Interview: Former Treasury Secretary Snow Talks Eurozone Crisis, U.S. Debt

Jan 19, 2012

John Snow, former U.S. Treasury Secretary under President George W. Bush, remains an influential figure in the world of global finance as chairman of private investment firm Cerberus Capital Management LP.

In a wide-ranging interview with, Snow candidly discussed the eurozone crisis, U.S debt and deficit, tax policy, and U.S. competitiveness. In a recent unscientific survey of subscribers to Free Enterprise Weekly, the Chamber’s e-newsletter, 88% of respondents said that they are somewhat or very concerned that the European debt crisis will negatively impact their business. Is this fear among U.S. businesses and investors legitimate? How do you see the problems in Europe impacting the U.S.?

Snow: It’s absolutely a legitimate concern. The eurozone is under extraordinary pressures today. The convergence that was supposed to occur under the eurozone has clearly not fulfilled its potential, and instead we’re seeing divergence, which you see reflected in the financial markets.

In order to deal with the sovereign debt problems of the individual countries, Europe has embarked on a program of austerity for the peripheral countries such as Spain, Portugal, Greece, and Ireland that have diverged so much in terms of lower productivity rates and their relative lack of competitiveness versus the northern part of Europe. Those countries are finding it tough to compete under the EU regime.

With the benefit of the euro, they were treated as if they had the same credit status as Germany and France and others, which gave them more access to financial markets and they took advantage of it and took up a lot of debt. And now people are wondering if they can pay those debts.

Germany has said you need to practice more austerity. But the imposition of austerity on Greece, Spain, Italy, and Portugal is inducing a recession, and those countries aren’t happy with having a lower standard of living and higher unemployment.

U.S. businesses need to be concerned because these austerity measures are causing a contraction in Europe and putting them in no-growth territory in 2012. With Europe growing so much more slowly, it’s going to constrain export opportunities for U.S. companies. A lower euro makes it harder for U.S. companies to compete against European companies. It’s already having an impact. Weak demand from Europe is already impacting US exports. The central debate in the European debt crisis appears to be who should bear the burden of rescuing the Eurozone - bondholders, taxpayers, or the banks? In your opinion, what is the path forward?

Snow: The option that’s being pursued by EU Chancellor Angela Merkel and the EU is basically, ‘we’ll make funding available if you behave more like us - if you save more, get higher productivity, and lower your real wage rates.” And how do you get all that? Through a recession. So the North is imposing a recession on the South. How long will the South put up with it? It’s not clear. The burden of rescuing will have to be carried by everyone.

We had the same problem when we were founded under the Articles of Confederation and states ran up huge debt. The solution was the U.S. Constitution, which created a stronger central government. Europe doesn’t have a fiscal policy; they have a monetary policy, and most conclude that you can’t have a successful monetary union without a fiscal union. That would require an integration, which would require the countries to give up sovereignty.

So these are huge problems to overcome and I’m sympathetic. I think they’ll muddle through somehow. I think the eurozone as we know it will have to change. Maybe with the weaker countries dropping out, or maybe the creation of a more centralized control system, maybe with the richer helping the poorer with a eurozone bond. Do you think the Obama administration has taken the right approach to the European debt crisis? What, if anything, should it do differently?

Snow: This is Europe’s problem to solve. We may be able to offer some useful advice growing out of our 2008 experience with our own crisis. I think the U.S. experience is useful to keep financial markets from seizing up, but at the end of the day, all we can do is offer advice. I’m not sure a more active approach would be useful at all.

What we should do and what we’re not doing is get our own fiscal house in order as an insurance policy against the storm that’s brewing in Europe. Turning to our own country’s fiscal problems – what is your prescription for meaningful debt reduction? Is that plan plausible, given that it appears nearly impossible that Congress can agree on anything?

Snow: The policy prescriptions here aren’t hard to come up with. What’s needed is political will and consensus to get it done.

Despite the need to get on with it and agreement among all the observers that we have an unsustainable situation, I don’t think it’s feasible to reach any agreement until after the 2012 elections. It’s likely the financial markets at that point will force whoever is elected to deal with our debt in a comprehensive way. That is dealing with the sources of the problems, revenues and expenditures. I predict sometime early in 2013, our leader will have to call a summit of some kind and go to the country and tell them it’s time to have a comprehensive solution.

When it comes to addressing the problem, there are only three ways to do it: massively higher taxes, which I think is the wrong way. Another alternative is substantially reduce the spending rate, not reducing spending, but reducing the rate of growth of spending. The third way to deal with it is inflation. Countries routinely rely on inflation to get out of fiscal burdens, which reduces the debt obligation.

I think the fundamental problem is clearly the rate of growth of spending, especially in health care. Taking care of that would do more than any other thing to rein in the debt. We’ve got a spending problem. Our problem is that entitlement programs are becoming an increasingly large and unsustainable part of GDP, so we need to reduce the growth rate of entitlements. Do you think it’s essential to raise the debt ceiling? Should it be done separately from the budget? Do you think that it is irresponsible for Congress to try to attach any conditions to the debt ceiling, which is what happened over the course of last summer?

Snow: We live in a political world, and the reality is that the debt ceiling is there. Another given is that default is unthinkable, from a strictly financial management point of view. It would be preferable if we didn’t have to have repeating votes, but it’s Congress’ constitutional prerogative to have a say in the debt. 

It seems to me that Congress should be applauded for forcing a meaningful discussion on the debt and deficit situation. If they hadn’t done so, there would have been no action of the kind we got, just higher spending. In this instance, I think the congressional leaders were right to force the issue. The country got something out of it better than there would have been otherwise – a real discussion of the debt and deficit. And they exposed a fundamental disagreement in the country about how to deal with it. There’s a philosophical divide between approaching the solution through higher taxes or slower spending. It’s still unresolved, and the results of the next election will go a long way in determining the results of that discussion. It’s my hope that in 2013, we get a real compromise. Many people think that the U.S. tax code is too complicated and unfair and needs to be overhauled. If you could draw up a comprehensive tax reform package to send to Congress, what would it look like?

Snow: There’s no doubt about that. We spend billions and billions each year as a country on taxes. It’s too complicated, but in my view, more important than being too complicated, it gets in the way of our growth. It favors consumption over savings and distorts investment decisions across the board, which hurts long-term growth, investment, and productivity in the US. The net result is that the U.S. is less competitive than it otherwise would be.

Could there be a fairer tax code? Yes, no doubt. When I was Treasury Secretary and went around the country talking about taxes, nobody ever came up to me and said they love the current code. Nobody likes this code.

The fundamental problem with our tax system is it gets in the way of long-term growth and efficiency. We could have lower tax rates and more revenue out of the existing tax system. Lower rates on capital are very beneficial. We need to encourage more capital formation and investment, and lower rates on capital do that.

Tax reform is the kind of thing that always looks great in theory, but it’s so hard to accomplish in practice. The fundamental trade off is lower tax rates by reducing the distortions in the form of tax credits and reductions and special incentives. It’s hard to get rid of them. That’s why the flat tax, despite all the appeal it has, has never really found traction. If you touch so many sacred cows to broaden the tax base and lower the rates, like the mortgage reduction and research and experimentation tax credits, you create winners and losers and strong political opposition.

Closing on a hopeful note, we have a tax code with an expiration date: many of the key features expire at the end of 2012, so tax reform is going to happen either by design or default. We are on the precipice of a historic opportunity for far reaching changes to the code. You’re now chairman of a private equity firm that invests in companies all over the world. Outside of the United States, where do you see the biggest opportunities?

Snow: The global economy is growing the most in places like the BRICs (plus Turkey, South America, Southeast Asia, South Korea). But going to growth places doesn’t ensure good investment returns. It’s always helpful to have winds of growth at your back, but growth alone won’t ensure high internal rates of return on your investment. You need good due diligence, you need to understand market conditions, government policies, and capital flows in the industries your interested in.

But even countries in distress offer good investment opportunities because prices are down. That’s why private investors are looking hard at Europe. Because of their shakeout, there’s opportunity there—an excess supply of assets whose values will fall and provide good investment opportunities in the long term. There’s opportunity for a turnaround. When it comes to investing in companies, what are the United States’ strengths relative to emerging nations like China, India, and Brazil? What are its weaknesses?

Snow: The U.S. has a long track record of success, which is a huge advantage. We continue to enjoy a comparative advantage in many areas - aviation, higher education, value-added manufacturing, agriculture, and abundant energy. We have the most liquid debt markets and best capital markets in the world. We have flexible labor markets.

Most importantly, we’re the most open, adaptive, and flexible economy in the world. We don’t get stuck; we keep moving. Our commitment to open markets and capital flows, things the U.S. Chamber stands for, is a huge advantage. The Chamber’s advocacy of these policies plays an important role in keeping America on the right path.

We’re a competitive open market economy that allows investors to take risks and enjoy the rewards of their risk taking. That’s the free enterprise system. And our commitment to that system is our biggest advantage. And I commend the Chamber for continuing to be the voice of free enterprise.

But I worry about some of the policies coming out of the current administration that make our capital markets more regulated. There’s the growth and profusion of regulations that have become the new Washington, whether it’s the EPA and its fulsome rules, or the health care law that imposes so many burdens on small employers, or the lack of clarity on future tax policy. This has all cast a pall over the economy.

The greatest weakness is our failure to date to create a clear path forward to address our fiscal situation, which puts our whole future in jeopardy. Without addressing that we’ll have higher taxes and higher interest rates, which means the cost of funding everything goes up. All of those alternatives are hugely negative and threaten America’s future.

But I would say America always gets it right in the long run. Voters and the financial markets ultimately will require a solution on this. The stars are aligning, the public at large is unhappy with Congress and its inability to solve this problem. There’s a recognition that things have to change.


Subscribe for Updates

First Name:
Last Name:
 Daily   Weekly

The Challenge Cup: Follow the Global Tournament

Join the Discussion