One sentence in Lawrence Summers’s op-ed in the Financial Times on what Europe needs to do to heal its wounded economies leapt out at me:
Treating symptoms rather than causes is usually a good way to make a patient worse.
Ignore the frontal assault on modern medicine in which treating symptoms is an important part of what physicians do. Ignore that Dr. Summers, apparently, does not know what physicians do, remarkable, even disturbing, in a grown man of his gifts and education. A stream of questions occur to me:
- Is he right?
- If austerity is the treatment, what do Greeks think the cause of their problems is?
- What is the Eurozone’s problem and what is the treatment?
- Has Dr. Summers followed his own advice?
Let’s start with the second question, the easiest to answer. Austerity is the correct prescription for Greece because without it Greece’s creditors would not continue to lend. The Greeks’ diagnosis of their own problem is that they need to borrow more. Their creditors, mostly German, French, and Luxembourger banks, wouldn’t continue lending to them without austerity measures. Hence, austerity.
What is the Eurozone’s actual problem? In one word, Germany. A monetary union whose policies fit Germany (“one size fits Germany”) will not be a gracious fit for any country other than Germany. Among the possible solutions:
- Persuade Germany to leave the euro.
- Persuade Greece (and, by analogy, the other troubled Eurozone countries, e.g. Ireland, Portugal, Spain, maybe Italy) to leave the euro. Over time that will result in a return to the status quo ante.
- Persuade Germany to buy more and sell less (Dr. Summers’s solution).
- Persuade Germany to support the struggling economies of Europe in much the same way that New York supports Mississippi and has done for decades.
The last is probably the best solution but the hardest sell. It also has the defect that it might encourage other countries that don’t presently have the severe problems that Greece does that aggravating their problems is their best strategy.
Okay, I’ll bite. How can Germany be persuaded to sell less to and buy more from its neighbors? Enlightened self-interest? What in Germany’s history would lead one to think that the Germans are likely to sell less and buy more from the Greeks out of enlightened self-interest? That would undercut the “lazy, profligate Southerners” narrative you occasionally hear from Germans.
And they certainly aren’t behaving that way now. Most of the actions by Germany to date in the financial crisis have been aimed at saving German banks.
As to the question of whether Dr. Summers has heeded his own advice, I’d like to throw the question on the floor. Assuming that Dr. Summers did, indeed, follow his own advice and, according to available documentation, he insisted that the size of the stimulus enacted into law in 2009 was precisely the right size, what did he think the problem was? Was he right? Or was he (as I think) treating the symptom and not the cause?
1) Is he right?
In terms of Europe I believe he is. Europe can keep passing bailout packages but that only papers the problem over temporarily while the underlying problems grow worse, i.e. trade imbalances and rapidly growing debt.
2)If austerity is the treatment, what do Greeks think the cause of their problems is?
The stated think of the eurobosses and the Troika at the time was that too much public debt made markets nervous and created the incentive to reduce exposure. By cutting deficits and reducing public debt markets would regain their confidence and the private sector would resume healthy levels of spending.
What is the Eurozone’s problem and what is the treatment?
The EMU has a currency crisis on its hands. There’s no corrective mechanism for the cash Germany drains out of the peripheral countries each year. In addition Europe has the same balance-sheet recession problem we do, which has massively suppressed economic performance as people cut spending in an attempt to deleverage. These two problems are exacerbating each other.
Has Dr. Summers followed his own advice?
Not in the slightest. Dr. No has, to my knowledge, never spoken about U.S. trade imbalances or private debt problems. He’s alternately harped about spending too much/too little (treating the symptoms) depending on who was in power at a given time.
think = thinking in the second answer.