Following the election of a pro-bailout party in Greece on June 17, the new Greek government being formed this week will try once more to negotiate a solution to its intractable debt crisis that will keep it in the eurozone. But how did Greece get into this situation in the first place? Are other countries at risk of falling into the same predicament? In a panel discussion at the Metropolitan Museum of Art earlier this year sponsored by the Review and Fritt Ord, these and other questions were explored by Paul Krugman, Edmund Phelps, Jeffrey Sachs, and George Soros. Many of their comments remain relevant now. Here are some excerpts.
—The Editors
Paul Krugman: When you talked about Greece walking a tightrope, that’s not how I see it. I guess I see them walking the plank. Will they fall off?
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Edmund Phelps: People see the fix that Greece is in as a moral parable that is a warning to the rest of the West. But the parable has flaws or mistakes in it. It’s far too crude to lay the crisis in Greece on an over-large welfare state, or on pandering after the votes of public employees. Germany, Holland, and Sweden have the lowest unemployment rates in Europe, despite huge welfare programs and well-paid civil servants, too. They’re saved by their horror of under-taxation. There is no such horror among the Greeks. Greece allowed its public debt and its public outlays to soar in relation to tax revenue. So the correct moral to be drawn here is spend what you like, but pay your bills on time.
Now, press reports tell us that ordinary citizens in Greece did not know of [their government’s] now scandalous under-reporting of the under-taxation. The reports say that the crisis results from—or they imply that the crisis results from—the unpreparedness of the country to determine how the costs ought to be shared and the benefits adjusted. Tax increases or roll-backs of civil service pay, or some give-backs in pensions for a while, or what? Everybody is at loggerheads. So I think the correct moral of this story is do not keep the truth from the public. We need openness, transparency. It has nothing to do with the size of the welfare state or [the level of] pay for civil servants.
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Jeffrey Sachs: We do not have a global economic crisis. Not even close. We of course have a mess in the United States. We have a mess in Greece. We have a crisis in Spain. We have a crisis in some of the other countries of southern Europe. We have a crisis in Ireland. But even within Europe, there is no crisis in Germany now. Unemployment is at very low levels compared to the last couple of decades. There’s no crisis in the Netherlands, in Denmark, in Finland, Sweden, Norway. Northern Europe is doing rather well. Low budget deficits, rather high employment, very high prosperity. Trade balances or surpluses.
And if we look farther beyond the north Atlantic of the United States and western Europe, then it’s even less the case that there’s a global crisis. After all, in Asia, developing Asia, meaning India, China, southeast Asia, economic growth rates are at unprecedentedly high levels by historical comparison.
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Paul Krugman: Within Europe, yes it is true that Germany is floating along pretty well, although I’m not sure that we’ll have that same story next year. Some other countries are floating along. Germany is floating along pretty well because it’s running an enormous trade surplus, which is the flip-side of a large trade deficit being run in southern Europe. And what the Germans tell you, basically they say, “Why can’t everybody be like us?” So we should all run gigantic trade surpluses. And I was actually just talking to somebody from NASA this afternoon and asking about where we’re going to find the planet we’re going to export to.
Everybody talks about Greece, and views Greece as the great example of what’s going wrong. Greece is pretty much in a class by itself. Portugal a little bit, but even within the crisis countries in Europe, none of the others has a crisis where government irresponsibility was a large share of how they got into the crisis.
Look at Spain, and you see that it was monstrous private sector overreach: a monstrous housing bubble. The Spanish government was running budget surpluses on the eve of the crisis [and] came into the crisis with low debt. Italy, for everything that we say about it, yes, they have a large debt, which is an inheritance of very irresponsible policies quite a while ago. But they were steadily reducing that debt relative to GDP until the crisis hit. So Greece is a terrible motivating example. Unfortunately, because of the underlying weakness of the European situation, if Greece blows up, which seems extremely likely, then it will probably have contagious effects. But do not think of Greece as being a role model for what’s gone wrong elsewhere.
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Jeff Madrick: What are the odds of a recession and crisis in Europe having serious fallout in the US?
Jeffrey Sachs: …We only export about two and a half percent of US GDP to Europe. So even a fairly serious slump in Europe in terms of the actual impact via imports is not all that big. It’s perfectly possible that we could have a recession in Europe and a continuing modest recovery in the United States. If it turns into a Lehman-style event, all bets are off.
There are a lot of reasons to be very, very upset about what’s happening in Europe. Among other things because it’s not just economics, it’s politics. The European project, which is democracy and peace, has to succeed, or the world is a much worse place. But I’m actually a lot less scared about the direct economic impact than a lot of people are—probably famous last words.
George Soros: As far as Europe is concerned, Mario Draghi did relieve the credit crunch, which was really beginning to hurt the European economy. So that’s a very important relief. Now there are still problems with Greece, et cetera, but the immediate downward pressure is relieved. And interestingly, you have a counter, positive influence on the global economy from China. Because China is in a period of transition, a new group is taking over later this year or next year. And they are determined to avoid social unrest during this period. So they are now stimulating.
Now the interesting thing is that actually China is facing a need to re-jigger its growth model. It cannot maintain the current rate, because it’s all based on exports and infrastructure investments. And only one-third of the economy is now consumption. So even if you move to stimulate consumption, stimulating one-third while the other two-thirds has to diminish will bring about a slow-down in the growth rate. But that will only come next year. [T]his year, I think the stimulus, the Chinese stimulus, will help the global economy. So the outlook is mixed.
