As the world economy steers over into the new year, one of the its most worrying spots remains the Eurozone. To discuss prospects for the region, as well as for other leading economies such as the US and China, CNBC-TV18's Latha Venkatesh spoke to Lord Adair Turner.
A British academic, member of the UK's Financial Policy Committee and former chairman of the Financial Services Authority until its abolition in March 2013, Lord Turner is a post graduate in history and economics and has previously worked for Chase Manhattan Bank, McKinsey & Co and Merrill Lynch at various times.
He also lectures part time at the London School of Economics where, in 2010, he delivered three lectures titled 'Economics after the Crisis' which were later published by MIT Press as a book under that same title.
This book criticised conventional wisdom that the objective of policy should be to maximise gross domestic product (GDP) that the way to do this is to promote freer markets and that inequality is an acceptable price for growth.
But Turner is best known for his stint as chairman of the Financial Services Authority (FSA) from 2008 to 2013, where he defended actions of the regulator during the global financial crisis, and said other regulatory bodies throughout the world too failed to predict the economic collapse.
In April 2013, he joined George Soros' economic think tank as a Senior Research Fellow.
Also read: World recovery increasingly dependent on US growth engine
Below is the transcript of Lord Adair Turner's interview on CNBC-TV18.
Q: Let me start with the economy at your doorstep, closest to you, the Eurozone. It has been marked by recession for the better part of 2014. Does it recover to see some growth in 2015?
A: I don't know exactly what the pattern of growth will be in 2015 but the overall picture for the Eurozone is: I have to say, not an optimistic one. We are caught in a deep deflationary, recessionary cycle with a very low inflation and the dangers that it could actually turn into absolute deflation and we have imperfect policy levers within the Eurozone institutional structure to deal with it.
So, without getting involved in the business of predicting a particular year's growth rate, my worry for the Eurozone is that unless we are very careful, the next five or next ten years the Eurozone will look rather like Japan in the 1990s and 2000s.
In other words, a very slow growth and very slow rate of inflation and that is a major risk for the Eurozone whatever the precise level of growth we see next year.
Q: That sounds very dire, 5-10 years like Japan. Won't political dynamics within the Eurozone work to resolve it? Won't you expect a full blown quantitative easing (QE) in the first quarter of 2015 from the European Central Bank (ECB)?
A: We probably will see now something of the form of QE in the first quarter of 2015. The difficulty is that unless it is accompanied by some fiscal relaxation either in the major country which doesn't have a debt problem which is Germany but also in some of the other countries, I am not sure that QE in itself will necessarily be transformative.
I mean QE works through the indirect impact of higher asset prices or it works through reducing long-term yields as well as the short term interest rates, which have already been reduced to a very low level. But the fact is that the Eurozone already has very low interest rates.
Businesses already borrow at very low rates of interest and I think pushing them even further lower and longer along the yield curve through a QE operation although it is bound to have some beneficial effect, I am not sure that in and of itself it is going to be transformative of performance.
From the point of view of financial market investors, it's highly relevant. It probably underpins the price of bonds and to a degree is equated but what we know from the pattern of ultra-loose monetary policy over the last five or five years in the western economies and in Japan in the 1990s and 2000s is that very low interest rates alone can take a long period of time to stimulate the economy.
So yes, I do think the ECB will take action. I think it might be quite significant action. I think it's a majority on the board to do that and the minority who are voting against will accept the will of the majority. My concern is not about whether they will do QE or not but how effective that will be alone in stimulating the Eurozone economy.
Q: There are some critics who think that there could be some kind of political crisis and maybe there is already one developing in Greece. Jim O'Neill on one episode of this show pointed out that there are unusual parties that have come up, political parties that didn't even exist a year ago in countries like Spain. You spoke of a possibility of long recession. Would that lead to social tension and therefore even to (Euro) exit-like situations in some countries like we saw in Greece a couple of years ago?
A: Well, what we are seeing increasingly is a number of populist parties which are either talking about exit from the Eurozone or effectively repudiation of debts. So, we have the Greek left wing party and we'll have to see how they do in the forthcoming elections that we're going to have in Greece. In Italy what we have seen is the Northern league which was previously positioned as essentially a secessionist party within Italy is repositioning itself as essentially a party saying that Italy should leave the Eurozone and then of course we have Podemos in Spain who are arguing for repudiation of debt and then only two and a half years down the line of course we have the French presidential election where an increasing number of observers are beginning to assume that Marine Le Pen, head of the National Front will get through to the second round though most people assume at the moment that she would lose at that point.
So, we do have a set of forces around Europe who are basically arguing that they're not going to put up with a slow growth low inflation path and are arguing for more radical policies. I cannot predict how well they will do and how that plays out. It is possible that each of them will do relatively well but never quite well enough to capture a hold of the political power and put their beliefs into action but the longer that we have a period of slow growth, rising unemployment and low inflation, the greater the dangers that they get that reaction and I would say here that I draw the analogy with Japan in the 1990 and 2000s but it is much more worrying in Europe.
Japan is one country with a debt which is pretty much owed to itself by itself. It is an ethnically and culturally homogenous society and it does not have large immigration flows. The Eurozone is a country of many nations where you can then get blame games and national politics. It has a significant degree of ethnic and religious and cultural diversity with imperfect degrees of integration which then has potential for people to blame each other and for minorities to react against majorities etc and various forms of right wing populism can exploit that and it has a very significant and I fear somewhat uncontrollable immigration flow from our somewhat chaotic neighbourhood in bits of North Africa and to the Middle East and all of that I think makes it far more important that the Eurozone avoids a long period of stagnation.
If we put a long period of stagnation in the Eurozone, the social and political consequences are much more potentially severe than they were in Japan but unfortunately it's not only more important to have radical actions that avoid a long period of stagnation it's also more difficult to get those radical actions because of the particular complex structure of the Eurozone as a country of one central bank but many nations and with the fiscal debt residing at the national level. So it's very important to have as good a leadership, as thoughtful a leadership as possible through this and I'm hopeful that we will manage without severe crisis but this is a worrying outlook I think for the Eurozone.
