Wednesday, September 29, 2010

Viðtal við Robert Mundell

Ég átti þess kost að setjast niður með Robert Mundell kennara mínum og taka við hann stutt viðtal. Robert Mundell er prófessor í hagfræði við Columbia háskóla. Hann hlaut Nóbelsverðlaunin 1999, lagði grunn að evrunni með brautryðjendastarfi sínum í peningamálahagfræði og er meðal þekktustu hagfræðinga heims.

Viðtalið var tekið í Columbia háskólanum í New York þar sem Mundell kennir og er hér birt eins og það kom fyrir, þ.e. á ensku.

JHE: You prepared one of the first plans for the euro and you are also regarded as the father of the optimal currency area theory. How do you respond to those arguing that the euro zone does not fit the criteria for an optimal currency area and therefore the euro is suboptimal for the countries involved?

RM: Well, we didn’t include as a definition that all countries would have fiscal stability or fiscal balance. Maybe more stress should have been on that. But that‘s always true of every kind of a union. If you have any kind of market in a free trade union, you have to have fiscal balance. You have to assume that certain things are in place. Also you have to have political stability and all kinds of things. I don’t think it is a part of the optimal currency area in a special way. You have to have good fiscal behavior by the members of any kind of union.

JHE: Do you agree that a political union among all the euro zone members in the long run is a precondition for the euro to last?

RM: The Greek fiscal problem as an example doesn´t have any particular bearing on the euro at all. It may cause a few points in the exchange rate, but that‘s largely wishful thinking or harmful thinking on part of speculators. It becomes a euro problem if the fiscal solutions involve bailout by the European Central Bank and it having to inflate.

JHE: José Barroso‘s economic adviser said recently that the euro zone has a centralized monetary policy but allows budgets and wages to move in different directions. He also said that without a political union in the long run the euro zone cannot last.

RM: I don’t think that‘s a current view of history. In the US you have 50 states and each has their own sovereignty in respect to their budget. They can get into trouble, there have been very few cases where there was a bailout, like in 1975 for New York. In the United States you kept the union together but you have defaults of several states and the defaults didn’t hurt the US dollar.

JHE: But, you have a federal government that can impose taxes nationwide?

RM: It doesn’t affect the fiscal stability of the individual state. It is a matter of its own budget. Canada is perhaps more similar to Europe because Canada has just 10 provinces and 2 of those are very big. Ontario is like the superpower of Canada, like Germany. Quebec is like France. There is a similarity there. It would be a problem if the big provinces like Ontario got into trouble. The bank of Canada would probably have to bail it out a little bit but if a smaller province got into trouble in Canada, it shouldn’t.

JHE: How can you argue on one hand the importance of an optimal currency area and its preconditions such as labor mobility, and at the same time be a supporter of the euro? For an Icelander it is not a straight forward task to go to, let’s say, Poland for a job when the Icelandic economy is in a recession. Such a move involves a different language, different educational-, healthcare-, social systems and more. It‘s a different world. Is that comparable for someone from, let’s say, California to move to Texas for a job?

RM: I am sure that different languages, cultures and systems make a difference. But there are lots of Polish workers in Iceland. Polish workers are in Ireland. The people of poorer countries come to the richer countries. They move. In Ireland I am told they like them very much and they are very successful. Because they come, they work hard, are serious and go back home and raise families back home. So there’s no real problem. I don’t know about Iceland but I have heard good reports about Polish workers in Iceland too.

JHE: So you don’t see this as a problem at all?

RM: You‘re right about the labor mobility. If you get big differences in culture and way of thinking it hurts labor mobility a lot and that makes it more difficult.

JHE: Don’t you see this as a problem for the euro?

RM: No, I don’t. The USA has become a melting pot of a source of all different groups and of different races. Of course they end up speaking the same language, English. Europe is becoming more and more ... increasingly English speaking as a trading language.

JHE: Are you confident about the euro and how it will develop in the future?

RM: Well the euro is one of the great successes of the European integration, as well as the common market. But this was a big step, a very difficult step. Just imagine the difficulty of countries like France, Germany and Holland giving up their national currencies!
In the case of Holland the people had it for 1200 years! A big heritage, it is a kind of patrimony to give it up for countries that were once world powers. Very difficult for them to do that, but they did it. And it is a good thing.

JHE: Do you then advocate enlargement of the euro area? Would you say we are heading toward a single world currency?
RM: Well, what I would favor would be a global reserve currency for the world. I think that would be a good idea.

JHE: Something like SDR?

RM: We need a world currency in case the dollar becomes more unstable. And something that other countries can have a part in and control in. I don’t think the dollar is completely suitable as the major sole currency now.

JHE: Let’s go back to Iceland. From 2004-2008 the local currency appreciated due to carry trade, fueled by the central bank’s inflation targeting policy. The local currency got too strong, purchasing power increased and it built incentive to borrow in foreign currencies, since debt in foreign currency was lowered measured by the local currency. The banking system collapsed in 2008, and carry traders wanted out, but had to be locked in with capital controls. Debt, measured by the local currency, skyrocketed causing bankruptcies and related problems. So, given this recent history, what is your advice to Iceland and its 300 thousand inhabitants?

RM: I think that Iceland should fix its currency to one of the two big currency areas, the dollar area or the euro area. I think Iceland has no business having a floating exchange rate, a country that small. Well, you can a have your currency, but that should be rigidly fixed to one of the two big currency areas. Like Hong Kong is fixed to the dollar or African countries are fixed to the euro.

JHE: So, Iceland should fix its currency since it is too small to have a floating currency?

RM: Well you have Bill Gates and with his wealth he could buy up money supply of hundred countries like Iceland. You have no possibility of having a free market exchange rate that isn’t going to be dominated by big corporations or hedge funds. No possibility. Then you end up with a tremendous pressure on the central bank, or whoever is managing it, to keep sure of all the politics and corruption that go with these weird movements.

JHE: So, if I understand you correctly you are saying that countries that have small economies are so fragile that a limited number of companies or even one company can manipulate the exchange rate. Therefore they should give up the hope of having a floating currency?

RM: It’s like the The Isle of Tonga in the Pacific or one of these currencies. The idea that they have separate currencies ... well historically small countries in the past have always fixed themselves usually to some big empire like the French or the British Empire.

You can keep the currency, but fix it to another area. Then don‘t have any monetary policy. Let that be your monetary policy, like Hong Kong. Population of Hong Kong is 25 times Iceland. Iceland is a very rich country, very lucky country because it got all that wonderful water around it and those geysers and fishing rights all those things inside and outside of Iceland. A great country and you want to keep it, but you want to minimize the risk. The big question when I say you should fix it to one of the two currency areas, is which one? I think if you fix it to the euro area there are some emotional reasons for doing that. But from the standpoint of culture, stand point of language, and the stand point of capital market integration you are in a way closer and better off with the US dollar.

JHE: What about the fact that we trade more with the euro area?

RM: It doesn’t matter. It is like Britain is half a dollar country and half a euro country. It is true that there is a problem for Iceland. If the dollar or euro exchange rate would be fixed there wouldn‘t be any problem … there wouldn‘t be any problem at all. But because it is not fixed then whenever there is a big fluctuation then there is a problem for Iceland, the way there is a problem for Britain. But I think you end up getting more out of it. You see in New York, the US has a capital market, but the euro area doesn’t have a capital market. It is in London. It is outside the euro zone. Maybe if Britain joined the euro zone, the argument for joining the euro zone would be higher, much higher.
But the thing is if you join the euro zone you are making a deeper political commitment than you have to if you joined the dollar area. I was asked this question earlier by your government, about which area Iceland should fix to, and I said that basically I didn’t want to make a recommendation on it because so much of it is a political decision rather than economical. There are some advantages to the dollar area because New York is very well defined and clearly you have got the capital market there, you have got all those things there.

JHE: Back to the question of labor mobility, how would that affect this choice?

RM: What would the people of Iceland prefer? Would they prefer to have labor mobility with the US or with Europe?

JHE: Would you let that decide?

RM: I was asking you a question. I would like to hear your answer?

JHE: In some ways Icelandic working culture is more like the US than European. Research has shown that Iceland is closer to the US for example in terms of job participation in certain age groups, working hours pr. week, attitudes towards women participating in the labor market, importance of a job, trust and so forth. But the main pro-euro argument is that approximately 60% of our trade is with Europe and we are a part of the EEA.

RM: Well, I could also ask you what Icelanders prefer. Do they prefer watching French or German or American movies and television?

JHE: What? (laugh) Would you let that decide?

RM: I am not anti-American, I am Canadian ... but I think ... and I live in Europe as well as here ... I have lived for some time in Europe so I am pro-European as I am pro-American.