Ken Rogoff on the debt crisis and Italy

Earlier this week, Boyes and I blogged on the consequences of debt and the alternatives to addressing expanding debt.

Ken Rogoff writes:

The relationship between growth, inflation and debt, no doubt, merits further study; it is a question that cannot be settled with mere rhetoric, no matter how superficially convincing.

http://www.bloomberg.com/news/2011-07-14/too-much-debt-means-economy-can-t-grow-commentary-by-reinhart-and-rogoff.html

On the news hour last night Rogoff discussed the Italian response to deficit and debt with Calvo-Platero.

This final comment is both illuminating and, reflective of an attitude that I call the Doug Flutie syndome - a last minute miracle is always in the background to "save" us.

KEN ROGOFF
I don't think the current status quo is tenable. I think that's very, very clear.

And it's not yet transparent how they're going to move ahead. So, it's a very fragile situation, even though, at the surface, it's OK. And, by the way, about the austerity package, there's a bank run danger here, that, if you lose confidence, if people lose confidence in the Italian banks, what are they going to do? That's the big risk in Europe.

RAY SUAREZ: Well, Mario, you heard Ken Rogoff describe a situation that sounded like the euro having the possibility of unraveling. Do you think that's a possibility?

MARIO CALVO-PLATERO: Well, there is lots of talk on how Europe is going to deal with this, and there is talk about a two-speed euro, a few countries with the current euro, and some other countries with a less stringent attachment to the euro.

The question here is -- as Ken was saying, is political. If Europe is able to show one single face on this issue, then it will do much better to convince the markets things are under control. I do not believe for a second that there will be a run on the Italian banks. They're relatively solid.

The saving rate in Italy is very high at the private level. The debt is very high, 120 percent of GDP, but there is a plan to reduce it, of course. So, I don't think -- I mean, you know, we have an Italian, Mario Draghi, who's going to be the next governor of the European Central Bank. I have known him for many years.

I'm sure that he will make his mission to keep the euro, maybe a little bit more flexible, but to keep it as one currency. We need large currency in this process of globalization.

And can I tell you something?

RAY SUAREZ: Got to go.

MARIO CALVO-PLATERO: If something would go wrong on the euro, I bet that China will intervene and help the euro.