Pimco's El-Erian: Greek Package Will FailGreece has been sacrificed in order to build a firewall and the cost is a society that has to deal with tremendous austerity, according to Mohamed El-Erian, Pimco co-chief investment officer/CEO, who also believes the package will fail.

Transcript:

different one. unbelievable. our guest host is a squawk master, mohammed el-erian, ceo and co-chief investment officer, he doesn’t just invest in bonds now. and got the best phrases in the business. he does. i asked if he’d bring a new one to the table. mohammed i see that as kind of, i mean i don’t know, you say he makes up phrases? comes one normal looking, no, he’s got the language. it’s not just, you’re not just pify phrases. they do a lot of thinking and strategizing. there’s a lot behind the phrasing. that’s what’s powerful. andrew is thinking like a journalist. let me tell what you it’s like at our end. the other side. the phrases are the result of lots and lots of research, strategy, et cetera and they’re a way of simplifying very complex things into something that you can then disseminate easily. so the office looks out over the ocean so he can sit and think about exactly what’s about to happen to the world. i’ve been thinking about the first question. so greece, who knows. we got something done there but the austerity is going to be so tough and they got such a, you know, such little prospect for any type of real economic activity that it’s just going to be years of just watching this horse show in greece. so that’s on the negative, even though the euro is in. wouldn’t you say what we’ve seen in terms of getting that firewall between greece andity will i that that’s been incredibly positive in the past two months, what’s happened in italy, for the whole contagion fear? absolutely. i would go further and say greece has been sacrificed in order to build that firewall. i think everybody recognizes what you said which is in greece we are sustaining the unsustainable and it comes at a cost and the cost is a society that has to put up with tremendous austerity without seeing a light at the end of the tunnel. that’s why this package will fail like the previous package. the gangrenous arm is gone but the body lives. we have to deal with portugal next. do you write goportugal off do they have an italy rebound. it’s more like italy than spain. i think you can draw the line above greece and portugal and i think the europeans will draw the line when they feel confident that the fire wall is there. there’s something else going on that we must not forget, there’s also an effort led by germany to refound to use president sarkozy’s term to refound the core. they want to end up with a stronger core and that would be good for the global economy. see i didn’t talk to you about this yesterday and i would have. this is where i wanted to take him, too. you, you, wow! that’s exactly where i was going. because i — i wanted more research. i bought into the social welfare state caused a lot of the problems. he said that it wasn’t that. it’s the welfare spending and each of the pigs, he called them gypsy nations. gypsy put greece first. if you look at the welfare spending as a percent of gdp, italy was the only one in the top five. i wondered how you break down the welfare spending, how you break down the idea when you’re retiring at 50. and he put that sweden is a huge safety net and has been growing pretty well so he said there’s more to it than it was a collapse of the european welfare state that was the single currency. i think it probably is a combination of things. so it’s very complex because europe has two distinct problems, too little growth and too much debt. too little growth and too much debt. on the too much debt, the view had been it’s all because the public sector was irresponsible. in most cases the public sector wasn’t irresponsible. the public sector had to take over the liabilities of the private sector in order to avoid the pressure. so those who say the debt issue is all to do with the public sector in most cases, greece being the exception, in most cases no, it had to do with the with leverage and credit. but the second eissue is the growth, and here the camps are divided. those say spending on social programs undermines growth and those who say on the contrary look at sweden and that debate is a valid debate. the long-term structural issues involving the regulation in the labor markets in greece and italy, that makes it tough for growth. on the flipside you’ve got all of these — they have the example, germany. people underestimate how hard it was for germany throughout the last decade to get its act together. that is why they are exporting so much, that is why unemployment is so low, they went through multiyears of very difficult labor market performance. they may be equal to us or less contradicted from labor problems than we are here at this point, right? with the problem that they have contingent liabilities because they believe, and i think rightly so, they believe they have to be part of a union that have much weaker members, so they are carrying a lot of other people as they moved tor spending but reporting. it lied to the rest of the world. second they fell in love with the notion that their rates can converge to germany so when the interest rates came down everybody overborrowed and thirdly they destrl iindustrial. they have no industry left. that takes years to come back from. italy you said there was a valid argument to have, does the social spending help or does it hurt? where are you? i’m here about to irritate joe right at the top of the show. that’s okay, i know when you’re coming in, you’re going to. i get to have arthur brooks in here, andrew gets you in here. oh, i’m andrew. i like mohammed. i like mohammed, too, but i know that we’re going to have a — you know where this is going. i’m a little bit hurt because he makes fun of all your phrases and i was defending you, but go ahead, you can antagonize me now if you’d like. nice season the mets had and the jets. indeed, and the jets. good thing the patriots lost in the super bowl, let’s not fore get that, has to be mentioned early on. you’re going to say sweden — swede-a major banking crisis in the ’90s, major, and has bounced back, and what they have bounced back is a lesson for others, is that you can combine fiscal and financial soundness with a growth and system that has good safety nets. it can be done. sweden is small and special circumstances and can be done and that is what europe has to find, europe has to balance austerity for deficit reasons with growth and if it doesn’t we’re going to be talking about it for years and years. at least we’re asking the question, because prior to all of this happening, the word was that this utopia had actually been realized. now the question is, and at the same time we were paying for nato, doing all the drug development in this country, our partnerships with the university doing all the basic signs so we were subsidizing all of the stuff in europe anyway so you didn’t have to spend any money on that and spend it on the social safety net. the whole idea it was working came crashing down recently. you’re making the point it can work in sweden. maybe i’ll grant you a slight. we don’t have to argue on that. the question i ask you is we provide all sorts of global public goods. you’ve just talked about them. in addition we provide the dollar, we do the financial markets. we were the major locomotive of growth. we are funding nato, we’re funding — with so many public goods at some point we have to ask ourselves how are we going to pay for this. in a multispeed world and corners in a normal environment — don’t give me a hard time. he turned on me so i go back to the multi. you don’t have a single new one? he’ll come out with one but won’t present it as a new one. it will be a squawk exclusive. we have a strategy week when and we talk what the cyclical outlook looks like. group of thought leaders? you can look at mckinsey and find the terms. see how powerful the comments were, they’re on the website, we have an archive. in ’06-’07, it was we are living in a stable diseven disequilibrium. in ’08, it was the unthinkable is thinkable. bill is the leader? in bill is the leader. in ’09, it was w.i.t., whatever it takes, and then we moved through the new normal which is sluggish growth, 1.6% last year, high unemployment, guess what, we’re above 8%, regulatory issues every day in the newspaper, right? right. how about mcculley. we miss mcculley. he’s up on the mount tain the sound of one hand clapping, going what is the ohm, he’s looking at — paul came one shadow banking system. i would never play words with friends is with these guys. you know what words with friends is? yes. what’s the one for rap? okay, if you’ve got comments, questions about anything you see