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Just prior to France’s presidential elections you said, “Once again European efforts to contain the crisis have fallen short,” and, “Again, Europe and the global economy approach the brink.” Does François Hollande’s victory change your view?
I think the crucial issues in Europe have long had to do with whether reasonable growth would be resumed. If growth does not take hold, it doesn’t matter how much austerity is imposed, it won’t be enough to make it credible that Southern Europe will be able to repay its debts. And so the crucial questions were and are about growth. It may be that this recognition is sinking in, and you’ll see greater acceptance of the idea that growth, alongside financial stability, has to be a central objective in Europe. The electoral results, particularly in Greece, have to be anxiety-promoting. Greece is small, but what happens in Greece will be seen as a possible precedent for what could happen in other countries. It has an importance disproportionate to its economic scale.
Is your take on austerity vs. growth changing?
I have long been of the view that austerity is manifestly insufficient and may even be counterproductive. In the typical country in Europe, a 1 percent increase in GDP reduces the budget deficit by between four-tenths and one-half a percent of GDP. So if reducing public investment, reducing public spending, imposing austerity slows the economy down very much at all, most of the gains will be dissipated in lost tax revenues, increased benefit payments, and even increased bailout costs…. The idea that everybody could do what Germany did is really not plausible at all. What Germany did was enjoy a gain in competitiveness caused by the more rapid inflation of most of its trading partners. Well, there’s no way Southern Europe is likely to enjoy a gain in competitiveness from rapid inflation in Germany. There’s no way everybody can run a surplus.
What economic policies do you expect, even at this early stage, from President-elect Hollande?
It’s difficult to know, coming out of a political campaign. It is, I think, clear that he’s going to give more weight to issues of growth and fairness…. He’s likely to be a voice in support of more European solidarity and more emphasis on stimulating demand in Europe using the tools of fiscal and monetary policy. Given that the countries are all united in a currency union, that’s a welcome development.
Is there room for accommodation between him and Angela Merkel?
They’re both very pragmatic. And for both of them, European unity is the higher value than any particular economic issue. I’m less worried about the difficulty of finding political accommodations than I am about the underlying economic difficulty of the problem. Sometimes countries adjust, as Canada does relative to the U.S., by letting the currency change in value. Sometimes they adjust, as Michigan does relative to the rest of the United States, by having people move in and out on a substantial scale. The challenge Europe has is that it’s seeking to operate a mechanism that is very brittle. Currency can’t adjust. Prices adjust only slowly. Migration flows across countries are limited. And there’s very little central taxing and transfer. It is that set of challenges that will complicate the problem … and require that more take place on a central level than just having a common currency, if this experiment is to end successfully.
We keep talking about Europe on the cliff’s edge. When does catastrophe strike?
As an old, very unpleasant proverb has it: “You don’t want to know the things you need to get used to.” The reality of economic performance in much of Europe … is something we all would have seen as extremely unlikely 5 to 10 years ago. In many ways, the human losses from what we are going through are not to be minimized. The day could come, as it came in the United States after Lehman, when the confidence and the basic integrity in the financial system could come into question and you could face a seizing up of the financial system that required massive emergency measures. That point has not been reached in Europe, though it certainly was reached in England in 2008, certainly was reached at one point in Ireland.
How’s Europe affecting the U.S.?
It’s one of the factors contributing to a reduction in demand. You can see how much the U.S. stock market futures move in the very early hours without warning when the European markets start to trade as evidence of the sensitivity of U.S. prospects to what’s happening in Europe.
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