Views of the Statue of Liberty and Hudson River from Willem Buiter’s office in the U.S.-based Citigroup’s skyscraper in New York befit his status as the chief economist at the banking giant. During a midpoint in travels that recently took him to Europe and would soon take him to China, he took time to assess a likely increase in U.S. interest rates, his fears that the United Kingdom will leave the European Union and why Germany should invest more in its infrastructure.
Handelsblatt: Mr. Buiter, when will the U.S. Federal Reserve Bank start raising interest rates, June or September?
Willem Buiter: Until just recently, investors in Europe were assuming June, as I learned from my discussions. Our view is still that it will be at the very end of the year. We have December penciled in and we are staying with that estimate after the latest Fed meeting. I believe Fed Chair Janet Yellen wants to see the whites of the eyes of inflation before she reacts.
Following the Fed's last meeting, Ms. Yellen was very cautious in her comments about the economy. Did that surprise you?
No. The U.S. economy is recovering, but it is not overwhelming. Capital expenditure has hardly recovered after five years and the official unemployment rates don’t tell the whole story. There is long-term unemployment for the first time since the 1930s. Since 2008, the number of Americans still looking for a job at all has further declined. There’s a large number of people that are working part time that would like to work full time.
Apparently, the markets were surprised by Ms. Yellen’s cautious statement. Share prices rose sharply on hopes that an interest-rate hike will be postponed.
Somebody always winds up being surprised. Markets are the home of overreaction to things that don’t matter and insufficient reaction to things that do matter, so on average they get it right, but they’re always wrong.
What role does the strong dollar play? Is it burdening the U.S. economy and delaying the increase in interest rates?
The U.S. exports only 13 percent of gross national product and imports 15 percent of GDP. Seen that way, the country is a very closed economy, much like Japan. But the dollar will drive down the profits of the companies and the stock market and eventually reach the pocketbooks of the consumers. Besides that, the dollar influences the rate of inflation, at least temporarily. The Fed can’t ignore that.
Where do you think U.S. interest rates will settle over the long term?
In the long run, with two percent inflation, we could see a Federal Reserve interest rate of 3.5 percent, and four percent for U.S. government bonds, but we might still go through a recession in the meantime. So, I think we probably won’t get above two and a half percent.
Why a recession?
We have recessions every seven years on average. The world is cyclical. This recovery has already lasted five years.
What is the greatest risk to the U.S. economy?
Congress is still a huge random factor. They haven’t acted as irresponsibly since 2013, when random cuts in spending cost half a percentage point of growth. The U.S. is the only country in the world that can have its funding cut off by the government when no agreement is reached on a new budget. The U.S. lost a lot of prestige that way. If you talk to people in China or India, they can’t believe it, it hurts respect for the country.
Another automatic spending cut is looming in October if no budget agreement is reached in Congress. What do you expect?
If no agreement is reached, 50 percent of the defense budget will be cut. That points in favor of an agreement. The Republicans certainly don’t want to scrap their last aircraft carriers.
America has become the largest energy producer in recent years. How detrimental to the country is the low price of oil?
It is very painful for some regions but, overall, the damage is manageable. Oil and gas are only two percent of gross national product, similar to agriculture. Low energy prices benefit the rest of the economy.
Let’s look at Europe, which is in a much weaker position than the U.S. Is the European Central Bank, the ECB, right in its policy of helping by massively buying government bonds?
ECB President Mario Draghi has an impossible job, but he’s doing what he can. Managing a governing council with 19 bank governors, all with different national agendas, is like herding cats.
Is Mr. Draghi too late with his program?
Naturally, but not because of Draghi. He first had to overcome what I call the Teutonic fringe, countries like Germany, Austria, the Netherlands, Finland, Estonia, and Slovakia. Even during the economic slowdown, the ECB reduced its balance since in 2013 by a trillion euros. That is the most perverse monetary policy you can imagine.
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How did Mr. Draghi convince the Teutonic fringe?
Thanks be for the sinking oil price! Deflationary pressure could no longer be denied, not even by Bundesbank President Jens Weidmann and the other hawks.
How far will the euro sink?
Based on market expectations after the latest Fed meeting that interest rates in the U.S. won’t be raised until later, the dollar could give way in the interim. But once a rise in interest rates begins, the dollar probably will pick up again. And given that markets tend to overreact, parity would certainly then be probable.
But the low euro is certainly helping Germany with its strong export industry.
It most helps the national economies that are the most open, so certainly Ireland or the Netherlands, even more than Germany. Greece, for example, or Portugal get less from of it. Just because currency weakening doesn’t benefit everyone equally, it doesn’t mean you shouldn’t welcome it.
Germany often is criticized for its huge trade surplus. What can be changed there?
You can’t demand the Germans stimulate their domestic demand simply to benefit neighboring countries, but it would be in Germany’s own interest to invest more. There hasn’t been enough money spent on the roads and railroads since unification. Infrastructure particularly in West Germany is miserable. The roads aren’t as bad as in the U.S., but are just as bad as in Great Britain. The investments are overdue and you can earn most of the costs back by increasing the tax base, if it’s done in an intelligent manner.
It is primarily the crisis in Greece that causes worry in Europe. What do you recommend Germany's finance minister, Wolfgang Schäuble, do about it?
Above all, both sides should talk less in public. It isn’t helpful when the Greeks depict Brussels, Frankfurt and Washington as enemies of the Greek people. But the schoolmaster approach on the German side also won’t bring anybody to a compromise. The last time I experienced something like that in school, I was seven years old.
Is compromise possible?
A deal is possible. Fundamentally, both sides are only a small way apart. No direct debt cut, but perhaps a refinancing in zero coupon bonds so the momentary burden is gone.
How would a Grexit take place, in other words an exit of Greece from the euro currency?
Something like that doesn’t happen all at once. The exit probably would be a drawn out process. Capital controls probably would first be introduced, including bank holidays. Additionally, perhaps a shadow or alternative currency in the form of tax credits. California once had something like that. As long as the shadow currency isn’t converted into a new drachma, the door remains open to the euro.
What would be the impact of a Grexit?
The Greek debts aren’t the problem. They are in the public sector. The money is gone anyway. The voters just have to be convinced of it. The greater danger is other countries becoming infected. There certainly would be a great loss of political capital and possibly upheaval on the markets.
Could Greece become a model for other countries such as Spain? There also is a strong leftist movement there.
I don’t think the Spaniards want to play Russian roulette. And Portugal and Italy also don’t have to take Greece as a model. I think much worse than a Grexit would be a Brexit -- Great Britain exiting the European Union. And there certainly is the danger of that happening if the conservatives win the next election.
But Great Britain isn’t in the euro.
Doesn’t matter. For me, the European Union is the greatest post-war political piece of engineering. If Great Britain withdraws from it, Europe will play a role like ancient Greece had in the Roman Empire ... a lot of culture but no political significance.
Thomas Jahn leads Handelsblatt's New York bureau. Frank Wiebe is a New York correspondent for Handelsblatt, focusing on on finance policy. To contact the authors: [email protected] and [email protected]