Last week, Britain voted to leave the European Union (EU) in what has come to be known as Brexit.
Bloomberg’s Tom Keene and Mike McGee turned to former Federal Reserve Chair, Dr. Alan Greenspan to learn more about why he believes that there was no good reason for a Brexit, his predictions in terms of repercussions, and how to move forward from this devastating blow to the European marketplace.
Greenspan served as Chairman of the Fed from 1987 to 2006. At the age of 90, he has lived through a great many financial eras and offers a unique insight into any situation.
The Brexit, he says, is one of the worst political decisions in recent history, and “at least a terrible mistake” that “didn’t have to happen.”
When asked what choices we have moving forward, Greenspan stated, “I think they [Great Britain] obviously made a terrible mistake because they presumed that if they were to have the referendum there would be a closed decision very quickly and that the political problems they had internally…would be pushed aside.”
He continued: “I always thought that the real problem in Europe was the Euro – An unstable currency can’t exist permanently in the existing structure. It never entered my mind that (Pound) Sterling was an issue because it’s a floating currency and Britain was in fairly good shape economically.”
Greece is the Word
Greenspan addressed the Euro again when asked what he would request from Chancellor Merkel and from Brussels.
“The Euro is being pulled apart basically by the continued existence of Greece in the Euro structure,” he explained. He feels that Greece got into the EU by mistake, “Or I should say a miscalculation of some of the data they submitted for purposes of entering the Euro.” He continued, “It became very clear when the next Greek government showed up that the data which had been submitted were just not accurate. They have been a thorn in the side of the whole Euro structure ever since.”
Ultimately, Greenspan posits that if the EU ever wants to “sustain a fundamental Euro structure,” they will need to eliminate Greece from the equation as soon as possible. In fact, he says, the country never should have been included in the adoption of the Euro, in the first place.
Greenspan reflected on sitting in on the early stages of the Euro’s development, before it even had a name. “The basic purpose was essentially to foster the question of European integration politically,” he explains.
However, whether or not that goal was achieved through the Euro is an entirely different issue.
The Euro Zone “Failed Experiment”
Greenspan admitted that the Euro has become something of a “failed experiment”.
When Keene and McGee then asked if that suggests that the British are right to be concerned about the EU, and if he has any sympathy for the idea that the Brits are better off outside it, Greenspan responded with a resounding, “No.”
“There’s a fundamental difference between being in a structure where everybody is forced into the same currency irrespective of differentials and culture, economic status and a variety of other things,” he explained, “The EU is fundamentally a very good idea. It’s a free trade zone structure…The choice of Britain to stay in the EU and yet out of the Euro zone was, I thought, the most sensible action that could be taken.
Greenspan indicated that Gordon Brown was instrumental in that decision, saying “He ought to be distressed by what is going on, as I know he is.”
The question continued that, if the European Union is a failed experiment and it lacks fiscal authority, the only resolution is to centralize more power in Brussels – which is exactly what the United Kingdom doesn’t want.
“The problem with the Euro isn’t going to be solved,” Greenspan expounded, by simply adjusting the locale of authority. “The problem is a much more fundamentally difficult one. Let me suggest something … If the Federal Reserve were to run into financial trouble and the dollar in the very extreme case, the sovereign credit of the dollar and the treasury department would back up the Federal Reserve and there would be no problem. There is no back up on the European Central Bank.” And therein lies the issue.
“Theoretically, the Maastricht Treaty has got means by which they would be financed if they got into trouble but that’s not going to happen,” Greenspan concluded.
Nobody to Steer the Ship
Keene referenced such acclaimed leaders as Valéry Giscard d’Estaing, the Former President of the French Republic and Charles de Gaulle, the French military general and statesman, in hopes of identifying a leader willing to drive a decision and make tough choices – as Chancellor Merkel has.
Greenspan gave Tony Blair and Gordon Brown the thumbs up. Neither is currently in office and, unfortunately, there doesn’t seem to be anyone to match them, he thinks.
He was then asked what his first move would have been in the wake of the Brexit if he were still at the Fed and going to his office at the corner of 20th and C Street in Washington D.C..
His first task would be identifying the problem. “Trying to ameliorate the symptoms of a problem is never a successful course… Nobody is getting at the root issue that confronts all of the developed world which is the cause of the problem… what is happening is productivity growth… More than two-thirds of the OECD countries are running at less than half a percent per year for 5 years,” he explained.
This issue is not limited solely to the United States, Greenspan continued, but is relevant to “all the OECD countries, and what that’s doing is creating a general stagnation in the developed countries which is causing desperation on the part of their electorate.”
In light of the highly correlated markets over the last few days, Keene and McGee finally enquired about Greenspan’s experience dealing with a nation in a rapidly worsening current account deficit.
To that end, Greenspan pointed out that there are only two choices: flood the particular problem with reserve balances in some form or another, or allow the currencies to float. “The first is obviously a desirable one if it works, but it’s a risky one,” he admitted.
Echoing Adam Smith, Greenspan concluded the interview by saying,
“You’re always better off to allow the markets to run their course. In other words, free up the currency, free up the actions which allow prices to move. If you try to stop prices you’re going to have huge problems. And that has always been my view as to what should be done.”
Good investing,