At Davos, No Progress on Europe's Debt Crisis

A blizzard of words but no progress on debt at the World Economic Forum

In Thomas Mann’s novel The Magic Mountain, young Hans Castorp checks into an alpine sanatorium for three weeks of rest and ends up staying seven years. The European debt crisis is a lot like that—dragging on interminably as the patient sinks into a permanent malaise. Hopes of a breakthrough on the European debt crisis were dashed on Day One of this year’s World Economic Forum in Davos—as it happens, the location of Mann’s fictional sanatorium.

German Chancellor Angela Merkel took to the Congress Hall podium on Jan. 25 with a typically austere message: Germany isn’t putting up any more money. “We have said right from the start that we want to stand up for the euro, but what we don’t want is a situation where we are forced to promise something that we will not be able to fulfill,” Merkel told the gathered global elite. “I know we are labeled the big headache of the global economy.”

The most important new message from Davos 2012 is that there wasn’t any important new message. The stalemate among European policymakers continued in the ski town, which shuts down each year to host the world’s business and political A-listers. So the risk of continental economic contagion grew. Peter Diamond, the economist from the Massachusetts Institute of Technology who won a Nobel prize in 2010, underscored Europe’s problem. “Yogi Berra said, ‘When you come to a fork in the road, take it.’ That’s what Europe has failed to do,” Diamond said at a dinner hosted by MIT President Susan Hockfield. (The dinner was off the record, but Diamond agreed to put his remarks on the record for this article.)

Lacking the political power to get their way, advocates of stronger action to fix Europe were left to polish their bons mots. Lawrence Summers, the Harvard University economist who ran President Barack Obama’s National Economic Council until a year ago, noted in another session that the U.S. didn’t climb out of the Great Depression “by simply calling on the gods of business confidence.” In the medium term, Summers acknowledged, more fiscal discipline is needed “almost everywhere.” But, he said, “‘Expansionary contraction’ is oxymoronic. And there are days when I think you don’t even need the prefix”—i.e., the “oxy.”

Practicing austerity when the economy is weak is like digging when you’re already standing in a hole, Standard Chartered Chief Economist Gerard Lyons said at a luncheon meeting on the euro. “We’re in a self-feeding downward spiral,” he warned. In a cafe crammed with Davosians, Columbia University economist Joseph Stiglitz, also a Nobel laureate, said: “When you have austerity in so many of the countries of Europe, it kills Europe and will have a global effect.”

Merkel does have her defenders in academia, who give Germany’s case a valuable intellectual counterbalance to the pro-stimulus crowd. Josef Joffe, who is the publisher-editor of the German weekly Die Zeit and has taught at Harvard and Stanford, asked at the euro lunch, “What austerity are we talking about? There’s not a single government in the West that’s not running budget deficits.” Raghuram Rajan, an economist at the University of Chicago Booth School of Business, maintains that more deficit spending may not create sustainable demand. “You’re borrowing from the future,” he said in the lobby between sessions. “And the future isn’t 30 years down the line. It’s next year or the year after.”

And so it went. Having stopped talking and dithering, Europeans were now dithering and talking, one audience member at the euro luncheon grimly joked. Complaints about Europe’s inability to get its act together were second only to grousing about the icy sidewalks and long waits for taxis. What little optimism there was at Davos emanated from representatives of India, China, Turkey, and other less wealthy but faster-growing nations. Mexican President Felipe Caldéron, in the final year of his six-year term, was interviewed on the main stage by Microsoft Chairman Bill Gates. Caldéron advised Europe to benefit from Mexico’s experience and attack its debt crisis with overwhelming force. “The more money you commit, the less money you spend. And the opposite is also true,” he said.

The day after the One Percenters left Davos, Europe’s debt crisis road show moved on to Brussels. At a Jan. 30 summit there, Greece fended off German-led calls for a European overseer to take command of its budget. The sparring threatened to overshadow efforts to finalize a permanent €500 billion ($659 billion) rescue fund and a German-inspired treaty to control national deficits. “The free lunch is over: no external controls, no money,” insisted Michael Fuchs, head economic spokesman in Parliament for Merkel’s Christian Democratic Union. “I can’t look my constituents in the eye and say anything different.”

True. Greek lawmakers, though, also can’t look their constituents in the eye and ask them to suffer still more pain in the effort to maintain payments on unaffordable debt. That’s the impasse that Davos highlighted. In The Magic Mountain, young Castorp is praised by one of the sanatorium’s doctors for having “a talent for being ill.” Europe is at risk of developing just such a talent.

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