For the U.S. and EU, What Nearly Killed Us Could Save Us
In an economic crisis, our sins can look like virtues.
The U.S. entered the recession with too much borrowing, too much spending, and too much confidence, Lawrence Summers wrote for the Financial Times. But what we need now, ironically, is more borrowing, more spending, and more confidence. We need the federal government to take more money from investors at super-cheap rates. We need families opening up their wallets and living every Friday like its Black Friday. We need businesses lapsing into irrational exuberance and hiring like mad. Fiscal responsibility is usually a virtue. But not when your interest rate and GDP growth are both under two percent. Congress should brush up on its St. Augustine: "Lord make me chaste, but not just yet."
And what about Europe? The EU bound itself inside a common currency to make everybody feel wealthier. The peripheral countries -- "slow Europe" -- wanted a richer currency so they could borrow and buy more. The core countries -- "fast Europe" -- wanted their neighbors on a richer currency so they could sell them more stuff. Everybody got what they wished for and much worse. Like a sprinter leashed to a slow poke, fast Europe is now dragging slow Europe and everybody is in danger of falling down together. In the next few years, the euro as you know it might not exist. Both sides might be better served today if the euro leash didn't exist at all.
The EU's prescription for slow Europe is austerity. The thinking is that if Italy and Greece cut government spending, they'll achieve a primary surplus and investors will feel more comfortable lending to them. But if everybody engages in fiscal tightening in a recession with a credit crunch at the same time, the result could very well be a deepening recession.
The irony is that what Italy and Spain and Portugal and Belgium and all the members of "slow Europe" need right now is a little dose of a little of what got them into this mess. More borrowing. Lower interest rates. More (possibly shortsighted) confidence in the financial constitution of slow Europe to buy the EU time to make long-term adjustments.
The first solution falls to the lender of last resort. The European Central Bank has an opportunity to act like a central bank and unleash all monetary hell by gobbling up bonds and "printing" money to drive down borrowing rates to avoid default while Europe works out a long-term solution to its homemade disaster.
The alternative is so horrible to contemplate that the assumption is that it cannot happen. The disintegration of the euro isn't a handshake followed by an easy currency depreciation. It's a domino of defaults and bank failures that ends with a continental depression.
In the next few years, the U.S. has some adjusting to do. Washington will have to borrow much less. Families will want to save more. Businesses would do well to open their services to exports. But this is nothing compared to the reforms needed in Europe. Above all, slow Europe needs to grow. There is a time-tested solution to trading your way out of recession and into growth. You cheapen your currency so that more foreigners buy your cheap stuff and businesses get the money. Slow Europe will want to learn to run on its own dime rather than get dragged around the race track by fast Europe and a strong euro.
But this transition is almost too complicated to dwell on. It's the first question that has the easiest answer. What should Europe do right now? It should bang down the door of the European Central Bank and demand it start living up the last two words of its name.