Mohamed El-Erian ran the U.S.-based Pimco, one of the largest investment funds in the world until he stepped down earlier this year to spend more time with his family. He is now chief economic advisor of Pimco’s parent company Allianz. He continues to live in California, and flies to Allianz’s headquarters in Bavaria four times a year. He spoke to Handelsblatt about Germany and the new world economic order.
Mr. El-Erian, Germany has long been criticized for its austerity policies. What is the Berlin government doing wrong?
Today, Germany is a super power. And Germans have to decide whether they want to take on this responsibility.
A super power? Are you serious?
Yes, within Europe it is. What else? France or Italy surely are not.
What do you mean when you say Germans need to take on this responsibility? Do you mean that they should pay for the faults of others?
Yes, if Germans decide to take on a strong leadership role then that means introducing euro bonds – that is buying bonds where all European states share liability and transfer money directly to other European states.
But what if the Germans don’t want to do that? Does that mean we will have a never-ending euro crisis?
The current crisis is over. Euro-land is no longer in critical care. But without a strong German leadership the region will continue to suffer from a fever that could always flare up.
So there is no alternative to sharing current problems?
At the moment we see a sharing of dealing with the economic malaise: Italy has become slightly stronger, Germany has become slightly weaker.
Why is Germany stronger than other countries?
The country is the only industrial country that has invested in growth. In particular, it has introduced reforms on the employment market and in the tax system.
How do you rate growth prospects world-wide?
Growth is too weak. There is a lack of reforms, demand doesn’t work and there is too much debt. All of those three points need to be tackled. In Germany, one tends to ignore demand. In other countries, people don’t want to talk about reforms and debt.
Why does the concept of demand not work internationally?
Those who have money don’t want to spend it. In Europe, this country is Germany. In the United States, these are the richest 3 percent of Americans. And those who would like to spend money, don’t have it. In Europe that’s Greece. In the U.S. these are the remaining 97 percent of the population.
Has the U.S. invested enough in growth?
Luckily, in the U.S. there is a very strong private sector. But politics there doesn’t work at all, parties there can’t even find consensus on salient topics such as immigration, infrastructure and a tax reform, of which many actually share the same opinion. Moreover, the U.S. mistakenly focused too much on the financial sector as a motor for growth.
Can central banks straighten out the weakness of demand?
It doesn’t matter whether you look at the European Central Bank (ECB), the Federal Reserve (Fed), the Bank of England (BoE) or the Bank of Japan. They all have two things in common: never in modern financial history have they been in such a position to take responsibility for the entire world economy. Also, they have never had to experiment so much with unconventional methods (in maintaining price stability). With this I mean methods that have never been tested before. Problems won’t be solved this way. But they can help governments gain some time.
“At the moment we are all driving with a car that has its last spare tyre in the boot. It’s working out so far but if there is another geopolitical shock, then things won’t work anymore”
Are governments actually using this time given to them by central banks?
Have central banks bought time so that the system can be bettered? Yes! In Europe a lot has happened. But has the system healed so much that we can see a significant upswing? No, we are not at that point yet. And paradoxically, politicians in the United States feel less pressure to find consensus. But one thing should be clear to everybody: at the moment we are all driving with a car that has its last spare tyre in the boot. It’s working out so far but if there is another geopolitical shock, then things won’t work anymore. And for Europe especially, the situation in the Ukraine presents a great risk. And a second big risk is another casualty on the markets.
The ECB’S extremely relaxed monetary policy is leading to a weakening of the euro.
That’s what they want and that’s a good thing – the euro was far too strong before.
In the long-term, do you see the euro reaching parity with the US-dollar as Goldman Sachs predicted?
I see a tendency towards an exchange rate of €1 to $1.20. If that rate fell to 1.00, that would initiate a new crisis on the markets because many investors and businesses have not secured their currencies.
Do you believe that the ECB will buy bonds like the U.S. has done? Will that help?
They will do. But it won’t help. It’s better than nothing though. A dirty shirt is better than running around naked.
Aren’t markets far too blown up by central banks’ politics already?
In some areas that is the case – such as in southern European countries or with U.S. corporate bonds.
It appears that stock markets are ignoring crises such as in the Ukraine now whilst getting excited about the flow of liquidity produced by the ECB.
Investors trust in central banks – they have learned that crises are good for buying. And there is a lot of money flowing into markets right now through takeovers by mostly German firms. That explains the boom (on the markets) – which is certainly also worrying.
The U.S. central bank wants to increase interest rates in the next few years. How far will the Fed go? Up to only 2 percent, as Bill Gross, your former Co-CEO at Pimco once said? Or up to 3.5-4.0 percent as most other economists predict?
A historical comparison would even suggest 4.0-4.5 percent. The markets mostly predict 3.5 percent. I don’t believe in 4 percent or anything above that figure. But don’t pin me down on a figure between 2 and 3.5 percent.
Bill Gross is alone with his thesis that extremely low interest rates are the way forward.
He is a great investor. And one can only beat the market when one takes a different line to the rest of the market.
There are critics who doubt that Mr. Gross does exactly what he says.
Pimco is very transparent. Anyone can see what Bill buys or sells. With banks that is not always the case.
Let’s assume that Bill Gross is right and world interest rates remain low in the long-term. Would that present problems for insurers like Allianz?
Allianz is a very diversified company with non-life insurances, asset management, and life insurances. Only life insurances will have a problem with low interest rates. And even here there is the option of foregoing this problem. One could turn investments into an infrastructure. Also, according to analysts, Allianz on average, has too many financial cushions – not too little.
One final question about your favorite country, Egypt: how much of the Arab Spring remains
More than most people in the West would think. The population there overthrew three governments – Mubarak, the military interim regime and then the Islamists. People don’t forget that – and neither do those in power.