., the banks, because if the debt doesn’t have its full value, that undermines the bank’s capital. And then that shows with problems with people pulling money or illiquidity out of banks.

But third for some countries, the competitive position. So it really comes down to a question of whether that monetary union that was created some 20 years ago will have a complementary fiscal union, which could be done in different ways, or whether Europeans manage the consequences for highly indebted, uncompetitive countries.

But it’s also affecting all of us, just as we saw in the summer, where the combination of events in Europe and the United States started to have a contagion effect in markets globally.

JUDY WOODRUFF: Well, given — you speak about the Eurozone, the monetary union. There are those who argue that it would be better to have each country standing on its own dealing with the consequences on its own, rather than trying to hang together and have the sort of difficulties we’re seeing right now in Europe.

ROBERT ZOELLICK: And these are decisions that only Europeans can make. So, if you’re sitting in Germany or some of the other countries, you’re saying, look, I’m tired of bailing out other partners. But then those countries have to decide do they want to preserve a Eurozone?

Do they want, in the case of the  absence of a euro, you would see the Deutsche mark have appreciated in value. But it’s more than just that aspect of trade. It’s a question of what sort of future of Europe do they want and how should it be structured?

So, if one does move towards a fiscal union — I’m not by any means suggesting it just needs to be a bailout — you would have to change — and there’s different ways to approach this — the types of fiscal discipline, whether used through markets or whether used through institutions.

JUDY WOODRUFF: What do you think?

ROBERT ZOELLICK: I really believe it’s a European question, because it’s so fundamentally political. It’s not — this is not a technical expert question.

Experts can offer various alternatives. But to make this work, just as the United States had to make its decision in 1787 — that was a political decision about the future. And so these are the questions that they have to face because they’re going to pay for it one way or the other. And it’s going to affect their future as a union.

JUDY WOODRUFF: You have also mentioned you’re worried about the weak growth here in the United States. Solutions — is the solution the kind of austerity that some are saying must happen, cut government spending massively or should it be some combination of cutting government spending and strategic investment in things like infrastructure?

ROBERT ZOELLICK: Well, the U.S. also has to pay attention to fundamentals. It’s not quite as imminent as the European situation.

But over the course of the next year or two, and maybe after the 2012 elections, given American politics, people are going to have to face up not just to the question of what we call the discretionary spending, the annual budget spending, but really the growth of entitlements.

And here it doesn’t really have to be cuts. It’s slowing the rate of growth. And that’s a decision that neither the Congress nor the executive have really joined yet.

But, also, there are — there’s a need for pro-growth strategies.

And you have seen — I was at the Treasury in the ’80s when there was the last major tax reform. There’s starting to be a movement for the idea of trying to broaden the base, lower the tax rates. That would be a strategy that would boost growth. And, frankly, open trade is something that we haven’t been pursuing. That’s another important structural reform.

So, my message, whether it be to Europeans or the U.S., or frankly with the developing countries we work with, is don’t forget the structural aspects of growth, the fundamentals of growth going forward. And I’m not by any means a believer that the U.S. or others are caught in some stagnation. There’s certainly all the possibilities of moving ahead. But people are going to face some tougher decisions.

JUDY WOODRUFF: So do you think people are acting like things are worse than they really are here in the U.S.? Is that what you’re saying?

ROBERT ZOELLICK: No, I think they’re serious. But I think — the difference is I think, in terms of market response, Europe is right now on the firing line. I think, in the United States, if the United States doesn’t act on these issues, I see it already globally, how it’s sort of weakened the United States’ position. But in terms of financial markets, the United States can muddle through for a while longer.

JUDY WOODRUFF: Why does all this matter for the developing world, which is your principal focus here, the World Bank?

ROBERT ZOELLICK: Well, you know, in this downturn, the developing world has actually been the one source of light. About a half of global growth now comes from emerging markets.

And that really relates to your prior question, too. What we have seen over the past 10 years much faster than one would have expected is the rise of emerging markets as players in the system. But starting in August, we started to see some of the ripple, the contagion effects.

The bond spreads for emerging markets debts on average rose about 70 basis points. That’s about three-quarters-of a percent.

JUDY WOODRUFF: Costs more money to…

ROBERT ZOELLICK: Costs more money for their sovereign debt. Their equity markets also took serious hits, just like they did in some of the developed countries.

Their exports to developed countries have already been down because of the crisis. And the issue which we’re watching closely, because this could be the game-changer is that, if the confidence effects also undermine their investment or their consumer confidence, then the one source of global growth that’s kept us going would start to slow.

JUDY WOODRUFF: And that, you’re saying, would have a — in turn, a big effect on the developed world, on Europe…

ROBERT ZOELLICK: Yes. I mean, one of the — if you look at the source of U.S. growth, it’s primarily been some of the exports. So we’re all in this together. That’s part of the point, whether you’re developing or developed or Europe or the United States.

And the need is not only for actions, but some cooperative actions that reinforce one another.

JUDY WOODRUFF: You are putting at this meeting of the World Bank a lot of emphasis on providing more equality for women, gender equity.

I think you’re using the theme “Think equal.” There’s been efforts over the years in the international community by non-governmental organizations and others to increase opportunity for women. Why is this one different?

ROBERT ZOELLICK: Well, this is being driven by an annual report that we do. It’s a world development report. It’s certainly a major contribution to a field where we don’t just try to advocate or talk about a subject, but provide some solid analysis.

And while, you know, I believe that gender equality is not only the right thing to do. What this report makes very clear is that it’s smart economics. So what we can show with studies from African countries, developed countries, is what a difference it makes to give women the same property rights, a chance to move into business lines, credit, inputs for agriculture and how it improves productivity.

So at the exact moment that we’re looking for sources of global growth, how can any country really succeed with growth if it doesn’t draw on the full capacities of 50 percent of its population?

JUDY WOODRUFF: Well, it’s certainly a full plate that you have.

And, Robert Zoellick, president of the World Bank, we thank you for talking with us about it.

ROBERT ZOELLICK: Glad to be with you.