Paul Krugman: “I may have overestimated the competence of the Greek government”

The following transcript is of an interview by host Fareed Zakaria with economist and The New York Times columnist, Paul Krugman. They discussed how a Grexit would impact the European Union, if a Grexit is probable, if the Greek crisis is over, and how Puerto Rico and Greece differ fiscally.

MANDATORY CREDIT for reference and usage : “CNN’s Fareed Zakaria GPS”

VIDEO HIGHLIGHTS

Krugman: The impact of a Grexit

Krugman: Is the Greece crisis over?

Krugman: Is Puerto Rico is the next Greece?-WEB EXTRA

TEXT HIGHLIGHTS

Krugman on assuming that Greece had an exit plan from the Euro: “…it didn’t even occur to me that they would be prepared to make a stand without having done any contingency planning …amazingly — they thought they could simply demand better terms without having any backup plan. So certainly this is a shock. But, you know, in some sense, it’s hopeless in any case. …it’s not as if the terms that they were being offered before were feasible. I mean, the new terms are even worse, but the terms they were being offered before were still not going to work. So I, you know, I may have overestimated the competence of the Greek government.”

Krugman on the inevitability of Grexit: “My guess is — nothing can ever be certain — but. …either in the end they will get this sort of enormous debt relief that they’re not getting or they will have to exit. And I guess — my money, in some currency or other, is on exit one way or another. …A Greek exit would have huge implications for the future of the European project. And if Greece exits and then starts to recover, which it probably would, that, in turn, would be, in a way, would be encouragement for other political movements to challenge the Euro….”

Krugman on whether the Greek crisis is over: “No. I mean, really nothing has changed in the strategy, which is still cut, cut, and, you know, austerity your way to back to solvency, which wasn’t working, has never worked, actually, in this kind of situation, and will not work. So all that’s happened is that they’ve — we’ve gotten a pause for the moment, maybe. I’m not even sure of that. It’s amazing — we’re by no means out of the woods.”

Krugman on Puerto Rico vs Greece: “Puerto Rico — if you want to talk about an economy that has problems, that’s inefficient, low productivity compared with the rest of the United States, it has all of that. And Puerto Rico is depressed, but it’s not depressed the way Greece is depressed. … if you want to have a common currency, you want to have a common fiscal system as well, which, of course, is what Europe lacks.

FULL INTERVIEW TRANSCRIPT

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.



FAREED ZAKARIA, HOST, CNN GPS: Now to the other big deal that was reached this week: the agreement struck between Greece and its European creditors. Tehran reacted joyfully to its deal. Athens? Not so much. There was rioting in the streets against the deal. Former finance minister Varoufakis said that what the Greeks agreed to was “fiscal waterboarding.”

And my next guest, Paul Krugman, called the deal a “ritual humiliation” for Greece. Krugman is, of course, a Nobel Prize-winning economist and a columnist for The New York Times.

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FAREED ZAKARIA: Paul, thanks for being on.

PAUL KRUGMAN, COLUMNIST, THE NEW YORK TIMES: Thanks for having me.

ZAKARIA: Lots of people believe that the Greek crisis is over. You don’t think so.

KRUGMAN: No. I mean, really nothing has changed in the strategy, which is still cut, cut, and, you know, austerity your way to back to solvency, which wasn’t working, has never worked, actually, in this kind of situation, and will not work. So all that’s happened is that they’ve — we’ve gotten a pause for the moment, maybe. I’m not even sure of that. It’s amazing — we’re by no means out of the woods.

ZAKARIA: Ken Rogoff on last week’s show actually said that you bared some responsibility here, because you advocated that the Prime Minister of Greece voted no, supported the no proposition, the referendum he took, in a sense defying the European creditors. The result of that was that he got worse terms. Do you think that’s fair?

KRUGMAN: Well, it’s certainly true that — I assumed — it didn’t even occur to me that they would be prepared to make a stand without having done any contingency planning. I…

ZAKARIA: This is Greece. You —

KRUGMAN: That the Greek government —

ZAKARIA: You assume that Greece had an exit plan from the Euro?

KRUGMAN: Yes, that they — not that — at least something they could hold up, “this is what we will do if we can’t get any new cash.” And, amazingly, they were — everything hinged on them — they thought they could simply demand better terms without having any backup plan. So certainly this is a shock. But, you know, in some sense, it’s hopeless in any case. They — with — they — it’s not as if the terms that they were being offered before were feasible. I mean, the new terms are even worse, but the terms they were being offered before were still not going to work. So I, you know, I may have overestimated the competence of the Greek government. But, in some sense, it’s a hopeless situation regardless.

ZAKARIA: And what does that mean in terms of where is this going to end? Is Greece going to have to exit the Euro?

KRUGMAN: My guess is — nothing can ever be certain — but my guess is, yes. I — it’s — either in the end they will get this sort of enormous debt relief that they’re not getting or they will have to exit. And I guess my money — my money, in some currency or other, is on exit one way or another.

ZAKARIA: And will that cause a Lehman-like crisis? Because the Germans seem convinced that, at this point, all that debt is on the — on the balance sheet —

KRUGMAN: Right.

ZAKARIA: — of central banks, not private banks, and so it won’t have that cascade that Lehman had.

KRUGMAN: No, I think that’s right. I mean we do not see that kind of crisis. We’re not — I mean, even a Lehman event would not cause a Lehman event now because there has been a lot — a lot of buffers have been put up. We know that the public sector will stand behind. That doesn’t mean that a Greek exit is not — is trivial. A Greek exit would have huge implications for the future of the European project. And if Greece exits and then starts to recover, which it probably would, that, in turn, would be, in a way, would be encouragement for other political movements to challenge the Euro. So it’s — this is not trivial, but, no, we’re not talking about 2008 all over again.

ZAKARIA: Steve Rattner and several others — I mean, this is the general view in the business community — feel, look, the truth of the matter is, the fundamental problem is Greece is massively uncompetitive — is a highly overregulated economy. Its retirement — you know, if you look at its retirement age, if you look at areas like pharmacy, you look at, you know, vast swaths of the Greek economy, there’s too many regulations, very business unfriendly, and a Swiss cheese-like model of tax collection, and that if you don’t reform that — and that’s what really the Germans are asking for, more than austerity.

KRUGMAN: Well, let me say on — the one about tax collection, while it’s true that there are a lot of holes and a lot of evasion, Greece, nonetheless, does manage to collect a lot of taxes. People, you know, look at it and say, well, they must be, you know, they can’t be collecting any money. In fact, they’re collecting, you know, a higher share of GDP in taxes than the United States is, one way or another. So it’s not as if they don’t manage to raise revenues. Maybe they should do it better. They should, obviously. As for all the other stuff, yes, Greece is an over-regulated, problematic economy — not as much as it was. It’s done much more reform than people think. But also it — all of these structural issues —

ZAKARIA: Structural reform, not just cutting budgets?

KRUGMAN: They’ve done a lot of structural reform. You look at the World Bank survey of doing business, and Greece is not a great place, but it’s not as bad a place as it was. So — but the main point is, all of these things were true of Greece 10 years ago, 15 years ago, but Greece was not in the midst of an incredible Great Depression-level slump back then. What — so these are part of the background noise, if you like. It is, in fact, the Euro — the trap that the Euro has turned into and the austerity policies imposed in an attempt to keep Greece in the Euro that are responsible for the disaster that’s taking place now. It’s like looking at — you know, they’re — every country has problems — Greece maybe more than some, less than others. But it’s the Euro that is responsible for this disaster.

ZAKARIA: Paul Krugman, pleasure to have you on.

KRUGMAN: Thank you.

###WEB EXTRA###

KRUGMAN: Puerto Rico, again, if you want to talk about an economy that has problems, that’s inefficient, low productivity compared with the rest of the United States, it has all of that. And Puerto Rico is depressed, but it’s not depressed the way Greece is depressed. And the reason is, first of all, the banks are not in trouble because they are part of a U.S.-wide bank safety net, so Puerto Rican banks do not, you know, they’re – they’re covered by the FDIC. And also Puerto Rico receives just as – by virtue of being part of the United States, when the Puerto Rican economy takes a downturn, the amount it pays in taxes to Washington goes down.

The amount it receives in aid from Washington and not – I don’t mean the Puerto Rican government, but I mean the – the people. Social Security, Medicare, Medicaid, food stamps goes up. And so Puerto Rico, in its slump, is receiving aid on a scale that would be absolutely inconceivable between European nation states. So basically saying, stuff will happen, economies will stumble, but if you want to have a common currency, you want to have a common fiscal system as well, which, of course, is what Europe lacks.

ZAKARIA: I – and The Upshot had a calculation that pointed out that if you were to look at the various states in the United States –

KRUGMAN: Of course.

ZAKARIA: That Connecticut, you know, a rich state like Connecticut, has net transfers to states like Alabama and Mississippi that are much, much larger, an order of magnitude larger than what Germany is providing Greece.

KRUGMAN: Of course. Yes, I’m surprised it’s just one order of magnitude. And, of course, what’s really funny about U.S. politics is, it’s the very states that are, in fact, on the dole, that are, in fact, major recipients of aid, they’re the ones that talk about self-sufficiency and get government out of my life.

ZAKARIA: But at the end of the day you don’t worry about any of these U.S. crises in quite the same way, Puerto Rico –

KRUGMAN: No.

ZAKARIA: The municipal bankruptcies, things like that?

KRUGMAN: No, these are, you know, bad things. And Puerto Rico – Puerto Rico, unfortunately, you know, it’s not – we don’t have complete fiscal integration. So Puerto Rico does face a kind of downward spiral in which working-age people leave for employment opportunities elsewhere, which reduces the tax base for supporting the people who stay, but nothing like – I mean there’s just – they – being part of the United States means that you are insulated. You cannot have the kind of disaster that – and, by the way, it’s not just Greece. You know, we – the success stories in Europe, Spain is now being held up as a golden example, but it still has more than 20 percent unemployment. So even, you know, what Europeans call success is still a disaster that would be inconceivable for a U.S. state.

END INTERVIEW