Pier Carlo Padoan, Deputy Secretary-General, OECD : Tackling the financial and economic crisis
ELIAMEP: The global financial crisis is the first major challenge for the euro as a multi-national currency. Although early indications suggest that the eurozone countries are weathering the storm, this has not stopped prominent economists such as Martin Feldstein (Harvard University) from cautioning that ‘the current financial crisis may provide a severe test of the euro’s ability to survive’. What is your reaction to this statement?
Pier Carlo Padoan: The crisis is putting to test the euro for the first time since its inception. So far the euro has proved to be an invaluable protection against international financial instability for its members. As we move forward two issues will have be tackled to strengthen the euro.provide stronger governance including in financial supervision. Address the issue of possible fiscal divergence between member countries following the large fiscal stimulus to cope with the crisis.
ELIAMEP: In the current crisis, are you agree that the unemployment rate is likely to rise easily because of government employment policies conducted in developed countries over the last twenty years?
Pier Carlo Padoan: Unemployment will continue to rise well beyond the time when growth turns positive again. This is what historical evidence on recessions suggests. Policies in developed countries carried out in the past have actually lowered, not increased, unemployment.
ELIAMEP: A common argument is that fiscal stimulus will have less effect because financial markets are operating poorly and lending is not flowing. Are you agree with this argument?
Pier Carlo Padoan: The response to the crisis requires both addressing the disruption in the financial sector so as to restore lending and support aggregate demand to restore growth. These two policies should mutually reinforce each other.
ELIAMEP: In a post-crisis era, do you think that fiscal restrictions will be brought into effect by governments in developed countries because of their important accumulated debts?
Pier Carlo Padoan: The fiscal response to the crisis has generated an unprecedented rise in public debt in most developed economies. There are serious risk that this debt will become unsustainable and generate the seeds for a new crisis
Debt sustainability will require a combination of higher taxes, lower public spending and higher tax revenues. If debt does not decline interest rates will go up putting a brake on growth.