By Simon Johnson
Yesterday’s announcement of European “support” for Greece was badly bungled.
The Global Crisis Fighter’s Guide to the Galaxy clearly states that when “markets overreact… policy needs to overreact as well” (see Larry Summers’s 2000 Ely Lecture to the American Economic Assocation, American Economic Review, vol. 90, no. 2, p.11; no free link available – and yes, I know that the White House doesn’t always follow its own playbook).
This definitely does not mean: Vague promises to provide some support in an unspecified fashion in return for some policy actions to be specified later.
Irrespective of your view on how much fiscal adjustment Greece needs vs. how much German taxpayer money it deserves (or can realistically expect), you need a different approach – much more concrete and detailed. The only good news yesterday was that the IMF will play a slightly greater role than previously expected, but even this change was a nuance missed by everyone – and who knows where it will lead.
If the euro continues to depreciate as it has so far today, the G7 will need to weigh in.It’s not that the G7 can, in the short-term, do anything at all. But in the highly ritualized theater of speculative attacks, the G7 carries the big stick – the threat of currency intervention.
Waving this stick is not without its complications – particularly if it is not backed up by real policy actions. And the Americans (and Japanese and Canadians), on the basis of the last week, have every reason to push the Europeans to “show, don’t tell.”
Still, talk is cheap and the Europeans are starting to sound a little desparate. Expect the G7 to come in this weekend with a statement about concern regarding potentially disorderly adjustment in major currency markets.
Let’s hope this buys some time – and that the Europeans use that wisely.