NEW YORK, Oct 25 (Reuters) - European central bankers and policymakers will choose European unity over any alternatives, even if it involves high levels of inflation, said Former Treasury Secretary Lawrence Summers in New York on Thursday.
“At end of the day, central banks will do what is necessary” to maintain the European project, even if it means years of high inflation or taking action beyond the latest program of bond-buying by the European Central Bank, Summers said.
“Any time there’s a choice between Europe falling apart or something else, something else will be chosen, even if it has inflationary consequences.”
Summers said he was “convinced” that if forced to choose between a 4.5 percent inflation rate in Europe, including in Germany, and a collapse or weakening of the union, “the choice would be made for a period of that inflation.”
In early September, ECB Chairman Mario Draghi unveiled a new bond-buying plan aimed at easing the region’s debt crisis. The Outright Monetary Transactions (OMT) has not yet been implemented, but global financial markets reacted favorably to Draghi’s commitment to support troubled euro zone nations like Spain and Greece.
Summers, who was Treasury Secretary under President Bill Clinton from 1999 to 2001 and who served as director of the United States National Economic Council under President Barack Obama until November 2010, said ECB action had been “reassuring more than problem solving” but that “one has to be more optimistic about the future of the European institutions today than one would have been 6 months ago.”
Summers was appearing on a panel on Europe’s debt crisis at the Economist Buttonwood Conference in lower Manhattan.
He was joined for the discussion by BlackRock vice chairman and former head of the Swiss National Bank, Phillip Hildebrand, and economist, Lorenzo Bini Smaghi, a former member of the Executive Board of the European Central Bank.
All three men agreed that the future of the euro zone includes Greece, and that ECB actions over the last few months had fundamentally changed the course of the crisis for the better.
“It has been a game changer,” said Hildebrand, who cautioned that further strong action was needed, especially in Spain.
“Speech is not enough. The sooner more decisive action is taken, the higher the probability it will yield a successful outcome.”