by Aaron Gertler:
This Tuesday, as financial disorder in Europe knocked hundreds of points off the Dow and other global stock exchanges, students and adults alike packed the Luce Hall auditorium seats and watched from wings to hear four international finance experts give the dirt on the latest G20 summit – and whether any organization or nation really had any power to prevent further calamity.
Since 2008, Europe has struggled mightily to shield itself from the fallout of the global fiscal crisis, with some countries – Portugal, Italy, Ireland, Greece and Spain, or the PIIGS – suffering more than the rest of the EU. Greece, in particular, has hovered on the edge of collapse for over a year. However, an EU aid package that would have absolved half of the country’s debt in exchange for austerity measures seemed like the first step to solving Greece’s problems – until Prime Minister George Papandreou decided to wait until January to hold a national vote whether to accept the bailout. The delay in itself, argued the panelists, is likely to bring about collapse; the possibility that Greece might vote to refuse aid was terrifying.
Though Carmen Reinhart, Ernesto Zedillo, Stephen Roach and Benn Steil all approached the European Union’s debt crisis and the latest Greek tragedy from different angles, they agreed on one thing: it’s a depressing time to be an international finance expert.
“Stephen, you’re my last hope!” cried Zedillo (the moderator), as the final speaker began his opening remarks, ready to add his own pessimism to the others’ rueful analysis. Roach, a Jackson Institute fellow and Morgan Stanley executive, paused to consider this.
“Maybe I shouldn’t talk, then. Or I could talk about China, and then stop!” Roach went on to explain that “denial of biblical proportions” almost always encased the world during a major financial crisis, whether in Latin America, Asia, or Europe. He took the position that the EU, despite its common currency and economic agreements, still wasn’t unified enough, politically or fiscally, for the euro to survive as a unit of exchange.
Roach was also dismissive toward Thursday’s G20 summit, intended to rescue Greece and win the support of non-European nations for a bailout fund to preserve the Union, arguing that whatever plans they made couldn’t possibly be enforced, since no legal entity exists to enforce them. Keynesian policies wouldn’t be enough, he said – the world’s greatest economic issue now is that of “zombie consumers” too weighted down with debt to start spending. Roach’s conclusion: unless the world finds the money to simply wipe out much of the EU’s collective debt, and the EU begins to police itself, crises are bound to reoccur far into the future.
Reinhart, head of the Peterson Institute for International Economics and co-author of “This Time is Different”, wasn’t any happier about the European state of affairs, but her analysis focused more on political folly than economic predictions. In opening remarks, she recapitulated her book’s main points: governments rarely restrain booming economies that eventually bust, the developed world takes a long time to recover from crashes, and that the EU was typical in trying to save itself with policies that were “too little, too late.” Reinhart predicted, and the other panelists later agreed, that “de-globalization” was the next step the world’s richest countries would take. This financial isolation for the sake of safety might not solve their problems – indeed, would likely exacerbate them – but was inevitable nonetheless, unless this time really is different.
Steil tried to paint himself as an optimist, but the most he could do was try to downplay the gloom spread by recent developments. He argued that Greece would, one way or another, have to accept the EU aid package, and that Papandreou’s referendum would never come to pass.
“It is not possible to run Greece like an ancient Greek city-state or Swiss canton right now.”
Steil listed the entities that could serve as saviors for the EU – the European Central Bank, China, and the U.S. – but concluded that the ECB’s 81 billion euros weren’t nearly enough to save a continent, China probably wouldn’t bail out rich countries and risk the anger of its people, and the U.S. had too many of its own problems to focus on Europe. In the end, said Steil, Germany would have to bear the bill for assistance to the PIIGS, however furious its citizens may have been to pay for less responsible countries’ mistakes.
One of those citizens got up to speak when the time came for questions. The German man spoke of the Republic’s current emotional state: “look at Der Spiegel online – it’s like the entire nation is fuming!” He also mentioned that, with an 83% debt-to-GDP ratio, Germany’s capacity to spend wasn’t as unlimited as many people thought.
Another audience member, this one Greek, sympathized with Papandreou, whose next election depended on a show of strength. Zedillo countered that political considerations must always take a back seat to sensible economic policy – though Reinhart and the rest knew that this rarely occurred. Steil, though, still held hope for Greek citizens: “it’s a lot easier to tell some pollster you’ll never vote for a bailout than it is to refuse help at the ballot box.”
As the panel came to a close, more futuristic ideas bounced from speaker to speaker. Reinhart speculated that the Chinese Renminbi would replace the dollar as the world’s reserve currency one day, while Steil suggested that banks trading only in gold might grow to form an original secondary economy by issuing their own debit cards. “If I can trade a tenth of a gram of gold for my latte, why wouldn’t I?”
Zedillo summed up the discussion with an apology to the audience for the depressing nature of the two-hour talk. He voiced hope that the panelists would be proven wrong, and that “a few months from now, we can gather here again to talk about how everything worked out better than we expected!” He didn’t quite wink at the audience, but his comments brought laughter, just the same. There wasn’t much else listeners could do in the face of the Great Recession.