US Economist Kenneth Rogoff - 'Germany Has Been the Winner in the Globalization Process'

In an interview with SPIEGEL, Harvard economist Kenneth Rogoff, 58, says it was a mistake to bring all the southern European countries into the common currency. He also argues that Greece should be granted a "sabbatical" from the euro and that a United States of Europe may take shape far sooner than many believe.

SPIEGEL: Mr. Rogoff, the eurozone finance ministers are likely to soon provide Greece with new loans totalling €130 billion ($171 billion), with the aim of stabilizing the country for the next few years. Will that save the euro?

Rogoff: It is hardly the final word, even for Greece. The mountain of debt in Greece is simply too big and the country is not competitive. Indeed, it's going to be very difficult to keep Greece in the euro zone.

SPIEGEL: But the government has announced tough austerity measures. Pensions are being cut, wages frozen. Those kinds of measures are almost unheard of in Europe.

Rogoff: But they're still not enough. To make Greece competitive, wages would have to be halved. That is impossible to implement politically, but without a steep wage cut, the economy will continue to stagnate. Greece urgently needs the prospect of growth. It is currently experiencing its fifth consecutive year of recession. This is a failure of historic dimensions.

SPIEGEL: But surely it can't get any worse? Many economists are saying that the crisis in Greece has bottomed out and the worst is over.

Rogoff: I would be more cautious. The problem in Greece is not an ordinary recession but a full-blown financial crisis, something which countries usually take a lot longer to recover from. This kind of economic collapse goes much deeper than a normal slowdown. The longer the economy continues to shrink, the more restless the trade unions get, and the more pressure builds up on politicians to put an end to the misery.

SPIEGEL: What cure would you prescribe?

Rogoff: The government in Athens should be granted a kind of sabbatical from the euro, while otherwise remaining a full member of the European Union. The country would leave the monetary union and reintroduce the drachma, for example. The drachma would immediately trade at deep discount to the euro, making Greece's export and tourism sectors competitive again. Once the country had achieved a higher level of social, political and economic development, it could return to the euro zone.

SPIEGEL: What advice would you give Merkel and her counterparts? Should they tear the euro zone apart?

Rogoff: No, certainly not. We are talking about bending not breaking, with one or more periphery countries allowed to leave temporarily in order to enjoy greater flexibility. There is currently no simple solution for this unparalleled crisis. The big mistakes were made in the 1990s.

SPIEGEL: Does that mean the whole idea of the euro was a mistake?

Rogoff: No, a common currency for countries like Germany and France was a reasonable risk, given the political dividends. But it was a grave mistake to bring all the south European states into the euro zone purely for reasons of political union. Most of them were not ready for it economically.

SPIEGEL: That may well be, but the fact is that now they are part of the monetary union, and that can't simply be unravelled.

Rogoff: Which is why there is only one alternative: Either the euro completely collapses -- with all the catastrophic consequences that would entail -- or the core members of the currency union manage to turn the euro zone into a genuine political union.