Antoine Reverchon, Le Monde

An interview with Lord Nicholas Stern, professor at the London School of Economics, who received an honorary doctorate from the University of Paris-Dauphine on November 24.

    Le Monde: Your report on the economics of global climate change, published in October 2006, had a significant impact, since it quantified the economic costs of different scenarios of global climate change for the first time. However, isn’t there a risk that the present crisis will push greenhouse gas reduction to the back of political and economic priorities?

    Lord Stern: The economic crisis will cause a 4-5 percent global GDP reduction for two or three years, while, if we don’t act today, the planetary crisis – I use this term rather than "environmental crisis" which I consider too limited – will have still more serious effects over time scales from fifty to a hundred years. Not only in terms of destruction of value, but also in terms of the natural catastrophes, human migrations, and conflicts between communities it will engender.

    If I were to redo my 2006 report today, I would be even more alarmist, since we’ve observed an acceleration and an aggravation of the consequences of warming in the interim. That said, these two crises, economic and planetary, have one thing in common: they’re the consequence of a system that does not evaluate the risks that its operation generates, that does not take into account the fact that it may end up destroying more than the immediate profit it procures and that, finally, underestimates actors’ interdependence.

    In this respect, not saving Lehman Brothers was a typical error of judgment, since it neglected to take into account not only the chain reaction that would be unleashed, but, above all, the impossibility of knowing the real degree of exposure of the actors to that reaction – which is what definitively ruined all trust in the financial system.

    At the time of the Mexican peso crisis (1994), it was possible to bring everyone involved together around a table, to evaluate the risks incurred, and to arrest the crisis. That’s become impossible today; there would be too many people around the table!

    Is the present crisis a cyclical one, or rather – as its scope suggests – a much more serious systemic crisis?

    It is essentially the result of three factors: the first is the deregulation of the financial sector, which allowed extremely risky financial instruments to be forged in uncontrollable markets.

    The second is the expansion of the real estate bubble which caused an excessive number of actors to bet on the continuous rise in house prices. The third is that East Asian countries, drawing their conclusions from the consequences of the 1997 financial crisis, accumulated immense savings that allowed American deficits and the American credit bubble to be financed well beyond what was reasonable.

    So this crisis is cyclical to the extent it was unleashed by a drop in real estate prices, a phenomenon that had already occurred four times since the 1970’s – this last drop, moreover, was less severe than those preceding it! This crisis is also born from the inside of the system itself; it’s no meteorite that fell on us from above. But the combination of factors I just enumerated makes its consequences unparalleled in scope in the century.

    Are you optimistic or pessimistic above the effectiveness of the measures that have been taken to remedy the crisis?

    The instruments of political economy that must be implemented have to be in proportion to the seriousness of the crisis: extremely powerful.

    Settling for reducing central bank interest rates by a few points will not be sufficient; it seems to me, however, that guaranteeing bank deposits, recapitalizing establishments that seem close to bankruptcy, injecting liquidity to relaunch lending – all that is equal to the stakes involved, on condition, however, that those policies be coordinated.

    It’s the same for economic recovery plans, indispensable for the re-establishment of economic actors’ confidence. Even if they’re not really coordinated, it turns out that the planet’s main countries have understood that it must be done, and must be done now, which is already a big step. Knowing that the others were throwing themselves into such plans pushed each one not to hesitate too much to do the same! I don’t know whether these plans will be adequate for relaunching the economic machine, but I know that the situation would be much worse had they not been announced. They should, in any event, avoid having the recession turn into a depression.

    Yet, if they succeed in overcoming the economic crisis this way, isn’t there a risk that companies and politicians will immediately revive the model you deem responsible for the "other crisis," the planetary crisis?

    It’s up to us – researchers, economists, media and citizens – to avoid that. At issue is a major political choice we must make right now, taking advantage of the opportunity offered by implementation of the rescue plans and recovery policies announced these last few weeks, and also those still to come.

    For example, why not direct the aid offered to the automobile industry and all public assistance in general towards research and development of an economic model and technologies that act in concert with the fight against global warming.

    Why not guarantee first those bank loans towards investments in clean technology and renewable energy? Why not change the tax code to reduce the relative price of those technologies and those energies?

    All those initiatives are recovery measures. Today, we have the possibility to create a technology shock equivalent to the one industry experienced with the appearance of railroads or electricity, the source of long phases of economic growth.

    Of course, there will still be downward and upward business cycles within that phase. It would be a very serious mistake to believe that we must hold up long-term investments and policies because of the crisis. Certainly, companies need financial credit and liquid markets in the short term; but they also need long-term growth prospects, without which confidence cannot return.

    We must acknowledge that freeing ourselves from evaluating the risks our actions make others and the planet run is a mistake; we must demand more responsible behavior and greater risk awareness from companies and governments, and we must implement technologies that allow a reduction of those risks now. These technologies exist.

    You were chief economist at the World Bank. To achieve such a change, won’t it be necessary to profoundly alter the present political and institutional framework, especially at a global level?

    Constructing new institutions is a long process, and today the priority is to exit from the economic crisis as rapidly as possible. Consequently, we must act within the existing institutional framework. But that must not prevent us from learning the lessons of the crisis, and particularly from the way we will emerge from this crisis.

    For example, I think we would have to create an international institution independent of the United Nations – where quarrels between the big countries are too frequently a factor for paralysis – conservatively financed by foundations – in order to avoid its budget becoming a power prize – the role of which would be to evaluate risks inherent to the operation of economic activity and to anticipate the possibilities of crisis.

    That organization would be composed of leading economists, acknowledged as such by the scientific community, those who have occupied high-level responsibilities in multilateral institutions, such as Paul Krugman, Larry Summers, Daniel Cohen, Amartya Sen, Kemal Dervis, Michel Camdessus, etc.

    That expertise would, I believe, have real influence on governments, but also on markets and companies to the extent the operation of such an institution preserved it from any suspicion of defending the specific interests of such and such a country or some social group.

    Moreover, the multilateral institutional framework should, in my opinion, be reduced to three big organizations: one would be an instrument for financial sector finance and regulation, the result of a fusion of the International Monetary Fund (IMF) and the World Bank; the second would be the International Labor Organization (ILO), which already exists; and the third would be a Global Environmental Agency, which is yet to be created.

Translation: Truthout French language editor Leslie Thatcher.



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