Wednesday, July 27, 2011

Lawrence Summers on the Euro Crisis

At Der Spiegel, "'It Was Always Understood the European System Would Evolve'":
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 points 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.
Keep reading. Summers discusses the debt ceiling debate in the U.S., and suggests it's mostly politics (default would be surprising) and taxes are too low. Of course, he was until recently a top economic adviser to President Obama. And according to Elizabeth Drew's recent piece at New York Review, folks like Summers bailed because Obama adopted a too conservative approach on deficits. Figures.