Transcript Interview with Larry Kudlow - CNBC, The Kudlow Report September 14, 2011  KUDLOW: Now joining us for an exclusive CNBC interview, the president of the World Bank Group, Robert Zoellick. Bob Zoellick, thank you very much for coming on. You've given a tough speech today and I just want to walk through. You're basically starting out by saying the time for muddling through is over. And you point the finger at the US, Europe, and Japan. I'd like to stay with Europe, if I could.  ZOELLICK: Sure.  KUDLOW: You say Europe is resisting the difficult truth about common responsibility. Can you expand on that? What is the difficult truth they are resisting?  ZOELLICK: Well, up to this point, Europe has been trying to solve some fundamental problems, including solvency problems, with liquidity. And that buys time, and that sounds like the actions that you just heard come out of your most recent report. But, at some point, and I think that point is now, they're going to have to make fundamental decisions about the problems with sovereign debt, where some countries are in serious trouble, the effect of that on banks, because when the sovereign debt is bad, it means the banks are at risk, and then third, for some countries like Greece, competitiveness. And those are issues about whether they're eventually going to move to a fiscal union that will match the monetary union, or they create a different type of Euro Zone. And I think what we saw this summer is that the markets are starting to push and challenge. You can hold off with purchases from the European Central Bank for a while, you can hold off with purchases from the EFSF, but the fundamental issues have to be addressed. And the rest of the world is waiting because the uncertainty that comes out of Europe and to a degree, the United States, hurts everybody.  KUDLOW: Yeah. Well, let me--look, what--you're sort of inferring or implying this, and certainly the markets are clamoring for some kind of orderly technical default or restructuring of the bonds in Greece and elsewhere. Is that what you're saying, that Europe is not facing the hard truth, there's got to be a restructuring of the debt in Greece and maybe beyond Greece? Isn't that what you're suggesting?  ZOELLICK: I'm actually talking about beyond the issue of restructuring, Larry, because these are decisions that only the Europeans are going to make. They're going to have to make their--the decisions, and others are going to--they're going to have to end up paying for them. So one issue is restructuring of the debt. But what I'm really saying is that is not sufficient, that does not bring Greece back to competitiveness. And then there's the question of even if you restructure that debt, what about some of the other countries? And then, ultimately, one has to look back and to say how did Europe get to this position, and if it is going to have a fiscal union that will match the monetary union. Now, maybe they don't want to go to that direction, but if they don't, that's going to have severe implications for a Euro Zone.  KUDLOW: Well--all right. Let me just--let me just--I want to just go back one second. In the event of some kind of restructurings for the sovereign debt and maybe the banks as well, in the past, when there were crises in Argentina and Brazil and Mexico, the World Bank participated. You had the structural adjustment loans, the SALs. You also have the International Finance Corporation. Would the World Bank play in this? Would you be a contributor to some kind of financial assistance to Europe with respect to the sovereign debt restructuring, the banks, or both?  ZOELLICK: No, because Greece is a developed country, so the examples that you gave were developing countries. The IMF has participated, and I expect it would participate.  KUDLOW: All right. Let me ask you now--the IMF we know about. You mentioned before, the EFSF, and that's the big issue. Some people are calling it Le TARP. They're saying there has to be a blanket. The European Union has to have a bailout soon that has to include the banks. In terms of meeting the responsibilities of Europe, 17 countries have to approve of this, Bob. Is such a thing possible, number one, and within a reasonable amount of time to get us through this crisis without a contagious catastrophe and blowup?  ZOELLICK: Well, it's possible. That's what we're seeing right now. But, as you see in the discussions with Finland, Finland wanted some collateral, so that put a different burden on--compared to some of the other countries. But I think the other issue that you're touching on, Larry, with your analogy of the TARP, is to say how would the money be used even if it's approved? Remember, the TARP was first designed to try to buy the mortgage assets. That's equivalent to trying to buy the debt. Another use could be to put in capital into banks. Another might be related to guarantee of bank liabilities. So my message, really, it's--I'm not suggesting these are easy issues by any means. I know about the history of Europe, you do as well. But what I'm suggesting is this is moving to a stage where the leaders are going to have to make some fundamental decisions on where they want the future of this construct to go; and then, as opposed to dealing with the problem day by day with patchovers, they're going to have to have the solutions to the types of things I just mentioned fit with the overall strategy and design.  KUDLOW: Does the euro survive, Bob Zoellick? Should the euro survive? And should all the euro currency countries stay inside that currency zone?  ZOELLICK:  I believe it will survive. As for your second question, I believe that it's up the Europeans to decide. It's their choice. And the third question really depends on the decisions that I mentioned, is that if you're going to keep the Euro Zone with all the current members, you're going to need a much stronger fiscal union than you have today. Somebody's going to have to pay for that. If you are not willing to have that fiscal union, then I don't think you can keep the current construct.  KUDLOW: Right.  ZOELLICK: That's exactly the type of decisions that people have to come up with. And, in between, liquidity solutions buy time, they don't solve the problem.  KUDLOW: All right. Let me just shift gears slightly. You also, in your speech, fingered the United States. And this morning Treasury Secretary Geithner talked about political dysfunction. I want to ask you, Bob Zoellick, does the US suffer from political dysfunction or does the US suffer from policy dysfunction?  ZOELLICK: Well, the United States is not a parliamentary system, and you've dealt with this. So you have the Congress, you have the executive. Even if they're from the same party, they're going to have different views. So it's not an easy process. But, again, just as within Europe, I think the time for muddling through is past and people are going to have to focus on the fundamentals. What are the fundamentals? Cutting discretionary spending, the year-by-year budgets, is not the fundamental issue. You're going to have to slow the rate of the entitlement spending, the Social Security, the Medicare. That's one issue. A second issue is a type of broad-based tax reform like we had in the '80s that creates the basis for growth. And then you have to take other structural changes. For example, having a trade policy that right now is stuck.  So these are going to be decisions that only Congress and the executive can negotiate. They're going to have to be able to work it out together and across parties. But, so far, again, just in between solutions, quick stimulus packages, I don't believe that's going to get us where the US needs to go.  KUDLOW: All right, last one. You talk about a new normal. But you say you want a new new normal that has dynamism. But what I see, Bob Zoellick, is a new normal that has slow growth. We may be on the front end of a recession in the USA, zero retail sales today, zero jobs last week. I see slow growth, I see high unemployment, I see gold prices soaring, a lack of currency confidence. We are in a mess. If this is the new normal, I'd like to see a new new normal, too. Well, last question, Bob Zoellick, in brief, how to get there?  ZOELLICK: Well, remember, the World Bank deals with developing countries, and one of the striking things about the world over the past 10 years is about half the global growth is coming from emerging markets. That's a huge opportunity. But emerging markets are also put at risk by some of these things coming out of the US and Europe. That's the point that I mention. Now, what's the key point? Not just focusing on the fiscal and monetary policies but the structure of growth. So you want to change those aspects that you referred to? You have to get beyond short-term fixes and aspects like your tax policy, your trade policy, your education and science and development, and, frankly, some of the regulatory issues. Those have been the secret of success that the developing countries have learned, and the US and Europe are going to have to get back and relearn them.  KUDLOW: All right, I'll leave it there. Robert Zoellick, President of the World Bank, with a big speech today down in Washington, DC. We thank you for your time, sir, very much.  ZOELLICK: You bet, Larry, thank you.    |
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