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Rougher times await the euro, says alumnus

Ira Lieberman’s advice to more than 200 business students was simple, if not understated.

“International relations theorists use a well-known quote from Latin: In peace, prepare for war,” said Lieberman ’64, who holds a B.A. from Lehigh, an MBA from Columbia University and a Ph.D. in international relations from Oxford University.

“Economists should have their own saying: In good times, prepare for crisis.”

That advice might have helped prevent the greatest global economic crisis in nearly 100 years. Now centered in Europe, the failure came about because investors lost faith in local markets, resulting in a “flight to quality” to foreign markets.

Lieberman shared his thoughts here on Nov. 14 in an address titled “A Tale of Two Crises: Europe and the United States—A Global View.” His presentation was sponsored by the Martindale Center for the Study of Private Enterprise, whose advisory board he sits on.

Lieberman, the founder and CEO of LIPAM International, a financial consulting firm, has advised the World Bank, the International Monetary Fund (IMF) and the European Investment Bank on economic challenges.

No magic bullets are likely

That experience gives him insight into the current financial crisis. His prognosis doesn’t inspire confidence.

“There are no magic or silver bullets. I see Europe muddling through because that is what the EU and Euro Zone has been like for many years,” he said. “European governments will continue to kick the can down the road until the divergence [between stronger and weaker economies] grows so large the Euro Zone falls apart when an extreme crisis in one country, such as Italy, brings contagion and forces a solution.”

Last week, the European Union downgraded its forecasts to just 0.5 percent growth in 2012. All 17 countries in the Euro Zone bloc had their growth prospects downgraded.

The European market, in some respects, is fighting for its survival. Lieberman suggested that the Euro might be a casualty of the current economic situation. While that may be a good thing in the long term, Lieberman said its immediate impact would be “messy” and would adversely impact the world’s capital markets indefinitely.

“Greece might have to leave. And if the Germans did not have the history of the Weimar Republic and all that followed, I believe they would be tempted to pull out of the Euro and re-adopt the Deutsche Mark and the German Central Bank in a heartbeat.”

An American advantage

Lieberman sees greater potential for the U.S. market to recalibrate.

“We don’t have 17 or 27 decision makers and a host of other institutions involved. We have one Congress and one Administration that could reach a reasonable compromise.”

That compromise should be built around another stimulus package that includes a new infrastructure bank—a proposal the Obama Administration has endorsed. Lieberman also suggests an increase in revenues, such as the end of the Bush-era tax cuts, entitlement reform, and significant cost-cutting measures in areas like defense spending.

Of all the countries struggling under financial strain, Lieberman said, it is Japan that may end up recovering fairly quickly. The damage caused by the earthquake and tsunami of March 2011 may exceed $300 billion, but Japan’s investment in rebuilding its infrastructure and economy may act as a stimulus in its own right, he said.


Photo courtesy of the Martindale Center


 
Posted on Thursday, November 17, 2011
 
 
A beach scene in Greece, whose financial crisis has embroiled the other countries in the European Union. Ira Lieberman ’64, a financial consultant, said here recently that the economic crisis afflicting Europe has its roots in a loss of faith by investors.
 
“There are no magic bullets. I see Europe muddling through because that is what the EU has been like for many years.”—Ira Lieberman ’64
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