Lawrence Summers on the Euro Crisis 'It Was Always Understood the European System Would Evolve'
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.
'It Was Always Likely a Crisis of this Magnitude Would Take Long To Resolve'
SPIEGEL: If you can't raise taxes, you have to cut spending even more. The timing couldn't be worse, either, given the economic stagnation. Doesn't the US economy need greater support through public spending?
Summers: We need to be focused on the jobs deficit as much as we need to be focused on the budget deficit. For the immediate future, our concern has to be strengthening demand. By strengthening demand you improve the performance of the economy and put people back to work.
SPIEGEL: So does that mean another stimulus program to the tune of billions of dollars?
Summers: There should be a set of measures, whether you want to call it a stimulus or not. I think the payroll tax cuts should be extended. I believe the country is badly underinvesting in infrastructure. We are not even spending enough on basic road maintenance. There is also a strong case for state and local governments to be supported at a time when many kids only go to school four days a week because the funding for schools has been cut so much.
SPIEGEL: Isn't that wishful thinking in the current political environment? Right now Obama is offering trillions of dollars in budget cuts to strike a deal with Republicans on the debt ceiling.
Summers: More will be possible in the short run to support the economy if you have a credible plan to reduce the deficit in the long term.
SPIEGEL: You often compared the global financial crisis to the Great Depression in the 1930s. One of the big mistakes then was to cut off government stimulus too early so that the recovery collapsed. Is the US making the same mistake again?
Summers: There is a serious risk that in excessive enthusiasm for immediate deficit reduction we could do real damage to the prospect of growth for the next two years. And, ironically, the most important determinative for where the deficit is going to be five years from now is the pace of recovery between now and then.
SPIEGEL: In 2008, you were brought in to save the US economy. Now the country still has an unemployment rate of more than 9 percent and sluggish growth. What went wrong?
Summers: It was always likely that a crisis of this magnitude would take a long time to resolve. There was a real risk that we would have seen a situation like in the 1930s, with the economy spinning out of control. The measures President Obama took were successful in avoiding that outcome. But it will take a long time to generate the kind of unemployment rates that Americans had become accustomed to.
SPIEGEL: Would you have done things differently in retrospect?
Summers: We sought more stimulus than Congress was willing to provide, and I think in retrospect that is unfortunate -- and it might have even been desirable to have more stimulus than we sought.
SPIEGEL: Many American unemployed have now been out of work for more than six months.
Summers: That is a huge problem. The longer this downturn is perpetuated, people who are out of work for a long time might lose their qualifications. And it is a huge structural problem: A statistical projection based on current trends suggests that one out every five men between the age of 25 and 54 will be out of work after the economy has fully recovered.
SPIEGEL: The US economy is not really prepared to deal with long-term unemployment.
Summers: Yes, and some of the things that are done in Germany, such as the success in helping workers transition from secondary education to employment, or training unemployed workers, are all positive examples from which the US can learn.
SPIEGEL: Another way out could be cutting remuneration even more in the US and competing in the global race to the bottom on wages. That is how some states in the US south try to attract manufacturing jobs that would otherwise go to China.
Summers: In some sectors and parts of the country we have indeed seen significant reductions of labor costs. Ultimately, it is important to remember that the vast majority of new jobs in the American economy will be in the service sector. Manufacturing is going through the transition agriculture went through in the 1920s in which tremendous technological progress is enabling us to produce more and more with less and less people.
SPIEGEL: But President Obama is still making the promise that manufacturing will boom again in America.
Summers: When the economy recovers, manufacturing will recover. Also, one of the most important things the Obama administration did was to rescue the automobile industry. But to suppose that manufacturing can be the basis for the US economy going forward is to fly in the face of largely unchangeable trends.
SPIEGEL: Can Obama be re-elected if the US unemployment rate remains higher than 9 percent?
Summers: History suggests that presidents are re-elected not on the basis of any single indicator but on the basis of whether the country feels that they have a strategy and are taking the nation forward. Voters also compare that vision with that of the opposition. And while it may be hard for some people to see, President Obama averted what could have been a financial catastrophe and he has moved the country forward in important areas like health care or financial reform. So I am very optimistic about his political future.
SPIEGEL: You just signed on as a senior advisor to a huge venture capital firm in Silicon Valley. Do you want to spot the next Mark Zuckerberg?
Summers: It is a fascinating environment. And it is still one of the great strengths of the US economy that you can raise your first $100 million before you buy your first suit.
SPIEGEL: So America is still the greatest place on earth for the lucky few like Zuckerberg, but an increasingly difficult place for the "Average Joe"?
Summers: There is no question that the ability of those with ideas to leverage them in the global economy has contributed to rising inequality and to more rewards for those very few with great ideas -- and less progress for average Americans. That is why universal access to health care or creating a financial system that protects middle class Americans have been such important achievements of the Obama administration.
SPIEGEL: Liberals see that differently. They think Obama has betrayed his progressive roots -- and that he has been too close to Wall Street, not Main Street, by putting people like you in charge of his economic agenda.
Summers: If you look at legislative sessions most historians would tell you that in terms of productive legislation more was done to protect the middle class than was done since the 1960s, or perhaps even since the 1930s. But listen, the left thinks we are too close to Wall Street. The right accuses Obama of "European socialism." In political life it is usually a sign that you are doing the right thing when you are attacked by both sides. By this standard, Obama is clearly doing the right thing.
SPIEGEL: Professor Summers, we thank you for this interview.
