Countries like Greece are being "attacked by financial markets" and the European Union should intervene in the stock market to "teach speculators a lesson," according to Nobel Prize winning economist Joseph Stiglitz.
Speaking at the London School of Economics Monday, Stiglitz said that the notion of a European Union default is “absurd” but that the EU should show solidarity for its weaker members to stop what he has branded “irrationality” by financial markets.
Talks of a possible bailout for Greece intensified following news that ECB President Jean-Claude Trichet would be cutting short a trip to Australia in order to attend the forthcoming EU Council summit in Brussels on Thursday. A spokesman later said the change was purely logistical.
But Stiglitz, who is advising the Greek government, believes no bailout will be required and downplayed fears of contagion throughout the euro zone.
“A problem in Greece should not be causing a problem in Spain … the notion of contagion illustrates a weakness in standard economic models," he said.
But Stiglitz urged governments to intervene in markets to “teach speculators a lesson.”
"The speculators will always look for the weakest link. What they're doing now is a version of the Hong Kong double play in 1997 /1998,” Stiglitz said.
“What Hong Kong did in response was to raise interest rates and intervene in the stock market. They burnt the speculators and Europe needs to do the same thing."
And it’s not just the EU that has markets on tenterhooks. In recent months the ratings of both the U.S. and the UK have been questioned. But Stiglitz said he believes they deserve to keep their AAA rating, dismissing the notion of a default as absurd.
“The likelihood of a default is so small, particularly in the U.S., because all we do is print money to pay it back," he said.