An Alternative Perspective on the European Debt Crisis

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Edward P. Lazear, in a recent Wall Street Journal article suggested that there are two theories at large which describe the current concern for European Economies.  The more prominent description is the “domino” theory, suggesting that if Greece fails, then other countries will follow, like dominos in a row.

As an alternative, Lazear suggests his own “popcorn” theory.  In short, he suggests that the players in the current Euro situation are more like kernels in a hot pan.  They are all subject to the same financial issues, but like kernels in a hot pan, each kernel may pop independently of the others.  The underlying cause of the problem is not the failure of one country leading to the failure of another, but rather structural issues.  Economies are no longer capable of paying for the government programs that they have created.  If they persist in the status quo, the structural “hot pan” will cause them to fail.  It will not be caused by another country’s failure, but by inattention to the root causes of the problem.  The fact that one kernel pops does not trigger the others to follow.

Rather than worrying about propping up any individual domino to keep it from affecting the others, leaders must change the policies that created the problem in the first place.

http://online.wsj.com/article/SB10001424052970203554104577003924075089102.html

Lazear is an economist who teaches at the Stanford Graduate School of Business.  He formerly served as Chairman of the President’s Council of Economic Advisers and as chief economic advisor to President Bush from 2006 to 2009.

Larry Maddox, CFP®, CPA
Larry founded Horizon Advisors, LLC in Houston, Texas in 1999 with fellow business partner Joe Thomson. He collaborates with our wealth management team and other external advisors to provide comprehensive wealth management services.

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