Robert Zoellick’s last day as World Bank president is Friday, when he will be succeeded by Dartmouth College president Jim Yong Kim. The Washington Post interviewed Zoellick on Wednesday in his office at bank headquarters, where moving boxes were packed and luggage --- a gift from his staff -- was sitting by the door.
Q: Start with Europe. You were critical of Spain and felt they had mishandled the announcement of their bank recapitalization. How would you have handled it differently?
A: The key point was that 100 billion euros is still a big sum of money. Even a rich continent does not have too many of those bullets to fire, so when you fire the bullet you want it to hit the target. It missed the target because there was a large amount of uncertainty about which fund it was coming from, what the seniority of the position is, and, fundamentally, is it inserting capital or just making a big loan? What the banks need, like the U.S. banks in 2008, is a capital infusion. So the European Union worked its way to bypass some of their procedures to arrange 100 billion euros. But because those questions were left unanswered, the market reacted negatively. So, the point in that case is that you have to try to get ahead of the problem and not only make the tough decisions but execute in a coherent way.
The second big issue is that Spain and Italy have been making difficult reforms on the fiscal side and to a degree on the structural side to improve their competitiveness. But those reforms will take time to show the benefit. So they need a duration match between the time that the benefits show up and their funding. And the lack of assurance about that funding is what leads their bond yields to be creeping up. There are a host of options out there…but Europe is hesitant about making clear that anyone will be the backstop.
Q: Why do you think this crisis has proved so difficult to resolve – so persistent, despite all the steps the euro zone has taken over the last two years?
A: The market situation is tricky. Expectations are very low. That could be good news because if something positive happens you could get a positive reaction. Second, even though market expectations are low, behind that is an assumption that when the Germans say we won’t let it fail, that they mean it, so that, ultimately, Europe will save the euro. The biggest risk is of miscalculation. So as Germany deals with the problem incrementally, or plays brinksmanship, or negotiates, that the snowball starts getting so big going down the hill that you can’t stop it at the last minute…The other variable is France, both politically and economically. Historically, France and Germany have been the drivers of European integration. So if one wanted to look for something that could help, (French President Francois) Hollande is much more of a Europeanist than (former President Nicolas) Sarkozy or (former President Jacques) Chirac. If he were willing to take some steps…that could provide some opportunity to work out with the Germans a compromise. And even if they have not executed it all that would deal with some of the confidence problems in markets. But, Hollande is walking a very thin line because some of his campaign rhetoric, if implemented, could make France part of the problem not part of the solution. So I think this remains a very fragile period. The proposals...put out are an effort to come up with a coherent approach. That is the good news. The bad news is the key countries, particularly Germany, are not yet ready to embrace them. From the perspective of the rest of the world, Europe is now a troubled place that has negative economic effects on some markets, particularly the Balkans and North Africa. And it remains a significant downside risk if things slide out of control.