Joseph Stiglitz is better placed than most to adjudicate on the sovereign debt market buffeting Greece, Portugal, Spain and, of course, Ireland. The Columbia University professor, who shared a Nobel prize in 2001, worked as a chief economist at the World Bank, was a former economics adviser to President Bill Clinton, and now, as a bestselling author and commentator on the global economic crisis, is a scourge of banks, bankers and speculators who benefited from government bailouts.
Described as a "worthy successor to Keynes", he was critical of President Obama whose bailout, he said, should have been bigger and better directed. He also knows a thing or two about Ireland. He was a regular speaker in Dublin at Economic and Social Research Institute events at the height of the boom, and has commented critically on the Irish government's response to the bust here ever since.
But it is Stiglitz's current role as an adviser to the new Greek government that gives him a ringside seat to the unfolding market crisis facing Ireland and the rest of Europe. Greek sovereign interest rates soared to unbearable levels, spreading turmoil through debt and currency markets to Madrid, Lisbon and back again to Dublin and potentially the rest of the EU.
The Daily Telegraph has dubbed the crisis a Club O'Med affair, unreasoningly, because Britain with its own huge sovereign debt pile and its Greek-sized annual deficit could be next in the firing line.
The Sunday Tribune caught up with Stiglitz last week as he prepared to shuttle between London and Paris promoting his latest book, Freefall, which argues that only major reform will save the world economy from the damage inflicted by the cult of unfettered markets.
On the eve of the EU leaders announcing a so-called bailout of Athens, Stiglitz said that Europe needed to stand and fight off speculative attacks on one of its members. "The vocabulary needs to change from bailout to commitment," he said in a phone interview. The markets were taking big bets about nothing less than the break-up of the eurozone and the speculators should be faced down.
It matters little, he said, whether the fund for Athens is sourced out of Brussels or the Washington-based IMF. The important thing is that it happens, he said. If Europe were to say it would stand by any country and if necessary tap more funds from organisations like the IMF, the crisis could pass.
The size of the fund required to regain the confidence of the markets is hard to estimate because, he said, the lesson of the bust is that markets were "irrational and crazy". The stakes for Europeans were anyway too high to be left to the mercy of sovereign debt markets, he said.
"You cannot calculate how they [markets] will react. It is unpredictable. What is true is the willingness to support countries against being attacked. That is what you need," said Stiglitz, adding that a prospective fund need not necessarily be a large amount, maybe just €50bn.
"That's a small number," he said, covering the bond debt that Athens will need to refinance this year, not the whole stock of Greek debts of hundreds of billions of euro stretching out to 120% of the country's GDP.
"It is not a huge amount. And it is a loan. The loans for the private banks were much greater. If it is loans, they will have to be repaid."
Stiglitz chose his words carefully when asked whether the strictures of the EU's Stability and Growth Pact were damaging the chances of European recovery. Ireland has committed to hammer its annual budget deficit – at 12% of GDP – below the 3% ceiling by the end of 2014, while Greece has promised to have driven down its similarly-sized yearly borrowing even sooner, by the end of 2012.
The answer, he said, depends on the speed of the global recovery. "I am a pessimist. The markets have gone into euphoria [in predicting a strong recovery]," he warned.
In Ireland, under normal circumstances, it would be unwise to take money out of an economy in an "environment of recession". But he said that, in contrast to Ireland, Greece was better prepared to plug the loss of credit from its failing banks by setting up a state-sponsored fund for small- and medium-sized businesses.
Athens has also a tranche of EU structural funds that it plans to spend faster to help salve the shock for some of the cuts, he said. The Greek government, he said, will not use the current market crisis and new EU fund as an excuse to back pedal. It was committed to tackling its so-called structural budget deficit of unsustainable spending. "They will tackle that," said Stiglitz.
Some differences necessarily shaped the responses of Ireland and Greece. "One thing they [the Greeks] have is a very 'engaged' population." He said bluntly: "If they did what you did, there would be massive strikes. The other aspect of contrast between Ireland and Greece is that their top civil servants are not well paid."
He said he had spoken to a senior boss of the Greek Post Office Savings Bank whose monthly income was €3,000. "And this is one of the top people in a state enterprise. It is hardly excessive pay."
Asked if Greece, Ireland and others can reach the budget targets set by the new EC deadlines, Stiglitz hesitated, but suggested that, in the absence of a strong international economic rebound, the 3% deficits would indeed be difficult to reach.
The crisis could become serious if the EC makes a misstep. "All those countries are under speculative attack. It depends on how you react. Spain has [only] a 60% debt-to-GDP ratio and it is under attack. I think that what is going on is that speculators have seen an opportunity to make money. They are political debts, not accounting debts, where you can identify a cash flow," he said.
It will now depend on how the European Union responds to the crisis. Even a 120% GDP debt pile, like that of Greece, with interest rates after inflation at 2%, may not be a serious matter, he said. "Of course, if it is at 120% and it is heading to 200% then there is no denying there is a problem," he added.
He remains a critic of Ireland choosing a bad-bank model – the National Asset Management Agency – to clean up its banking mess. It was "by and large" a bad idea, he said, because the bad assets in a bank were not the same thing as dealing with government debt.
"The banks and bankers are awarded. Norway did not do it, but Sweden did it. But they say they would not have done it without nationalisation.
"Otherwise, it is an invitation for private-sector bankers to benefit. One thing that is getting people annoyed in Europe is seeing the European Central Bank using low interest rates to bail out bankers. That double standard has to stop."
Stiglitz – the economic adviser to Athens in its hour of need – acknowledged it was unlikely he would be invited by Dublin any time soon to advise the Irish government.
Joseph Stiglitz's Freefall – Free Markets and the Sinking of the Global Economy is published by Penguin Ireland, priced €25