by Maria Bartiromo
The European economy has been getting slammed, first by an extended debt crisis and the implications and pushback 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 and head of the president’s Council of Economic Advisers 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.
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.