Alan Greenspan said the eurozone needed “consolidation politically”
Former US Federal Reserve Chairman Alan Greenspan has said that a repeat of the crisis that brought the country close to default is “perfectly conceivable”.
He told the BBC that he had not seen another situation in Washington where “compromise” seemed so far away.
Mr Greenspan confessed to sympathies with the aims of the Tea Party, the Republican faction that fought the government during debt ceiling talks.
But the former central banker said the movement’s tactics were “undemocratic”.
Mr Greenspan, the most powerful figure in economic policy when he ran the Fed between 1987 to 2006, spoke to the BBC’s Evan Davis ahead of publication of his new book, The Map and the Territory.
In a wide-ranging interview to be broadcast on Radio 4’s Today programme and the World Service’s Business Daily, the former Fed chief had strong words for those who thought the eurozone crisis was over.
The crisis is likely to continue until the eurozone sees “consolidation politically. I think that’s where we are going”.
He said: “The culture of Greece is not the same as the culture of Germany, and to fuse them into a single unit is extremely difficult.
“The only way you can do it is by political union, like with East and West Germany, and even that is not working as well as it should be.”
But he was optimistic about the UK’s attempt to revive its economy.
“What Britain has done with its austerity programme has worked much better than I thought it would,” Mr Greenspan said.
“As far as I can judge, it [the economy] is coming out pretty much the way they [the coalition government] had expected.”
Mr Greenspan also defended his record at the Fed against criticism that easy-credit policies and light-touch regulation had contributed substantially to the 2008 financial crash. He also declined to criticise the financial derivatives market.
He said: “One thing that shocked me is that not only did the Federal Reserve’s very sophisticated model completely miss (the crash on) September 15th, 2008, but so did the IMF, so did JP Morgan, which was forecasting American economic growth three days before the crisis hit, going up all through 2009 and 2010.”
There is a difference between predicting economic bubbles, and predicting when they might burst, he said.
He rejected suggestions that he was not clear enough in warning that the financial markets might be teetering on the edge of collapse.
However, his words of warning had to be couched very carefully in order not to unsettle the markets, he said. “I was very worried about what the impact would be.”
Mr Greenspan, 87, who now runs his own consultancy business, also criticised a growing “crony capitalism” in the US.
He said: “Crony capitalism is essentially a condition in which… public officials are giving favours to people in the private sector in payment of political favours.”
He said it was prevalent in China and Russia, but had not been common in the US or the UK. But he added: “I am beginning to worry that we are starting in that direction.”
On China, he said that growth rates would begin to slow unless the country could be more innovative.
“One of the major problems with China is that its innovation is largely borrowed technology.
“There was a recent Reuters study where they listed the top 100 most innovative companies. Forty were American, none were Chinese.
“Chinese productivity is the highest in the world but the way they do it is by borrowing the technology from abroad, either by joint ventures or other means.
“What they are going to find, I suspect sooner rather than later, is that… unless they pick up innovation very specifically, their growth is going to slow down,” Mr Greenspan said.
Part of the problem was that China remained a single-party state which was too conformist, and innovators there still did not “think outside of the box” enough.