Larry Summers has a solution to the European debt crisis: Don't let faith in politics trump rational economics. At a conference sponsored by the Economist today he said, "This [crisis] didn't have to happen. People believed in the triumph of politics over economics. And a judgment was made that if there was sufficient political will the laws of economics would be repealed by that common desire. Anyone who says it’s the politics, not the economics, they’re at risk of compounding the error."
Summers was part of a panel that included Philipp Hildebrand, Vice-chairman of BlackRock and Lorenzo Bini Smaghi of the Weatherhead Center for International Affairs at Harvard. The panel was ably moderated by Zanny Minton Beddoes of the Economist. She asked all three what the eurozone would look like in five years, and their crystal balls lit up.
Summers predicted that none of the current members would be drop outs; that the EU will have experienced very slow growth. He said, "There will have been two moments of significant financial trauma around countries or big institutions, but the basic unity will have been preserved." Whew! For a minute a thought it would be clear sailing.
Echoing a slew of other economists, Hildebrand said there will be some incremental steps towards a model that's politically more integrated. But, he cautioned, "there will be a change at the margin to the degree of fiscal sovereignty or maybe structural sovereignty.…There will be very difficult constitutional debates, particularly in France and Germany."
Finally, Bini Smaghi, perhaps the most optimistic of the three, predicted more countries joining the eurozone--particularly from the Baltic region which he said would balance the north/south issues facing the EU now.