Arnold Kling  

Larry Summers on the European Situation

Monetary Contraction Update... The Great Factor-Price Equaliz...

He writes,

At every stage of this process, from the first signs of trouble in Greece, to the spread of problems to Portugal and Ireland, to the recognition of Greece's inability to pay its debts in full, to the rise of debt spreads in Spain and Italy, the authorities have played out the stalemate machine. They have done just enough beyond euro-orthodoxy to avoid an imminent collapse, but never enough to establish a sound foundation for a resumption of confidence. Perhaps inevitably, the gaps between emergency summits grow shorter and shorter.

Read the whole thing. My favorite line is his quote of Rudi Dornbusch:

"In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could."

That line could serve as a response to those who say that the United States can afford fiscal expansion because interest rates are currently low.

Although I agree with Summers that the minimalist approach to the crisis is not working, I do not agree with his end goal of a more centralized, technocratic European fiscal and monetary system.

In my opinion, the main lesson from current events ought to be that government's ability to provide social insurance is over-used, if not over-rated. As Tyler Cowen says, governments are writing too many put options. Particularly on financial institutions.

COMMENTS (4 to date)
roystgnr writes:

But..but.. interest rates are currently low! Sure, even with low interest rates we can no longer afford to pay back new debt except by issuing even more new debt later, but I've got a really good feeling that interest rates will always be low later, too. It's just like getting an Adjustable Rate Mortgage - what could possibly go wrong?

8 writes:

Government is overrated to an extreme degree at the moment. The problem in Europe is political, not economic. We see the victory of The Finns and other similar political parties as a reaction to the events in Europe, and in some sense there's a feedback loop, but I believe the major arrow of causation is in the other direction. The EU was born at a peak in optimism, a (near) peak in demographics, a peak in the stock market, a peak in peace for the West. Had the EU been born in 1960, there would have been major integration in the 80s and 90s and today they'd have the same financial problem, but also the unified financial system to deal with it. Instead, they launched at the top.

Political, social, cultural and economic forces are all working against the project. This is working at an individual level, for example Europeans are traveling abroad less, and at the national level, as each country considers it's own best strategy.

The centralized, technocratic system is 20 or 30 years away, if they can keep some part of the system alive. Today people talk about Eurobonds, tomorrow they will be trying to convince the Europeans to keep the common market. The best move here, if one wants a unified Europe, is a strategic withdrawal to satisfy public anger. Pushing centralization further at this time will result in total failure by creating an even larger reactive force.

Daniel Kuehn writes:

re: "That line could serve as a response to those who say that the United States can afford fiscal expansion because interest rates are currently low.""

It seems to me that line could serve as a response to just about anyone's argument about what to do in anticipation of something happening! Which doesn't make it less true, of course.

Lord writes:

All the more reason to legalize the money drop, money without debt.

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