Greenspan Says ECB Has `Terrible Problem' on Deficits

Former Federal Reserve Chairman Alan Greenspan said the European Central Bank faces a “terrible problem” because its measures to combat the debt crisis make it easier for countries to defer cutting budget deficits.

“I think they’ve got a terrible problem,” he said in an interview with CNBC in Washington today. “To the extent that they increase their purchases of bonds of the various different countries, they of necessity take the pressure off the political system within those countries to do what has to be done.”

While the ECB yesterday delayed withdrawing emergency liquidity measures and bought more government bonds, President Jean-Claude Trichet said governments should take the lead in quelling the region’s deficit crisis. Bond yields of Spain and Portugal have soared on investor concern that they may follow Ireland and Greece and seek aid, increasing the risk that the ECB may have to do more if politicians don’t deliver.

“I think it’s an extremely difficult problem because there is as we now know -- as we knew right at the beginning -- there is a fundamental flaw in any currency arrangement in which you are pooling the cultures of various different societies,” Greenspan said. “Implicit in this arrangement is it’s got to be that people have got to abide by the rules.”

“If you try to get benefits from others -- beggar-thy- neighbor as we call it -- nobody gets anything,” he said. “It’s a sort of a prisoner’s dilemma.”

‘Going Nowhere’

Greenspan said the U.S. economy is “going nowhere” unless people are able to get rid of a “deep-seated fear” due to economic uncertainty and conditions return to “normality.”

Investment in plant and machinery is a “critical measure of how certain and uncertain people are about the future,” he said. “People are investing far less in physical assets, i.e. homes, and their cash flow is going to pay off debt.”

The former Fed chairman said he always looks at the U.S. 10-year note to gauge the market and that the outlook for the stock market would be “terrific” if it wasn’t for debt concerns and the crisis in Europe.

To contact the reporters on this story: Scott Hamilton at; Svenja O’Donnell in London at

To contact the editor responsible for this story: John Fraher at

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