Where Next for Europe?: Part 2

This is the second part of a two-part transcript in which Fool.co.uk's David Kuo chats with veteran market commentator David Buik from BGC Partners about the two main issues of the day: Europe and banks. David Buik looks at the future of Europe and the prospects for Barclays following the resignation of chief executive Bob Diamond. They also examine some of the more worrying bubbles that are forming around the world.

You can read the first part of the transcript here.You can listen to or download the full podcast here.

EDITOR'S NOTE: What follows is a lightly edited transcript of David Kuo's conversation with David Buik.

David Kuo: OK, now I'm glad you touched on Europe, because that is going to be our next discussion -- Europe itself. Do you think that the eurozone ministers, the eurozone leaders, have done enough by allowing, first of all the European Financial Stability Facility, the EFSF, and then eventually the European Stability Mechanism, the ESM, to lend directly to the banks? Do you think this is the right move for Europe?

David Buik: It's too little too late. I mean, Germany has to decide whether it actually wants the eurozone to carry on. It's a simple decision, because they have to make that decision, because one thing that might surprise your listeners, and I think might make you laugh and smile wryly, is, everybody's going, oh dear, about Spain, and oh dear about Italy -- you need to have a good look at France, because France has got now a president who is deeply and irrevocably in love with a bloated public sector, who talks waffle about growth, that's got no idea how to deliver it. Before his very eyes today, Peugeot are going to hose out 10% of their workforce. The shares have dropped 75% in value because there's no demand for cars in Europe. He needs to get his act together, but France voted not for a change, but for no change, because they are basically lazy people, irrevocably in love with their public sector, and this is very dangerous. Today it was flagged up, 43 billion' worth of cuts need to be implemented in the next two years. France can't deliver that.

So Germany needs to make a decision -- do you want a eurozone, or don't you? And if they do, they've got to open up their pockets.

David K: What, Germany?

David B: Yeah.

David K: But Germany's not going to do that. Germany will never allow that to happen, because they do not want somebody having their hands on the German money.

David B: No, no, no -- what I think will happen, David, is that the more you require fiscal help, the more you surrender your sovereignty, so Germany ain't going to do it for nothing, but you have to make up your mind whether you're going solvent. The only powerful country in Europe at the moment is Germany. France is diminishing, and has still, I think, got a bit of growth, but it's still diminishing, and I think will get worse. You have to make up your mind whether you want part of banking unity, whether you want part of fiscal unity, and if you want those things, and if you're going to have one regulator for everything, there's a price to pay, and that is, you surrender sovereignty, and let's not mince words -- it's the only way it's going to work. The only thing is, that to think that the eurozone may be dissolved is unthinkable, because the bill would be catastrophic. We would be not in recession for five years, we'd be in depression.

David K: So you don't think that will happen?

David B: No -- it should happen, but it won't, because it's unthinkable. I personally think Greece will go, and the reason I think Greece will go, it'll be a convenient political football, because they cannot deliver, and it would be much better to say, Greece -- right, we'll give you two years. Get the drachma going, let it be devalued by 50 or 60%, make holidays really cheap over there, because they've got nothing to sell, and they will pick themselves up from tourism and various other things, and also they could attract companies, such as Dublin has done, such as Google and Apple and things, to go to Greece under very, very reasonable tax levies, to set up some businesses, and give themselves a chance, but it would also send out a message to the rest of the world, and to Europe -- we mean business. We're going to run our affairs properly, which we haven't done to date. But we had a long conversation -- well, it wasn't a conversation, because I listened, which is rare for me, to Professor Joseph Stiglitz over the weekend, and he just said to me, he'd been to Spain and he'd been to Italy, and what had been exacted by the European authorities was too little too late. He said he thought they were going along the wrong lines, but because of the huge fear of making a mistake, they're just going too slowly, and as a result of which the situation, in his opinion, could get significantly worse before it gets better.

David K: Which then brings us to this question about austerity or growth. This is the big argument of the moment -- do you need more austerity in order to try and reduce these budget deficits and the debt mountain? Or do you go for growth? In other words, you pump more money into the system, take on more debt in order to expand the economy -- which one is correct?

David B: I'm very much of the old school, and the old school says that you've got to get your balance sheet right first, and I think more twaddle is talked about growth than you can imagine, like, we've got to go for growth, yeah? Like what, how? The answer is, that comes out of confidence, and if the world perceives that governments are running their shows correctly, it would improve, and one of the reasons I have against the political coalition at the moment is that they're terrified of each other, and nobody has actually grabbed the bull by the horns and said, we need -- because actually I've talked to a lot of people in business, industry and commerce, they're all, well it's not too bad. Lots of companies have got pots of dough, but their hands are under their armpits, and their pockets are on the floor, and they ain't even going to get close -- why? Because the political instability is such that people are terrified, and that's why I admire David Cameron when he goes out to the Far East and does his stuff. But when we're at home, apart from going and putting some tin helmet on in some factory in Milton Keynes or something, we never hear a coordinated hurrah from the government of how important it is to go and sell U.K. PLC, and even though he's a massive intellect, Dr Vince Cable, and he was the first to flag up the banking crisis, without a doubt, and give them credit for it, I am deeply depressed when I listen to him, when it comes to selling U.K. PLC, because all he can do is slag the banks off, which they probably deserve, but I want somebody with a great big beaming smile, like Lord Heseltine did 30 years ago, who's up for this very great nation, and I'm not getting it.

David K: Now, one of the problems with what's been happening in the West, and I'd like to end on this note, and it is the excessive printing of money. We know that America has printed and pumped nearly $1 trillion into the U.S. economy to try and revive it. In Europe, they have printed and pumped, through various mechanisms, 1 trillion euros into the eurozone; here in the U.K., 325 billion pounds, and it could be more by the time this podcast is uploaded. Now, with all of this money being printed into the various economies, I remember talking to Allister Heath from City AM -- he was saying that this is causing bubbles. His big bubble fear is the bond bubble, because people are just piling into bonds. Now, other people are saying that there's the Swiss franc bubble, because it is seen as a safe haven, and that is causing damage to the Swiss economy. Some people are saying there's an Australian dollar bubble.

David B: Gold and commodities as well.

David K: Gold, I've been out in Asia, and I'm seeing a property bubble in China. So do you see any bubbles around the place? And are you worried by this bubble fear?

David B: Of course I'm worried about the bubble fear, and it is a real fear, and both of you, for different reasons, have got every reason to be frightened about it, because unfortunately we've only got one game in town.

David K: Which is?

David B: Quantitative easing, and that is really dangerous, because A) it could be deflationary, then it could be highly inflationary, and also it will lead to massive unemployment, because selfish people like me who are way past their sell-by date refuse to retire, because they haven't got enough emoluments in order to pay for their pension. So they postpone their retirement, so that the young don't get a chance to come in and do their work. Now, it's not really visible today, but trust me -- in five years' time, if we carry on like this, you're going to find that we've got double-digit unemployment throughout Europe, and you will get very significant civil unrest. So I consider it a massive problem right around the world. The other thing is that we're living in false security.

David K: So you think there's going to be an unemployment time bomb?

David B: Sure, because we're not seeing the natural progression of people coming through and being employed, because interest rates are artificially far too low. We need them like this for the next maybe two or three years.

David K: If not longer?

David B: Yeah, well I think they won't change for five years, to be honest with you, but we need it. We need a proper interest rate structure, because until we do, people get lulled into a sense of false security. They say, oh, Spanish bonds, OK -- 6.4%, whatever it is, or 7% for 10 years -- buy some of them, because we know the authorities will bail us out, and as the period becomes shorter, the yield goes down, and money for old rope -- oh really? -- you wait till they go up, sunshine! And this is the problem, that's what Allister's problem is, and he's absolutely right. But I'm much more worried about the bubble because of the social damage, rather than, if people are smartarses, forgive the terminology, to get stuck into a specific asset and knock it for seven bells and get burnt, I have no sympathy for them, but I have great sympathy for people who are basically decent, who get properly educated, and leave university and leave school. Even if they've only got a couple of "O" levels, they deserve the opportunity to do some work, and they have every right to be very angry if they can't get that work, and that's my big fear. Even though those people who know me know where my political leanings are, I've still got a massive social conscience, and I believe that no government, to my satisfaction ... because even under the previous administration, those who have had a hell of a lot more, and those who had not had even less -- and that's wrong, and we have to do something to sort that out, but you can't do it on zero interest rates -- there's just no way.

David K: So you think that interest rates need to rise, then?

David B: They can't, but there comes a time --

David K: But under capitalism, it should rise, shouldn't it?

David B: Absolutely. There comes a time where ...

David K: So has capitalism failed, then?

David B: It's failed us on this account, definitely, because there's no other game in town. But I'm going back to my old theme, just to finish off on this -- confidence. If we get the right political environment, and we get the right things being said, and the right cooperation, ironing out these imbalances between China, the United States, Germany and the rest of Europe, Germany and the U.K., the Far East, the South East, South America and the rest of it, where there's some serious trade going on, and people feel good about themselves, and they throw that duvet back at seven o'clock in the morning, get out of there, spring-heeled, cut themselves shaving they're in such a hurry to get to work -- brilliant, but the kind of political leadership that I'm seeing today, I'm completely disenchanted with.

David K: So if you had to choose between China and America to lead the world out of this mess that we're in, which one would you put your money into?

David B: The United States of America, because they are unabashed isolationists. They don't give two tinkers about anybody else, and they've got a brilliant work ethic.

David K: Do you know what -- I agree with you there. I totally agree with you there. OK, now, thank you ever so much for coming in today, David.

David B: It's been a great pleasure -- it's always lovely having a good jar with you, lovely.

David K: Yeah, I enjoy them immensely. Now, I have to find a quote to sum up today's podcast, and the quote comes from a guy called Eli Seagull, who said: "When the truth gets divided, errors multiply." I think this is what's happened at some of the banks.

David B: I'd find it difficult to argue.

David K: I know -- the truth did get divided, and the errors have definitely multiplied. This has been Money Talk, I have been David Kuo, and my guest has been the one and only David Buik from BGC Partners. If you have a comment about today's show, please post it on the Money Talk web page, which you can find at fool.co.uk/podcast. Until next week, happy investing!

That was the second part of a two-part transcript in which Fool.co.uk's David Kuo chats with veteran market commentator David Buik from BGC Partners about the two main issues of the day: Europe and banks. They also discuss some of the more worrying bubbles that are forming around the world.

In the first part of the transcript, they discuss the prospects for Barclays following the resignation of chief executive Bob Diamond. Just click here to continue reading.

David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors for 2012" -- while it's still free!

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