Lawrence Summers on the Euro Crisis: 'It Was Always Understood the European System Would Evolve'
In a SPIEGEL interview, Lawrence Summers, 56, Harvard economist and former advisor to United States President Barack Obama, discusses the way forward for Europe's stricken common currency and a debt crisis and budget battle in the United States that has baffled many a European.
SPIEGEL: Professor Summers, the European Union has just adopted another set of emergency measures to save the euro and the European currency union. Is this just another Band-Aid, or is it a sustainable path toward recovery?
Summers: Some significant steps were taken at the summit in Brussels and a number of fundamental issues were addressed: sustainability of debt, provision of support to banks, preventive support for some countries. But saying fundamental issues were addressed does not mean they were resolved. Clearly, there is still much that needs to be done in terms of crisis resolution and mechanisms assuring liquidity and fiscal responsibility.
SPIEGEL: Aren't more radical steps needed, such as a drastic haircut for debtor nations like Greece?
Summers: It is premature to judge that. Successful growth-generating policies and determined efforts of fiscal consolidation are imperative. And creditors will need to take realistic views of the situation.
SPIEGEL: It seems a currency union across borders without a fiscal union cannot work. Do we have to steer toward a United States of Europe in order for the euro to survive?
Summers: No. Surely, the common currency has been insufficiently supported by common political approaches. But we will learn over time from the European experience what elements have to be common in order to make the system work.
SPIEGEL: Has the response of European leaders to the crisis so far been too dogmatic and bureaucratic?
Summers: There is no politician who will ignore the laws of physics when building a bridge. But there is a tendency in politics in every country to suppose that the laws of economics are flexible and can be adjusted to political necessity. At some point this belief has led to a lack of focus on economic realities in Europe.
SPIEGEL: Can you cite an example?
Summers: In retrospect, it is clear that a currency union requires more attention to the fiscal policies of the member countries than was provided. More central capacities to address issues in the financial system are required. But it was always understood that the European system would evolve through events and that is what is happening right now.
SPIEGEL: Many European observers are particularly disappointed with the euro crisis management of German Chancellor Angela Merkel. She was dubbed "Madame Non" because she refused bailouts for a long time before finally relenting. On the other hand, she was under considerable pressure at home because Germans largely oppose the bailouts. Is there a way out of that dilemma?
Summers: The art of economic policy making is reconciling the political and the technical or arithmetic imperatives. You cannot move forward in democratic nations without sufficient political support, and all the political support in the world will not repeal the laws of economic arithmetic. But we ask our political leaders not simply to take the preferences of their citizenry as a given, but to help guide those preferences in response to necessity.
SPIEGEL: For instance, the German public wants to punish greedy finance investors by making the private sector contribute to payouts. Can this be a viable policy option?
Summers: In any financial crisis, one has to recognize that just vengeance and the promotion of confidence are likely to be in conflict. As a consequence, just as in successful wars, there are unintended victims. In successful bailouts or support programs, there are unintended and maybe even unjust beneficiaries. So the challenge is not simply a moral one of assuring that those who have invested badly are punished. It is also a deeply pragmatic one of assuring that financial systems continue to function, that economies continue to grow and that stability is maintained. Policy judgments have to reflect both of those imperatives. And usually it will be found that the desire to punish is insufficient as a primary guide to policy.
SPIEGEL: The US government tried to punish Wall Street by letting the investment bank Lehman Brothers fail in 2008. However, many experts believe this decision helped trigger the financial crisis. Does that support your theory?
Summers: There were many issues involved in Lehman Brothers. I was not there, but I think it is fair to say that those who took satisfaction from the fact that an institution had been allowed to fail, very quickly found their thoughts turning to the potential breakdown of the financial system and what needed to be done about that. In general, it has been my experience that those who give the sternest moral hazard speeches often find themselves authoring the largest bailout because of the confidence problems that are generated. And confidence is the most important asset in any financial system.
SPIEGEL: Speaking of confidence: How concerned are you about the solvency of other leading European nations, most notably Italy and Spain? How high is the risk of contagion?
Summers: I think responsible Italian officials would be the first to recognize that there is a great deal that Italy has to address in both the fiscal and the structural area, given the difficulties the Italian economy has had in generating growth over the last 15 years. At the same time, most market observers would agree that there are elements of psychology, of crowd following and of contagion reflected in developments in Italy over the last several months.
SPIEGEL: Many Germans want the Greeks, Italians or Irish to generate huge primary surpluses for years to pay back foreign investors. It is an understandable notion, but would it be sustainable?
Summers: If you borrow money to spend more than you earn, then at some point you have to earn more than you spend in order to pay it back. That is the way debt works. Clearly, there is a need for important adjustments in all the euro-zone countries. What magnitude of adjustment is feasible and what adjustment in debt burdens is appropriate is something that will have to play out over time. I think the judgment to relieve Greek debt in a number of ways was an appropriate, perhaps an even belated one. The situation in other countries will have to be monitored carefully over time.
SPIEGEL: Would you say that many Germans do not appreciate enough how much their country -- the world's second-largest exporting nation -- benefits from the European Union?
Summers: There is also no question that, given the magnitude of Germany's current trade surplus and the strength its economy has derived from exports, the country has benefited enormously from the workings of European integration. It is important to remember that not every nation can run a trade surplus, and that if some nations adjust towards surpluses in order to repay debts, it will be necessary for other nations to reduce their surpluses or even move into deficit. And so I think it will be important for the German economy in particular to recognize that the counterpart of less deficit and borrowing in some parts of Europe will have to be less surplus and saving in other parts of Europe.
SPIEGEL: You want to hear that message from Chancellor Merkel?
Summers: I'm going to leave it at that.
SPIEGEL: Europeans are puzzled by the American debates over the debt ceiling. They think while they are struggling with a real debt crisis, Americans are creating one on their own. Is the current showdown in Washington really necessary?
Summers: I do not think there is any question the United States has serious structural fiscal problems that have to be addressed. But I find the behavior of those who take the creditworthiness of the country as hostage to drive a particular political agenda almost inexplicable. It is one thing to not pay debts because you cannot. It is a very different thing to not pay taxes because you default. Those who want to accept a default are taking great risks with the potential consequences for American borrowing costs or the integrity of the American financial institutions.
SPIEGEL: How likely is a default?
Summers: I would be very surprised if at the end of the day, perhaps in the last hour, default was not avoided because the consequences of default are so clear that responsible officials will find a way to prevent it.
SPIEGEL: But the Republican side seems totally determined not to raise taxes. Did the right win the war over taxes? Has it become a taboo in the US to even consider raising taxes?
Summers: The US federal tax collections are in the 15 percent range, an historical low -- even as health care costs trend upwards, even as the society ages, even as the world becomes a more dangerous place, even as debt burdens and the associated interest payments have increased. So, I cannot imagine how to sustain any form of fiscal responsibility at the current tax levels. Government revenues need to increase.
SPIEGEL: But even the Obama administration decided to extend the Bush tax cuts for super wealthy Americans -- partly, because it shied away from a political confrontation over the issue.
Summers: The decision seven months ago to extend the tax cuts for two more years was a very appropriate one in the context of an economy that has not yet reached the kind of escape philosophy from recession that one hopes for. Without this decision to provide for payroll tax cuts, which was part of the deal, we might well have been looking at the risk of a double-dip recession now.
- Part 1: 'It Was Always Understood the European System Would Evolve'
- Part 2: 'It Was Always Likely a Crisis of this Magnitude Would Take Long To Resolve'
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