Europe will see hard decisions and emerging markets like India will have to grow on their own, says financial expert John Mauldin
John Mauldin
Profile: A renowned financial expert and a New York Times best-selling author, he’s also a pioneering online commentator
Best known for: Every week, over 1 million readers turn to him for his penetrating views on Wall Street, global markets, and economic history
Children: He is the father of seven children (five adopted)
Governments everywhere are printing more money. But if that money is going into the balance sheets of the banks and it doesn’t get lent out, it doesn’t do any good. If they print money and banks use it to buy government debt from governments that are running deficits that are too large, all that is going to do is create inflation. In general, the effects of that are not good. It can be helpful in circumstances, but in a limited amount.
It will take close to three trillion euros for Europe to write off all its debt in total: Sovereign debt, bank debt and private debt. They just have too much debt everywhere; not just the government, but the banks, private companies and individuals as well. That debt needs to be restructured.
Now some of it just has to be an outright default, the kind that they are doing in Greece. Some of it could be changing the interest rates, there’s lots of ways to go about doing it. But it requires a great deal of pain on the part of a lot of the various actors in the economic world. There’s no way to get out of this without some pain.
And countries default all the time. There have been 160 defaults by countries over the last 200 years. It’s not a matter of whether a country will be allowed to default or not. If a country decides we are not going to pay, what can you do?
So I think we are coming to the final part of the end game. Europe can choose to have a greater fiscal union which means that the EU commission will have a great deal of control over the budgets of the nations or the nations will say we want more control but then they have to drop out of the Euro. Italy can’t support the debt it has. It has to revalue its debt.
If the rest of Europe doesn’t let them do it, at some point the Italians may say this is just too big a burden for us. There’s going to be pain sharing and a loss of fiscal control. I don’t know if it will happen. It’s a very difficult environment.
(This story appears in the 20 January, 2012 issue of Forbes India. To visit our Archives, click here.)