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NEW YORK ( TheStreet) -- The eurozone is currently in a great deal of economic trouble. The Southern European countries, collectively known as PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are having tremendous problems with their fiscal solvency. Even France is teetering at the brink of insolvency. Germany is left as the strongest economy in the eurozone and the country to which all are turning to set European fiscal policy. We interview Gary Becker, Nobel Prize-winning economist at the University of Chicago, to understand some of the political and economic implications of the European financial crisis.
|Gary Becker, Nobel Prize-winning economist at the University of Chicago.|
Q1: What is your opinion on the loans made by German banks to the banks and governments of the so-called PIIGS nations? Some of the evidence suggests that these loans will be impossible to pay off. Wouldn't it be irrational for competent financial players to make such loans?
A1: The weaker countries, economically speaking, might have anticipated that the stronger economies of the eurozone -- Germany and France -- would come to the rescue of their fellow EU members. That would provide economic protection, to some degree, for the weaker economies of PIIGS.However, the countries that originally made the loans and that are being called on to make the bailouts, Germany in particular, did act in a surprising way since they do seem to be losing a great deal of money. When engaged in financial enterprise, losing money is generally not the goal, and so engaging in a practice that would almost seem to guarantee losing money does seem to be highly irrational. >> Get your world economic news on the go with TheStreet's iPad app. Q2: That brings us to a broader question about your theory of behavioral economics. When faced with irrational behavior from otherwise intelligent economic players, it begs the question: what is the proper approach? A2: In such a case, I would advocate trying to find some underlying rationale behind the behavior that is seemingly irrational that would render the course of action engaged in by the player in question understandable and coherent. In this case, perhaps there might be some objective other than having loans paid off that was driving German lending practices.