The Corner continues with its summer series of interviews about the future of Europe seen by international experts. Today, New York University Economics Professor Lawrence White gives his take. He has been with New York University Leonard N. Stern School of Business for more than 30 years. His primary research areas of interest include financial regulation, antitrust, network industries, international banking and applied microeconomics. He is coauthor of Restoring Financial Stability and Regulating Wall Street. Pretty pessimistic about Europe in the short term, Prof. Lawrence believes there is already a two-speed Europe.
– First of all, a rather general question: is Europe ahead or behind the curve? Do you think the euro is here to stay? The leaders of the 17 members of the Eurozone are constantly reacting, rather than getting ahead of the problem. They are constantly trying to do what they hope will be “just enough”. This reflects the political realities: It appears that there is an absence of political support in a number of important Nothern European countries for the measures that would be needed — because the Northern Europeans fear that the measures would involve loans that would never be paid back; in essence they fear that their resources will be transferred to the South. Since these are sovereign countries, getting agreement is both crucial but also extremely difficult. Whether the Euro is here to stay will ultimately be a political decision; and I am not good at predicting political decisions. My best guess is that the Euro will be salvaged; but it will be a close call. But, again, this is an economist’s predictions about political decisions.
– Why do you think the ECB is not acting? It bought southern European countries’ debt before, so it cannot claim that that’s not in its protocol… Again, the ECB feels that it needs political support from its constituent countries, and especially from the North, before undertaking major actions.
-Some people think there is actually a political intention of creating a two-speed eurozone. What’s your take on that? There is already a “two-speed” situation: There are the 17 members of the Eurozone; and there are the 27 members of the EU. It seems likely that there will be fewer members of a surviving Euro (if it does survive); Greece may well exit the Euro but stay in the EU; there may be others as well.
– Why do you think the Spanish ten year bonds yield is so high? Everybody agrees it is not based in fundamentals. The markets fear that Spain may leave the Euro (or the Euro just disintegrates), in which case the investors in Spanish bonds fear that they may get repaid in devalued pesetas. To protect themselves against this risk, they will buy the bonds only if they receive an interest rate that (they feel) compensates them for this risk.
– It’s been said that Southern European countries are under speculative attacks. Can that be true? How can somebody increase the yield on Spanish debt if at all? If investors — non-Spanish or Spanish — are nervous about whether the Euro might collapse or whether the Euro survives but Spain leaves the Euro, then they will be reluctant to invest in Spain — whether it is industrial investment or purchases of Spanish bonds — and they will want to transfer assets out of Spain. All of this will imply a higher yield on Spanish debt. All of this has already happened with respect to Greece. It could happen to Spain as well.
-Geithner and Bernanke both said Europe together with the fiscal cliff are the biggest risks on US economy right now. On the other hand, US financial institutions already reduced drastically their exposure to southern countries debt. Why do they say that? Europe is a risk for the U.S. — even if U.S. financial institutions have already reduced their direct financial exposure. If the Euro disintegrates, there could be a great deal of economic and financial disruption in Europe. The primary absorbers of this disruption would be Europeans. But there would be a great deal of collateral damage. U.S. exports to Europe would suffer; and U.S. companies with production facilities in Europe would suffer.
–Please tell us one positive thing in the horizon for the sake of Europe, if you see any… It is hard to see anything good, at least in the short run.