LINDAU -- If politicians dont get a handle on it soon, the debt crisis will be a game-changer for the whole Western system. The economies of the United States and Europe will face years of stagnation and decline with regard to emerging nations in Asia and Latin America. In fact, the Euro Zone might break apart.
These are some of the views received by Die Welt received in answer to questions it put to 17 winners of the Nobel Prize for economics who are gathered this week for the Nobel Laureate Meetings at Lindau, an island in Lake Constance.
These wisest of men, brought together to discuss pressing world problems, are calling on political leaders to show courage and leadership so they can win back credibility in the eyes of consumers, business leaders and financial markets. Only confidence in the stability of the system can prompt an urgently needed reboot. The core issue, according to the laureates, is nothing less than the continued dominance of Western ideals that have shaped the world order since the Industrial Revolution.
Edmund Phelps, a Colombia University professor who won the prize in 2006 for his theory on growth, says that during the past decades the West has lived above its means and in so doing has already consumed part of its future. That means that the United States, but also Europe now face a long period of stagnation.
Phelps says the West has to pay for the mistakes of the past, but if it can get back on track rapidly, recovery can start that much faster and the mistakes will take less of a toll. He considers the political system to be the greatest problem. In the United States, political parties are busy putting spokes in each others wheels, while leaders in Europe have managed to create a system of perverted incentives with banks and insurers having to hold government bonds and governments exceeding agreed-on debt ceilings. Phelps says politicians need to show both more courage and a greater sense of responsibility, facing the fact that they are going to have to be the bearers of bad news -- such as tax hikes -- to their citizens.
Is stagnation here to stay?
Other laureates also see the debt crisis as responsible for the terrible state of the economy. To Eric Maskin, government debt addiction is ruining the Western system and if politicians dont wake up and act quickly economic turbulence can be expected to go on for years.
James Mirrlees, who won his Nobel Prize for political economics research, rates the chances that the Western world will be facing a long period of stagnation as very high. Myron Scholes agrees, adding that both the United States and Europe are looking at a fate similar to Japans lost decade if the present muddling continues.
Credibility and decisiveness are of the essence to solve the European debt crisis, and Germanys role is pivotal. Maskin says that the euro zone only stands a chance of long-term survival if a central fiscal system is introduced, while financial market expert Scholes is more optimistic about the zones chances of holding together, though not in its present configuration. A currency union with a central bank and 17 independently acting finance ministers cannot survive, he argues. Taxation would need to be centralized, transfers made possible, and in the short term, the European Central Bank should lower bank rates and continue to buy government bonds.
Laureates Daniel McFadden and John Nash believe the future of the euro zone is mainly dependent on Germany, and that Germany should understand that such a zone is in its interests. Weaker members would need to be removed, and in the longer term, Europe will have to build up a stable fiscal system that makes effective control possible, McFadden says. Nash, known to many through the film A Beautiful Mind, says: Where theres a will, theres a way. The euro zone stands a chance, he says, if all club members work really hard to keep it together.
In one respect, the laureates feel that a decline of the West is already sealed: regardless of all and any political decisions that may be taken, the dominance of the dollar as the worlds reserve currency will fade. Its leading role will decline progressively over the coming decades.
The economists see this as inevitable, like the devaluation of the British pound in the 20th century. They unanimously agree that the Chinese yuan will gain in stature. Unlike the others, game theorist Nash is also betting on a super ruble, while Edward Prescott sees opportunities for gold.
To save the Western system and its values, the laureates suggest better coordination among governments. Stronger institutions are needed to achieve results. And McFadden says that the United Nations cannot fulfill the role -- in his view, it doesnt have the support, nor does it enjoy the respect or clout, to do so.
Read the original article in German
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