5 Aug 2011

How to survive the eurozone crisis

Economist Professor Richard Portes tells Channel 4 News there is a way out of the debt crisis engulfing the eurozone – but it needs political will to succeed.

Can the single currency survive the eurozone debt crisis? (Reuters)

Markets are in turmoil across the globe in response to the burgeoning debt crisis in the eurozone, fears over the weakness of the US economy, and the lack of growth in the UK.

But there is a solution to stem the increasing panic, Richard Portes, Professor of Economics at the London Business School, told Channel 4 News. And he says the challenge is political, not economic.

“The problem is a question of political will. The European leaders are leading from behind, and they have not yet tried to bring the public with them by going out front, saying this is a matter of the deepest political importance for Germany, for France, and for the others.

“Therefore it requires a commitment to get through this storm,” he said.

‘Avoidable train wreck’

Professor Portes warned that there is a “train wreck” ahead for the eurozone unless a number of steps are taken.

The problem is a question of political will. The European leaders are leading from behind. Richard Portes

“There are several things need to be done. One is to provide serious backup for Spain and Italy so that you erect a serious firewall in the debt storms.

“Essential would be to expand substantially the European Financial Stability Facility (EFSF) and to enable it to operate without significant limits in the secondary limits for government debt.

“That would already take the minds of the markets off the short-term debt issues for Italy and Spain and give them the opportunity to reform.

“Spain is already well launched on those reforms. Italy does need a substantial, serious change in economic policies, and many people in Italy recognise that – the only person who doesn’t seems to be the pime minister.

But I think Berlusconi’s position is now so weak, there is a serious chance of getting a proper, deep reform programme, which is what Italy needs.”

From the point of view of the global economy, Professor Portes added that weak economic figures from the US were “disheartening”, noting that US long-term unemployment is now “higher than it has ever been in the post 1970s-period.”

Is the UK in the firing zone? (Getty)

Is the UK in the firing zone?

Turning to the UK, Professor Portes was unconvinced by Foreign Secretary William Hague’s suggestion earlier today that the UK was not “in the firing line” of the current economic jitters.

Mr Hague announced today that: “We in Britain are not in the firing line of these problems because of the difficult decisions we have taken in the last year, to bring spending under control, to bring our borrowing down and to control debt.”

While Professor Portes agreed that Britain was unlikely to become part of the sovereign debt crisis, he did not think that this meant it was plain sailing for the UK economy going forward.

“The UK has the longest debt maturity in the advanced countries. The story that Osborne was telling to justify the cuts and the austerity programme, that the UK could become Greece, was nonsense from the day that he stated it.

“There is just no serious comparison. We did not need austerity on the scale that the Government’s programme has introduced, and the result is that we are likely, I believe, to get a double-dip recession – although the current forecasts don’t suggest that.

“Nonetheless, I did a piece for the Channel 4 News website last October. It was dead right at the time and it’s dead right now. We have big problems, and they are problems of inadequate demand – but they are not problems related to our debt.”