Larry Summer’s European Tour: How the EU Will Survive

“All men will become brothers under thy gentle wing.” Thus sings the chorus in the final movement of Beethoven’s 9th Symphony, which serves as the anthem of the European Union. 

That phrase rings rather hollow these days as Spaniards suffering through 25 percent unemployment burn effigies of German Chancellor Angela Merkel. While some argue that the worst of Europe’s financial crisis appears to be over, the EU still faces enormous challenges. And these are challenges that could impact world markets and also put the U.S. recovery in peril.   

Speaking at The Nantucket Project, a festival of ideas that takes place on Nantucket, Massachusetts, former U.S. Treasury Secretary Larry Summers said that we should bet on the EU staying together. Nonetheless, “if forced to make a choice between almost any failure in teutonic monetary virtue and the collapse of monetary union,” Summers argued, politicians in Europe will likely choose the collapse of monetary virtue.

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What’s the Big Idea?

As Summers pointed out, the bailout cash is flowing in one direction — from central Europe to countries like Greece. If Greece leaves the EU, Summers argued, it will force more austerity, not less. That is why he predicts that Greece will stay the course. 

But what about the political risks for Germany? Former Thomson Reuters CEO and panel moderator Tom Glocer pointed out that Gerhard Schröder lost his chancellorship “putting forward the reforms that ultimately helped put Germany on the right track.” So what should Merkel do? 

Summers pointed out there are two approaches Merkel can take. One involves radical transparency. “One way to make a transfer to a country is to vote a foreign aid appropriation,” Summers said. But what if that type of transparency makes the option no longer politically tenable?

Another way “is to participate in a multilateral bank-clearing mechanism to provide guarantees to offshore inter-bank deposits,” Summers said. “If you do it the second way, it’s a lot less clear what’s going on. But it’s likely to be a lot more publicly acceptable.” 

So what will happen?

Summers predicted we’ll see “substantial non-transparent transfers over the next several years.”

What’s the Significance?

There are some politically correct words, like freedom and democracy that everybody loves so much that we forget how to think critically about them. The Carlyle Group co-founder David Rubenstein, who also participated on the Nantucket panel, argued that transparency has become another one of those buzz words. It’s not always a good thing in the business context, for instance, because information overload has overtaken our ability to make intelligent decisions about all of this information.

Similarly, in the political context, radical transparency is often held up as an unquestioned virtue, even though it can get in the way of making much-needed deals and compromises. 

As Larry Summers concluded, “you’d have to be a brave man to argue the principle that having absolute radical transparency and clarity that makes [multilateral bank-clearing mechanism to provide guarantees to offshore inter-bank deposits] completely understood to every German tabloid reader will make the world a better place.” Summers says radical non-transparency, on the other hand, “is not an entirely comfortable value that I’m defending in a democratic society.”

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Follow Daniel Honan on Twitter @Daniel Honan

To learn more about The Nantucket Project and how to attend the 2013 event visit nantucketproject.com.