_The following interview with Paul Krugman, American economist and op-ed columnist for The New York Times, _was conducted by Christin Martens, the editor-in-chief of Business Insider Deutschland. [DONALD TRUMP]REUTERS/TAMI CHAPPELLBUSINESS INSIDER: What's going to happen to the world if Donald Trump is elected president? KRUGMAN: God knows, right? I tell myself that, once actually in office, Trump might realize that he needs to listen to some people. He might not be as bad as one thinks. But we don't know that. He's never made policy, so we have no idea. But I have to say: I think that if any Republican is elected, the results will be catastrophic. Look at what Marco Rubio says about monetary policy. He want the Fed to abandon everything except inflation targeting. He wants to scrap all the new financial regulations. He wants us to balance the budget even in recessions. At the same time, he wants massive tax cuts. Any Republican would be a disaster for the world economy. BI: WHO'S YOUR FAVORITE CANDIDATE? KRUGMAN: I'm not allowed to endorse anyone. You can make some inferences from what I've said. I'm pretty critical of Bernie Sanders and I'm extremely critical of Republicans. [OBAMA XI]REUTERS/TAMI CHAPPELL BI: WHAT'S YOUR TAKE ON THE CURRENT SITUATION IN CHINA? KRUGMAN: China scares me. China has a huge adjustment problem. They have an economy that is based upon unsustainable levels of investment and needs to radically shift from investment to consumption. They don't seem to be managing it. They have a large internal debt problem and a government that doesn't seem to be thinking clearly about it. At this point their response to economic difficulty seems to be to crack down on the financial press and to tell them to write happy stories. BI: TURNING TO EUROPE, WHAT DO YOU THINK ABOUT BREXIT? KRUGMAN: It would be disastrous for the European project. In the end it would hurt Britain quite a lot. The case for close economic integration within Europe is huge. For Britain to be pulling out of that is a bad thing economically. The European project of peace and prosperity through integration is critical. Even if the currency was a bad idea. The broader project is still very critical. Britain needs Europe and Europe needs Britain. [GERMAN CHANCELLOR ANGELA MERKEL LISTENS DURING A JOINT NEWS CONFERENCE WITH ROMANIA'S PRIME MINISTER DACIAN CIOLOS (NOT PICTURED) AT THE CHANCELLERY IN BERLIN, GERMANY, JANUARY 7, 2016. REUTERS/HANNIBAL HANSCHKE ]REUTERS/TAMI CHAPPELLBI: YOU ARE ESPECIALLY CRITICAL OF GERMANY'S AUSTERITY POLICY. WHAT WAS THIS POLICY'S WORST EFFECT? KRUGMAN: The European economy as a whole has been very weak with catastrophic effects on Southern Europe. I would argue that the ramifications run very deep. It's not just that there's a huge cost in terms of lost output and lost jobs. Years of terrible economic performance have also done enormous damage to the European project and have basically left Europeans no longer believing in the whole message. The cost has been enormous. Once the bubble burst, there was going to be a difficult time for the Euro, regardless. But it's been far worse than it needed to be and Germany bears some of the responsibility because of turning what should have been viewed as essentially a technical economic problem into a morality play. That has been a very unfortunate story. BI: SO ALL SUGGESTIONS FOR REFORM WERE WRONG? KRUGMAN: Greece is pretty much in a class of its own. It's the only Eurozone member where it really does look like a solvency problem. And even in that case there should have been significant debt release right from the beginning. Austerity policies have taken what was fundamentally a story about excessive private capital flows and housing bubbles and turned it into lectures of fiscal responsibility that have ended up doing a lot of damage. [STATUE OF EURO BRUSSELS]REUTERS/TAMI CHAPPELLBI: What would have been a sustainable alternative for Greece? KRUGMAN: There should have been a large reduction in the face value of the debt early on. There should have been a large private sector haircut. Plus backstocking a guarantee of liquidity so there wouldn't be runs on the debt. Greece was going to have to do a fair amount of austerity but not this much. In the end it would still have been ugly, but not on this level. You could argue that a Euro exit would have been a better thing. If Greece had been able to leave the Euro with the best wishes and the good will of Europe in 2010, it would have been traumatic but less traumatic than what has happened. But I don't think that was ever really on the table. What could have mitigated the damage? The thing is that what has actually happened has not worked. Greece is still in the Euro. There's a little bit of economic growth but at the cost of an incredible slump. The ratio of debt to GDP is higher than ever. All of this austerity has not only not resolved the fiscal problem, it hasn't even moved it in the right direction. BI: ARE YOU STILL ADVISING THE GREEK GOVERNMENT? KRUGMAN: I was never an advisor. I talked to people now and then. I met Yanis Varoufakis some months ago, but after he was out of the government. I can talk to people but I don't play any kind of formal role. My understanding is that Varoufakis was willing to go with a parallel currency. In the end, Tsipras was not. Greece not only had no room to extract a better deal but also no quick way to produce a recovery. If the constraint is that the Euro inviolable then there is nothing. Then Greece is simply at the mercy of the system. I don't know when or how this will ever get resolved and I am not seeing any progress on the debt issue either. HOW COULD COUNTRIES LIKE GREECE, PORTUGAL AND SPAIN IMPROVE THEIR EXPORT BASES THAT ARE VERY LOW? KRUGMAN: That's not really true. Spain is actually starting to see some significant pick-up because it had an extended period of extremely high unemployment, which has kept wages down. As a manufacturing center within Europe, Spain is staging a bit of a recovery. Portugal is further from achieving that. [Greece]REUTERS/Tami Chappell Let's put it this way: Suppose that Spain had never joined the Euro and we would have had a sharp fall on the Peseta. We would probably see a significant increase of Spanish manufacturing at this point. The idea that there is nothing they can do can't be right. Given the right prices, lots of things can happen. It's also worth saying that tourism is a real industry. We tend not to take it seriously but it can bring in a lot of money. I always like to point out that the Greek economy is about the same size as metropolitan Miami. Why can't this be an economy that is driven by tourism? BI: BUT THESE COUNTRIES WOULD NEED SIGNIFICANT FOREIGN DIRECT INVESTMENTS. KRUGMAN: And why not? If we're talking about tourism, hotel chains are going to follow the opportunities. If we're talking about manufacturing, there's no reason why investments can't go there. In this situation it's funny to find people who say they are all about free markets but prices don't matter. Of course they do. These are not basket case economies. There's much more ability to actually do stuff than they are given credit for - given a workable monetary environment. BI: YOU HAVE SAID MONETARY POLICIES HAVE ZERO EFFECT... KRUGMAN: Not literally zero. Conventional monetary policy has zero effect. It's very hard to provide clear evidence that quantitative easing matters except that it's changing people's expectations. Monetary policy is very much a marginal factor in what's going on. [krugman]REUTERS/Tami Chappell BI: YOU ALSO SAID THE SITUATION IS SOMETHING OF A NATURAL EXPERIMENT. HOW WILL THIS EXPERIMENT END? KRUGMAN: We had two kinds of natural experiments here. On fiscal policy we had austerity as a panic over debt, which led to drastic austerity in countries that didn't really need it. What we learned was that fiscal policy works pretty much the way a Keynesian pretty much would say it does. On monetary policy we had desperate attempts to boost economies leading to monetary expansion on a scale never before seen. What we learned from that is that it doesn't do much. So we've learned some lessons but I don't see us applying what we've learned to actual policy. We learned that fiscal policy works pretty much the way a Keynesian says. But are we seeing austerity policies being replaced by stimulus? No, we're not. Austerity seems to at least have leveled off. That's better than doing even more of it but not much of a change. The main thing we should have learned is that monetary policy is not enough. You really need fiscal policy. That's not happening. Monetary policy works by making people think that the fundamental targets have changed. It's as if we continued to base policy on theory that we know is wrong. BI: YOU HAVE TALKED A LOT ABOUT REGIME CHANGE. WHAT DOES THIS SPECIFICALLY MEAN? KRUGMAN: We're talking about monetary policy. What the Central Bank does now at a time of very low interest rates matters very little. What you need is something that will change your view about what the Central Bank will do in the future. For example, you would need to have people believe that the Central Bank will be willing to accept a higher level of inflation than in the past. So if and when you have an economy that is finally booming to the point where inflation is significantly rising, the Central Bank will hold off and won't raise rates. BI: ISN'T THE CENTRAL BANK WAITING FOR A HIGHER INFLATION RATE? KRUGMAN: Except that they're not at all changing their expressed view of how much inflation is too high. It's an easier story in the US right now. If people were to believe that the Federal Reserve will not raise interest rates until inflation is 3 percent, that would be a big change in people's view about the Fed. But the Fed has now proven that it has not fact-checked. It started raising interest rates even though inflation is not even 2 percent yet. [U.S. Federal Reserve Board Chair Janet Yellen testifies at the House Financial Services Committee in Washington February 10, 2016. REUTERS/Gary Cameron]REUTERS/Tami Chappell In Europe part of the problem is that the future in which it might be seen as actually booming is far away. But still, if Mario Draghi were to hold a press conference and say: 'I now have the agreement, the Bundesbank is also on board. Our new target is not 0 to 2 percent but in fact symmetric around 3 percent. And we will not stop monetary expansion until we get there and will certainly not raise interest rates until inflation is 3 percent.' That would have a big effect on people's expectations. That would be a regime change. BI: BUT DO IMPLICATIONS LEAD TO MORE EFFECTIVE MARKETS? KRUGMAN: We think that announcing something that really leads markets to believe that policy would be different has an effect. You can see this in Japan. The Bank of Japan changed it's rhetoric a lot. The result is very clearly a drastic fall in the Yen and significant fall in long-term interest rates. Unfortunately those have not been enough to produce a real boom in Japan. Many of us have worried that the targets were not ambitious enough. But they certainly have had an effect and came from the belief that the Bank of Japan had changed its preferences. BI: So you believe that a psychological effect could change the markets? KRUGMAN: It's not psychological in the sense of irrational. All of this presumes that there is some chance that at some point normal monetary policy will resume. So this is all about changing market expectations about what will happen at the time the Central Bank does have a more conventional impact on the economy. That should have an effect. I'm not laying too much weight on all of this. I know it's hard to make this happen. Ideally, we would combine a change in targets with policies that we know work. Ideally, we would combine change in monetary regime with temporary fiscal stimulus to get the economy moving. Since that doesn't seem to be really happening, we should at the very least be trying for that kind of regime change. BI: The ECB recently reduced the volume of quantitative easing (QE). Was that the right decision? KRUGMAN: I don't think QE is very effective. It effects expectations. It's a signal of the values. The ECB should be very desperately trying to convey the impression that the taps are open. BI: Would another round of QE be right for the US economy? KRUGMAN: Not yet. Even if they're not ready to admit that the rate hike was a mistake, the Fed should be making it pretty clear that it's going to be willing to do another one. The US has already in effect had a large monetary tightening thanks to the rise of the dollar and we need to try to reverse some of that. BI: What announcement that could effect the markets would you like to see in the future? KRUGMAN: I would love to see Janet Yellen announce that the Fed no longer believes that 2 percent is an appropriate inflation target and that we should raise it to 3. I'd like to see the next President of the United States, having won a surprise victory that gives one party control of Congress as well as the White House, announce a massive infrastructure program. I'd like to see peace and goodwill among all men. And also: everybody gets a pony. NOW WATCH: Here's the question that prompted Cam Newton to storm out of his postgame press conference
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