Good grade

Reinhard Selten is the only German to have won the Nobel Prize in Economics. He was awarded the price in 1994 for his work on game theory. Selten is a professor emeritus of Rheinische Friedrich-Wilhelm-University Bonn and the founder of its Laboratory for Experimental Economics.

Deutsche Welle: As 2011 comes to an end, how would you rate European leaders' efforts to manage the European debt crisis this year?

Reinhard Selten: I think it is quite satisfactory. Given that there is a situation where many people have to come to a uniform agreement, it's quite amazing that you can get an agreement of 26 among 27 for a contract. Of course this progress in the European Union is always difficult, but it went well in former times and I think it will also go well this time.

At the end of the year are we any closer to end of the crisis or do you expect things to get even worse in 2012?

I don't think it will get worse. I am quite confident that it will get better. Of course you cannot exclude that there are some difficulties especially with Greece, but I think that basically everything will be alright.

According to a new IMF report Greece is behind schedule in its reform efforts. The ability of other countries like Italy, Spain and Portugal to repay their debt and get loans at affordable rates is also in doubt. How long can the eurozone as a whole sustain itself when at least four of its members are continuously on the brink of collapse?

As far as I now Spain is not in acute trouble and Portugal is improving, so I don't expect any great difficulties with these countries. All of them agreed to put a brake for their debt in their constitution, so I think they will also make the necessary efforts to contain the deficit. The debt itself is not as bad as the deficit which is increasing every year. That has to be avoided. They have to at least stabilize their deficit.

Greece has undoubtedly made deep and painful social cuts. As result, unemployment has hit a record level of 18 percent. At the same time, Greece's debt load would still reach almost 200 percent of GDP by the end of 2012 without restructuring. Is it really fiscally and ethically responsible to believe that Greece can be turned around by mainly demanding more austerity measures?

One should also see to it and it is important that the country gets investment and to create more employment, so one should encourage private investment in Greece. What's really needed is not only money to support the state budget, but one needs some input of private investments there. Maybe one could encourage this and maybe even subsidize this, because what is needed is some stimulus of the economy. Of course it is not possible to rely on savings efforts alone, because this will be a very big burden for the economy and the economy will suffer from that. Therefore one has to think of additional measures to stimulate the economy.

Do you share the conviction of most European leaders that all current eurozone countries must remain members under almost any circumstance?

No, I also think it should be possible to leave the currency union. Of course it's very difficult to have procedures for that and it's not something I find desirable, but if for example a country like Greece, if the government would decide that they want to leave it, then probably one could not really prevent them from doing this. As a last resort this should not completely be taken out of consideration.

How would you grade Chancellor Merkel's performance as arguably the leading political figure in Europe in solving the crisis?

I think that she is very good at getting agreements and to move something. I think what she did was quite remarkable. She is always quiet and many people think that she doesn't create the impression that she is a strong leader, but I think that actually her record is quite good. I am satisfied with her performance.

While the world is still waiting for Europe to solve its crisis, you have been worried about another crisis for some time, namely of a burst of the real estate market bubble in China. Do you still have those concerns and what could be its global effects?

It may have already begun this crisis in China. Maybe later one will come to the conclusion that this crisis already began this year. Of course the exact time it will happen is always very difficult to predict, but the signs are very clear. There is perhaps a certain delay, because this year there was inflation in China. There has been some mild inflation for some time, but now there is stronger inflation and some people might think going into real estate is safer than putting money elsewhere.

But this inflation will have to be fought. The government will have to fight inflation and growth rates are going down. I expect that this Chinese real estate crisis is quite near.

What would the effects be in China and globally?

In China it would affect the construction industry very heavily. One has to know that I think a third of the growth in China is due to construction. And that is of course a nominal increase of the real GDP because many of these new apartment buildings remain empty for a long time. People buy these apartments just as a speculation object. They think that prices will rise and they make a profit. This has been the case in China for a long time and they never experienced a real estate crisis.

That's why this could go on for so long and under this inflation trend it might go on even a little longer. But I think the prices have already decreased in some big cities. But of course at the beginning of such a crisis there will not be a sudden fall of prices. This will come later, because the sellers hesitate to sell below the value they had already and they always think that they will find somebody.

But due to the financial crisis imports in most countries have decreased and that hits China and at some point some firms in China will get into difficulties and they may have to sell something and then they will sell their speculative real estate assets. And that will perhaps lead to a sudden fall of prices. But I can't say when this will happen, but I feel that this may happen very soon.

How bad will this get for China and the world?

In China growth may go down to three from 10 percent. The rest of the world will also suffer from that because they will not import that much anymore. But then also the oil prices will go down because there is not that much demand any more. It is hard to predict all the things that could happen. For instance if the prices of raw materials should fall it that may not entirely be bad. But it also has serious consequences for the Western world.

Interview: Michael Knigge
Editor: Rob Mudge