Last week, Senior Fellow Bo Cutter hosted economist and former IMF Deputy Managing Director John Lipsky as part of the Next American Economy Breakfast Series, where they discussed how the European crisis came to be, past solutions, and what it will take to finally resolve it. In the video below, Lipsky lays out the current situation and the recent five-point plan:
Initially, most thought that the problems of the small European countries could be dealt with. But it became clear last summer that they were in dire need of a comprehensive plan -- which appeared with the five-point plan in July. Will it work? Lipsky believes "there is every intention and good reason to expect that the plan ultimately will be implemented -- if not perfectly, over stages." While he says "there is a risk that in the process of arguing about who’s going to pay they end up taking that too far" and create "an inextricable crisis that is seriously destabilizing," all sides likely understand the risks at play. However, he fears that "the criticisms that leaders have perceived... instead of making them bolder and say now we have to move forward in a cooperative way" will be ignored. “The biggest countries have to show leadership."
In the full interview below, Bo Cutter asks Lipsky how this crisis came about in the first place. He explains that despite the decision to take part in a single currency, the financial markets did not place enough restrictions on European countries to maintain economic sustainability. Most were surprised that Germany came out the winner of monetary union over Spain and Italy. How did Germany pull it off? It was "a failure, in a way, for the expected winners to capitalize on the opportunities and the unexpected success of the expected loser to actually grasp the nettle and make big reforms."
So what now? Lipsky says, "If policy adjustments, economic structural policies, budgetary policies, tax policies, monetary policies... and exchange rate policies were all operated in a coherent way, it could produce outcomes that were better for everybody."
Watch this video for how he addressed these questions in his lecture: