On February 16, 2015, in her column for USA TODAY, Maria Bartiromo talks with Summers about Europe, Russia, Ukraine and and the implications for the global economy. Summers also discusses the U.S. economy, oil prices, the Fed and what Summers is learning from his students.
February 16, 2015
By Maria Bartiromo, Special for USA TODAY
The European economy has been getting slammed, first by an extended debt crisis and the implications and push back from several European countries over austerity measures, then from Russia and its fighting with Ukraine. Europe gets much of its gas from Russia through Ukraine. And about 30% of earnings from Standard & Poor’s 500 companies come from the European region, which is why this issue has been a problem for American companies as well. The debate on whether to send weapons to aid Ukraine in its fight against Russia has also become a contested matter. Former Treasury secretary Larry Summers says it is more important for the U.S. to help Ukraine than it is to fight Russia. I caught up with the former Treasury Secretary to talk Europe, the U.S. and Harvard, which is where he remains a professor. You will be surprised at what his students are clamoring to take these days. Our interview follows, edited for clarity and length.
Q: Greece has been pushing back on all of the austerity measures that European leaders are putting in place. What’s your sense of what’s happening in Europe and how serious this is for the global economy?
A: The larger question is, is Europe in danger of becoming the new Japan — with a combination of weakness, sclerotic decision making, deflationary pressure, unaddressed debt burdens, leading to dismal economic performance with adverse consequences for itself and for the global economy. Mario Draghi (president of the European Central Bank) engaged in a necessary holding action. But it’s unlikely to be sufficient to bring about a new era of reasonable European growth. Layered on that is the challenge in Greece. My best guess continues to be that a way through will be found — because it is in the mutual interest of Greece and Europe to find a way through. But when negotiating positions harden and domestic constraints loom, the risk of accident goes way up. That is certainly a risk with respect to Greece.
Q: How important is all of this for the U.S?
A: This could have significant adverse consequences for the U.S. economy in three respects. First, a weaker European economy slows the global economy and demand for our exports. Second, a weakened European economy and more problems in European markets could increase risk aversion and drive liquidations with adverse consequences for U.S. markets. And third, trouble in Europe portends a stronger dollar, which reduces the competitiveness of U.S. exports more globally, reducing aggregate demand.
So, I believe the risks from what happens in Europe are significant for the global economy. The fact that there have been developments in Europe associated with so much dollar strengthening and with a large decline in U.S. long-term rates suggests that European developments may be adverse for the U.S. economy for quite some time to come.
Q: For the last at least year we’ve been talking about the U.S. being the only game in town in terms of economic growth. Is that why the dollar is strong and why foreign money is coming into this country?
A: Yes, the flows into the U.S. reflect a judgment about the relative strength of the U.S. economy in a troubled world. That is a process that easily could continue.
Q: Then there’s Russia and Ukraine. What should the U.S. be doing in terms of Russia and Ukraine?
A: There’s a danger that the focus is again shifting to Russian conduct rather than buttressing the Ukrainian economy. If we allow Putin to undermine confidence in Ukraine and in the process decimate the Ukrainian economy, we are in many ways giving him the destabilization that he supports. I have no idea whether we should arm the Ukrainians or not. I am confident, though, that we should more robustly be financing the Ukrainians so that Putin is not able to destabilize the Ukrainian economy. The irony of a traditional approach to conditionality, which requires a health economic environment in Ukraine before providing financing, is that while it may be good banking, it is terrible geopolitics because of the leverage that it extends to Russia.
Q: So what should we do?
A: Helping the Ukrainians re-profile their debt, meet their obligations to the IMF, support their currency and maintain necessary levels of government spending, even as they restructure their economy, is where the priorities for the international community should be. There’s not a more important country for the World Bank to be making substantial investments. It is time for it to step up even as the IMF accelerates its efforts.
Q: What does Putin want? Some people say Putin will invade other countries as well if not stopped. That he wants Moldova, then the Baltics. … How do you stop this?
A: I don’t think any of us can gauge with great accuracy, Russia’s motivations. But nations respond to combinations of carrots and sticks. And the challenge for us is to craft a policy that negatively reinforces Russian aggression and at the same time rewards the courageous victims of that aggression. I also think we need to recognize that insecurity may be a component of what is driving Russian policy and make clear that there is a viable offramp from conflict for Russia. But I do not believe that diplomacy alone, without the application of leverage, will succeed. One important aspect of leverage is providing sufficient support for Ukraine.
Q: Let me bring it back to the U.S. where there is a debate going on and really exactly where we are, it feels like every time we get new data out it feels like two steps forward, one step back. How would you characterize the economy here?
A: The U.S. real economy is in a strong stretch. The employment numbers for the last quarter have been impressive. There is at least a very substantial chance that 2015 will see some real acceleration in growth relative to the growth in the 2% range we have been seeing. At the same time, we need to be very, very careful about premature declarations of victory. There are very real risks of policy complacency about the adequacy of demand. And that the risks of a overly soft low-flation economy over the next few years still seem to exceed the risks of an overheated inflationary economy over the next few years. I think the crucial macroeconomic challenges involve what I’ve called secular stagnation, the tendency on a global basis for the supply of savings to be running very large relative to the demand for investment, creating downward pressures on interest rates and even some pressures that constrain the level of output.
Q: What about oil prices? Retail sales were down 8% last week. So down in December and January. We have yet to see any positive implications of low gas prices.
A: I think, in fact, it is one of the reasons we have seen some acceleration in the American economy, because consumers have more take-home pay. It is one of the reasons the situation in Europe and Japan are not substantially worse without the decline in oil. So I think it is a net constructive for most of the industrial world. My guess is it’s only 50/50 that we’ve seen the bottom on oil prices. And while I don’t expect oil prices to average their current levels over the next decade, I don’t think we can count on a rapid recovery.
Q: Meanwhile, even as people expect the Fed to raise rates, short-term rates are down. Why is the 10-year yield so low?
A: The market’s telling us that it is worried about the basic ability to generate economic energy in the industrial world over the medium to long term. Nowhere is inflation expected to reach 2% target levels over the course of the next decade. And the expectation is that real interest rates are going to be remarkably low, probably a negative on a real basis for much of the next 10 years in the average of the industrial world.
Q: Let me end on your current job as professor at Harvard. What are you learning from your students these days? Where do they want to work and start businesses?
A: The most popular course at Harvard is now computer science. Coding is the new accounting. It’s the new finance, the skill that students who want to pursue business careers are most focused on. I think we’re only in the second or third inning of what the information-technology revolution is going to mean for our economy. I think it’s going to mean better lives for all of us as consumers in ways we can only begin to imagine. But it is certainly going to have real consequences and disruptions that we as a society are going to have to figure out how to deal with.
Q: Is that where the jobs will be in the future, coding and coding related?
A: There will be many jobs there. My concern is that these activities have a very much winner-take-all character. And so I’m not sure they’re going to be creators of as much mass employment as the industrial revolution was. And so I think the question of finding jobs and meaningful work for everyone is going to loom large over the medium to long term, even when the current recession and financial crisis have been forgotten.
Maria Bartiromo is the anchor and global markets editor at the Fox Business Network. She can be reached @mariabartiromo and @sundayfutures. Her Sunday Morning Futures is live on Sundays at 10 a.m. ET on the Fox News Channel.