Austerity v. Stimulus Debate Continues
FOSTER: Germany's government has reached agreement on its financial priority, which is tackling the budget deficit. Ministers today backed an austerity plan that aims to shrink the deficit by $103 billion by 2014. Parliament will now have the final say on whether the cuts go ahead. If they do, Germany will join a long list of European countries that are tightening their belts. They are rejecting the advice they are getting from the other side of the Atlantic. Over there, the view is governments should keep on spending to stimulate economic growth. Let's get right to the heart of economic debate we're holding here on QUEST MEANS BUSINESS all this week. Does the rate of recovery call for greater fiscal discipline or the continued injection of government cash? I'm joined by David Blanchflower, professor of economics at Dartmouth College. And a man who is familiar with the kinds of decisions that policymakers around the world are wrestling with right now. He was a member of the Monetary Policy Committee, at the Bank of England from 2006 and 2009, is it? Is it easier to watch on this, from that position?</s>DAVID BLANCHFLOWER, PROFESSOR OF ECONOMICS, DARTMOUTH COLLEGE: Yes, that's right.</s>FOSTER: Rather from being within the Bank of England?</s>BLANCHFLOWER: Well, I think, yes. It probably is now because the Bank of England are meeting today and they are all going to sit on their sit on their hands, I assume. Now, on the outside, it is pretty worrying times I think. Everybody-what's the famous phrase, it is all over, it's all over, don't worry. We can retrench. And the worry is it is probably not all over, as the data suggests. So, I think it is worrying times. It is worrying if you are sitting as a policymaker, but if you are sitting as a commentator on CNN I think you should tell the audience that it is surely not over.</s>FOSTER: Your view is to throw money at the problem?</s>BLANCHFLOWER: Well, my view is not to throw money at the problem necessarily, my view is that we need to see growth coming. And you take the stimulus off gradually, because it is like thinking a patient is on life support and there are two views. One says the patient is fine take the life support off. And the great danger is that they'll die. And the other line, which is my line, which is that, well, the patient is on life support. We'll remove the life support gradually, if you like, take off the training wheels. And then pay off all these deficits. The problem of those who say take off the life support straight away is the patient could easily die.</s>FOSTER: But, if we take the U.K. for example. Fierce cuts, as you know, I know you've been following it in some detail. If they don't do that, foreign investors aren't going to invest in the U.K.-and they won't be able to borrow anything, so they're not going to have any money at all.</s>BLANCHFLOWER: There is absolutely no evidence for that. The only person who seems to think that is George Osborne. The markets have not responded in that way. When there was even a possibility that the Lib-Dems and the Labour Party were going to form an alliance, the bond markets didn't move at all. We have been borrowing money at very low, long-run rates of interest. We're not Greece. We're not Spain. We have a central bank of our own. We have an independent currency. And we have a sense of a fiscal regime. What you need to do is have a policy in place that will generate growth and keep revenues rising. You don't need to kill off growth at birth. There is not this crisis in the markets and there is Cameron and Osborne and their cronies actually create one.</s>FOSTER: OK, a lot of talk here in Europe about the stress test that the banks are facing and how that is being handled here in Europe, particularly.</s>BLANCHFLOWER: Yes.</s>FOSTER: From your perspective over there. What have you made of the news today? What do you think is going to be the headline in the papers tomorrow?</s>BLANCHFLOWER: Oh, that is a tough one. Trying to predict what is going to be on headlines in the papers, is probably the results between Germany and Spain.</s>FOSTER: OK, Professor Blanchflower, from Dartmouth. Thank you very much indeed for joining us on the program, as ever. Now already on QUEST MEANS BUSINESS we have heard from some of the world's most eminent economists, Professor Blanchflower being just one of them. On Thursday we get the views of Stephen King. He's the chief economist at HSBC. Where does he stand on the question of whether to slash or to spend? Find out on QUEST MEANS BUSINESS on Thursday. Everyone has got a different view. No one's decided. Ever since the financial crisis broke, bankers have been hearing threats of a crackdown on their industry. Now the EU is finally moving to change those rules. The European parliament today approved measures restricting cash bonuses and requiring banks to keep more of their funds in reserve to see them through possible shocks. It is part of a drive to reduce the risks taking, that most observers think played a part in the crisis. And bonuses, the EU won't set the limits on their size but from January 2011, a bank won't be allowed to pay more than 30 percent of any upfront bonus in cash, or 20 percent in the case of very large bonuses. Jim Boulden has been looking at what this means in practice. Because, Jim, it is all just numbers to me.</s>JIM BOULDEN, CNN INT'L. CORRESPONDENT: Well, remember, up until now, if you get a bonus based on your performance, whenever that performance may be, and you may get it all in cash at the end of the year. We see people going out and buying their Ferraris and that sort of thing. And the idea was to stop that. Not to have all the money upfront, not to have it all in cash, hold some of it back in case the bank gets in trouble. So that is one the critical issues here. Have that money available. Have whatever the reserve is, available for three to five years, in case the bank gets in trouble, or you don't hit the performances. And that way some of the money can be called back if in fact, that is what the government would decide to do. Now, we thought, well, let's look at some examples. Let's take some people in Europe and see exactly what this might mean for somebody. Let's say you are a banker and you are on $200,000 a year. And you know that your bonus will be 10 percent of your income for that year. Under the new rules, you would get $6,000 in cash. The rest of it would have to go into this sort of contingency fund, to get, you may be able to get it later. Hopefully, you would get it later. Let's move it up a little bit. Let's say you are a top level manager. You earn $1 million a year, and the company decides you have a 15 percent bonus coming to you next year. That would be $45,000 in cash. And I can tell you that is a lot less cash-wise than somebody would expect to be getting in a bonus. But that is what you would get if you were a banker, working at any bank, in the EU, starting next year. Now, you are a CEO, Max, you are on $10 million a year. The board decides, fantastic year, going to give you a 30 percent bonus. Now, this is $600,000 bonus, based on the idea that you would only have 20 percent in cash. So the bigger your bonus the more likely you are only going to be able to get 20 percent of it in cash. What we don't know, is what is a big bonus. We still have a months to decide-</s>FOSTER: Is this a cop out, because the bonus hasn't been reduced?</s>BOULDEN: No, no, not at all.</s>FOSTER: So what does this actually mean?</s>BOULDEN: Some people are this the cap on bonuses, but what we don't have yet is a cap on bonuses yet.</s>FOSTER: No, it is just the way they're paid.</s>BOULDEN: It is the way they're paid, to try to take the risk out of it. Now some people say there is a cap. What the European Union legislation says is that the banks using broad guidelines can decide on capping a bonus based on the salary. But what if they double the salary?</s>FOSTER: Yes?</s>BOULDEN: You know, that is what some cynics say. First they say, look, there is a way to get around it. Just increase people's salary, that way you can increase their bonus. Other people say I'm going to live in New York. I'm going to live in Hong Kong, where those rules haven't been put in place yet. I don't have t worry about this.</s>FOSTER: At least we don't have t worry about it.