April 30, 2012

Europe's Growth Challenge

Lawrence Summers, Washington Post

AP Photo

Unfortunately, Europe has misdiagnosed its problems in important respects and set the wrong strategic course. Outside of Greece, which represents only 2 percent of the euro zone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product five years ago, with ratios well below Germany's. Italy had a high debt ratio but a very favorable deficit position. Europe's problem countries are in trouble because the financial crisis underway since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems. And treating symptoms rather than underlying causes is usually a good way to make a patient worse.

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TAGGED: Europe, Germany, Italy, Spain, Greece, Ireland, Eurozone

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