Sunday 4th December, 2011

Q+A interview with Shamubeel Eaqub.

The interview has been transcribed below. The full length video interviews and panel discussions from this morning’s Q+A can be watched on tvnz.co.nz at, http://tvnz.co.nz/q-and-a-news

Q+A, 9-10am Sundays on TV ONE. Repeats at 9.10pm Sundays, 9:05am and 1:05pm Mondays on TVNZ 7

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SHAMUBEEL EAQUB interviewed by PAUL HOLMES

PAUL HOLMES
Now we’re joined by Shamubeel Eaqub from the NZ Institute of Economic Research, which this week predicted weak growth next year of just 1.5% and just 2.5% in 2013, much lower than government projections. But, Shamubeel, Europe - I mean, no matter which way they go, they seem to be buggered.

SHAMUBEEL EAQUB - NZIER Political Economist
Well, they really are. It’s a choice between bad and really bad and catastrophic. I suppose the real issue for them is if they don’t do something, the cost of breaking up would be so massive that they have to find some sort of alternate solution.

PAUL Yes, well, that’s right. Is Europe essentially broke?

SHAMUBEEL
I think there are large parts of central Europe that’s broke, and that really matters for us, because we do trade quite directly with them. We rely on financial markets that are very correlated and interrelated. And it’ll have some pretty important impacts for you and me.

PAUL What have they go to do, the Europeans? Do you know the answer?

SHAMUBEEL
Well, we sort of do. We sort of know that they have to have a fiscal union, but is it politically possible? I think that there is a question of economics and there is a question of politics. I don’t think that anybody wants to see their sovereign rights eroded, and that’s really what we’re talking about in terms of the economic solution.

PAUL Just quickly about the countries at risk in Europe. France and Germany are very much the power brokers, and increasingly so in the last few months. But France is not totally secure either, is it?

SHAMUBEEL
No. Look, France has a lot of debt They don’t have a very strong economy. And by all counts we are going to see Europe heading into recession. They may be in recession already.

PAUL All right, then, let’s bring it home. What’s it gonna mean for New Zealand? What’s it gonna mean for our interest rates and mortgages, say? What’s it gonna mean if it simply just continues to be bad? Let’s think that there won’t be an implosion.

SHAMUBEEL
So, if we just keep on going at or around the current rate, we stumble along and we find some kind of solution, it’ll mean we won’t have many new jobs, much income growth, and we’re really gonna be stuck in a quagmire. The government can’t do anything because they don’t really have money left in the kitty. But the Reserve Bank can probably cut interest rates a bit more. It’s at 2.5%. So we get a bit of relief from there. But really, we’re at the mercy of global events. We have exhausted all of the big possibilities we had. In the aftermath of the GFC, we increased government spending quite aggressively, we cut interest rates, and it’s kind of, like, what do you do now?

PAUL Yes, because, as I was discussing with Russell, the United Nations’ warning about big austerity packages, because that takes you nowhere as well, doesn’t it? So if something really bad were to happen in Europe, should the government spend more here, find some more money or go austere?

SHAMUBEEL
So the really tough thing is if you start to spend more money, it’s very likely that we’ll get a ratings downgrade and investors will stop funding us. We’re borrowing hundreds of millions of dollars a week. We just wouldn’t be able to do that. We have to stay on this course. But what we need to do is we have to make some very serious choices about where we spend the money. And really we need to get rid of things that are painfully expensive and not efficient.

PAUL Good time to buy and sell homes?

SHAMUBEEL
It’s always a good time to buy a home if you’re going to live in it. If you want to buy it as an investment, the house prices are way too expensive.

PAUL And if Europe continues to have grave difficulties, what does it do for unemployment and wages?
SHAMUBEEL
That is the biggest concern. If global economy slows, we are not going to have much growth in jobs and we won’t have much growth in incomes. That means you and I have to do it harder. We have to keep living within our means, pay down debt - those are things that we have been doing, but we need to keep doing it.

PAUL Realistically speaking, can a New Zealand government really do anything but watch?

SHAMUBEEL
Well, I don’t think that the role of government is to really manage the cycle. The role of government is to set the big agenda - the framework for long-term and medium-term economic growth. So this is about setting the incentives in terms of taxes, R&D, productivity, health, ageing policies - so those are the things that government really has to do, and it’s really the job of the central bank to try and manage the cycle.

PAUL These forecasts of yours last week - 1.5% and 1.8% - are they going to allow the- And they’re lower than government projections. Are they going to allow the government to balance the books by 2015? By 2014, 2015?

SHAMUBEEL
We think it will be very hard. They would have to cut spending more aggressively than they have signalled to be able to do that or raise the revenue.

PAUL Yeah, they keep having summits, the European leaders, don’t they? Do you expect much to come from this summit next week?

SHAMUBEEL
Well, it’s been a rolling wall of summits, and really the outcome of each one has been kind of incremental progress.

PAUL They give nothing, don’t they?

SHAMUBEEL
But I think the situation is they have to make some seriously big decisions in terms of giving up sovereignty or parts of their sovereignty, and no elected politician wants to do that. And we are going to see incremental progress, but I’m not hopeful that we’ll see a big one.

PAUL But it’s a big problem, isn’t it – too big to bail, too big to fail.

SHAMUBEEL
It is. That is the ultimate dilemma. The size of the problem is amazing – between 2.5 and 3.5 trillion euros. The mind boggles at the number of zeros. But the stability fund, the rescue fund that they have is like a trillion euro at the best. So we’re talking about massive shortfalls.

PAUL Thank you, Shamubeel, very much for your time.

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