Larry Summers: “The world must insist that Europe act”

In the Financial Times:

At every stage of this process, from the first signs of trouble in Greece, to the spread of problems to Portugal and Ireland, to the recognition of Greece’s inability to pay its debts in full, to the rise of debt spreads in Spain and Italy, the authorities have played out the stalemate machine. They have done just enough beyond euro-orthodoxy to avoid an imminent collapse, but never enough to establish a sound foundation for a resumption of confidence. Perhaps inevitably, the gaps between emergency summits grow shorter and shorter.

The process has taken its toll on policymakers’ credibility. As I warned European friends quite some time ago, authorities who assert in the face of all evidence that Greece can service on time 100 per cent of its debts will have little credibility when they later assert that the fundamentals are sound in Spain and Italy, even if their view on the latter point is a reasonable one. After the spectacle of European bank stress tests that treat assets where credit default swaps exceed 500 basis points as riskless, how can markets do otherwise than to ignore regulators’ assertions about the solvency of certain key financial institutions?

Personally, I’m not so concerned with preserving the credibility of policymakers.

Posted by on September 19th, 2011 at 10:18 am


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