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Q&A with Jim ‘BRIC’ O’Neill: Grillo’s good, China’s fine, Europe’s fading

AP Photo/Pier Paolo Cito
Beppe (above) is buono.
By Gideon Lichfield
Published Last updated This article is more than 2 years old.

CERNOBBIO, ITALY— Jim O’Neill, famed for coining the term “BRICs” and for his fierce devotion to football club Manchester United, retires as chairman of Goldman Sachs Asset Management next month. Of late, O’Neill has also been famed for his bullishness on everything from global equities to Chinese growth to European recovery; he even has a positive spin on the strong showing for populist ex-comedian Beppe Grillo in Italy’s recent election, which most economic observers perceived as a disastrous vote against common sense.

So does anything give him pause? Quartz caught up with O’Neill at the Ambrosetti Financial Markets Workshop, a prestigious annual gathering on the (currently fog-laden) shore of Italy’s Lake Como, and he explained why Europe is in danger of losing its own raison d’être, why he’s not worried about shady loans in China, and why the rise of Grillo is a good thing. This is an edited transcript of the conversation.

Quartz: So what are you pessimistic about?

Jim O’Neill: The framework for European Monetary Union (EMU). It was created so that Germany and France could avoid World War III. For that generation it was a great success. But that was a long time ago. The policymakers are stuck in a timewarp… That’s why Grillo is good—Europe needs a new generation of people to think for it.

Q: Do you mean Grillo himself could be the source of new thinking, or just that his success will force other people to rethink policies?

JO: It could be either one. I mean, look at the reaction I get here when I say the economic rationale for the euro is decreasing. [In a morning session at the workshop, O’Neill displayed projections showing German exports to the euro zone decreasing from 45.5% of its total exports in 2000 to 33.9% in 2020, with its exports to the BRIC countries over that period rising from 3.9% to 24.3%.]

Q. So what should the framework for EMU look like in 2020?

JO. If they can’ t pull things together in the next two years the framework might not exist in 2020, because the rationale will be so weak. Which means probably after the German election [in September 2013] they might have to become a lot more serious about the future of the European Union, which would mean giving up some political sovereignty. The French in particular are in complete denial about this.

Q.  But is it desirable for the ever closer union to continue?

JO: [Long pause] I don’t know. Economically it has some desirable qualities. If they did decide to go down that path and—this is critical—if they genuinely allowed for true cross-border services reform, then you could get some of the economies of scale the EU was supposed to generate. If you look at the original criteria for the creation of the euro, they’re not being fulfilled. Have we ever had a sizable cross-border banking merger, for example? Do we really need all these national European airlines? So I’m optimistic about most things but not the framework for European life.

What else am I not optimistic about? I wouldn’t be wildly optimistic about India until it discovers some of China’s steeliness. Its complex politics makes Italy seem like a garden party at times.

Q. You said this morning that China’s growth is being underestimated.

JO. Nouriel [Roubini, the economist popularly known as “Dr Doom”, who spoke alongside O’Neill in the morning] said the BRICs are overhyped, and that might be true but China is underhyped. Those who follow China really closely say it’s growing so far this decade by more than we assumed. We were expecting 7.5% growth a year, and in the first two years it’s been growing 8.5%.

Q. But are there any red flags to watch out for on China?

JO. Not obvious ones in the near future. I worry a lot about the thought that I’m missing something on China, because (a) it’s so important to the world that it would e a real problem if it went wrong and (b) I’m so identified with the China story that it would be worrying if I had missed something.

But I think that when things get dificult for China is when it’s close to 70% urbanization. Because that’s key to the China story. When you look over long-term economic history, in Britain, the US, Japan—in most cases the huge surges coincide with urbanization, and China’s probably only about halfway through. If it were 70% urbanized I’d worry  a lot more about the pictures we see online of empty cities, the rising house prices, and so on.

I do worry a bit about China and the internet. When their incoming president, Xi Jinping, disappeared for two weeks [last September, shortly before the Communist Party Congress that confirmed him as the next leader], it made me think China is good at doing so many things, but it’s not good at that yet. We wouldn’t even have known about his disappearing if it weren’t for the internet.

Q. Are you not worried about some of things people point to in China like banks with growing bad-loan portfolios or the rise of the shadow banking system?

JO. Shadow banking doesn’t bother me much at all. Its growth is a symptom of a rapidly changing economy and society. A woman sitting next to me earlier today said she does 80% of her family’s shopping in China online. You’ve got this classic situation that happens elsewhere, where the natural development of the people is running ahead of policy and regulation. If you have a tightly regulated financial system it’s pretty obvious you’ll get the growth of a shadow financial system. Will that in aggregate cause major problems? I don’t think so, especially because China has a high savings rate.

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