Nicolas Berggruen on the crisis in the West

Nicolas Berggruen is the founder of the Berggruen Institute and its 21st Century Council. The 21st Century Council is a forum for dialogue and action on issues of global governance that recognizes the radical power-shift underway in geopolitics reflected in the rise of the G-20 as the key governing body of globalization.

Below is an extract from the interview Berggruen gave B Beyond Magazine last month. The full text will appear in the 2012 Spring edition.

BB: You are a strong advocate for improving democracy and governance in the western developing economies. In your view, what is lacking in the current system? And where do you see room for most improvement?

NB: All Western democracies are suffering right now. There are a number of reasons for this, such as increasing globalisation on one hand and the rising economic power of the East on the other, with the inherent competition from that part of the world, in particular China.

The Western systems and democracies should be rightly credited for having been hugely progressive, not least in terms of the social contract they established with their respective populations, which has resulted in a very high standard of living. This contract, however, can no longer be sustained in the face of growing competition from the East. Additionally, most Western democracies are not sufficiently flexible to compete very well with the East.

Making an adjustment is clearly a very painful process all round. Political leaders are in a difficult position because implementing unpopular changes would cost them an election – or a re-election.

Matters are made even more complicated by the fact that changes need to be agreed upon by both sides of the electorate and as ever, the right is opposed to higher taxation, while the left is neither prepared to give up what it perceives as its entitlements, nor does it want to pay more tax.
Politicians seldom have the courage to address the above or if they have, their political parties wouldn’t allow them to.
This means the entire system needs to be restructured beyond the partisan – beyond the political agenda.

BB: If we look back far enough in history, we know that relative poverty (not absolute poverty) has always contributed or led to massive upheaval in societies. Nouriel Roubini was recently quoted as saying there may even be World War 3? Do you share this opinion?

NB: No, I don’t. But I think that people in the West are rightly concerned that the present generation of young people don’t have the opportunities that their parents had. I think that’s true, I think the opportunities are no longer there.

BB. And will not be there for the foreseeable future?

NB: They will be, but we have to implement reforms if we want to keep the same standard of living (the alternative is to lower the standard of living).
We are in a much different world, much more competitive, and some difficult choices have to be made. Clearly, protesters everywhere are sending a message to politicians, which is ‘we are not happy with your leadership, address these problems’.

Politicians have to come out and say, ‘these are the issues, we inherited them’, which is true – from Mrs Merkel to Obama to David Cameron, they all inherited these issues and they have to deal with them. And dealing with them is painful – you’re hurting vested interests everywhere in the process. I don’t envy them but it has to be done.

BB: If God himself suddenly gave the 21st Century council the executive power to change things, let’s say in Europe- let’s say we had a referendum and you could run a referendum – what would you do?

NB: We would give people a choice. Do they want something that will function more as a federation or less? Are they going to federate certain things, or not? They should have the choice to decide, but on a fully informed basis. Most people in European countries today are not that concerned about Europe – they don’t know that ultimately they will have to make the decision of being in or out of Europe, of centralising or not.

BB: What are the 21st Century Council’s recommendations for Europe?

NB: We would recommend that you first have a different system – direct parliamentary elections for individuals that the voter would recognise and feel some affinity with, as opposed to the existing system which is fairly anonymous.

BB: Would people vote for individuals rather than parties?

NB: In my mind they would – this of course is subject to discussion – but in any event I think they should vote for parties that will support people all across Europe, so that you have much more dynamic and vibrant elections.

BB: So European parties rather than national parties?

NB: Correct.

BB: But they would still be traditionally centred i.e. left of the centre – right of the centre.

NB: Most likely. Then you have Europe-wide elections and the central power would have jurisdiction over a number of different things, which need to be decided, such as fiscal, defence, foreign policy, probably energy policy, transportation… key things. Local power would still exist for everything else – education, language, religion – everything that is country or culture-specific would remain so, but the rest would be federated.

BB: So there would be a government of Europe, essentially?

NB: There already is today, but it doesn’t have any power.

BB: If such a government had executive power, do you think the recession could have been avoided in Europe at least?

NB: Well, for sure, because central power can issue money. If you can issue money you’ve got a lot of power, including the power to tax and therefore the ability to push for reforms. Is it easy? No. Will it happen in a day? No. But what I’m saying is that if you have that kind of power you can run a currency. Today the currency is being run without the normal kinds of power that come with it. If you can’t issue currency, you can’t regulate money. If you can’t regulate money you can’t run an economy.

BB: Following you reasoning, could the financial crisis have been avoided in America?

NB: No, but at least America was able to act pretty forcefully and pretty quickly.

America is not in a recession right now. It could go into recession, but at least America has the power to overhaul its system.

If America hadn’t acted when it did, the world would have gone into depression; so what America did was incredibly helpful – to America itself but also to the world.
If Europe cannot get its act together now and goes into a very bad recession, that could have a global effect, put America into a recession again, and the rest of the world too.
So the problem is serious and it is a structural one. That is exactly the kind of thing that we, at the Institute, are interested in – structural issues, such as those happening in Europe and in California.

America has a lot of issues. But the one thing that it can do, and did, is react fairly quickly; it should have done so earlier, but the main thing is that it did. When you have a crisis, you have to come up with a plan and act on it. Europe is not able to come up with a plan and not able to act. That’s the crisis here.

BB: Please, define Europe in the above context.

NB: All the constituent countries of the EEC today.

BB: If they were all to rubber-stamp a plan of action and get on with it, you reckon things would get better very quickly?

NB: Yes, for sure. This would create cohesion, political leadership…

If everyone works together, this would immediately stabilise the financial markets. Financial markets are forcing the hands of the leadership in Europe – because the markets are bigger today than any government, that’s the reality.

If they see political will to deal with the issue, markets would calm down very quickly. That’s what happened in America: the government took some measures and everything stabilised. There are, of course, still a lot of unresolved issues but the crisis we have today is directly related to the fact that the government didn’t go far enough at the time of the previous economic crisis.

BB: What could they have done better?

NB: Firstly, the global financial system wasn’t properly addressed at the time.

Secondly, Europe didn’t address its structural problem, something that is evident today. These are the two key things that weren’t addressed at the time and are now surfacing.

The financial system worldwide today is still fairly dysfunctional, the banks are probably undercapitalised and Europe is structurally not complete. Europe being structurally deficient today has created this crisis.

Individual debt was shifted to governments. Governments suddenly, in the eyes of the market, are no longer able to sustain themselves – they’re being attacked and they can’t respond to it. These are now symptoms of not having dealt with everything two years ago, and also not having dealt with the structural deficiency of Europe.