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Greek voters gave tepid approval yesterday to the conservative political party that supports austerity measures to address the nation’s economic meltdown. Euro zone leaders welcomed the New Democracy party’s win, expressing hope it can put Greece back on a path of growth. And financial markets surged briefly after months of dismal news from Athens. But the party’s narrow victory means hard work is still ahead. Many say it’s unlikely New Democracy will be able to pull together a coalition to form a new government. Guest host Susan Page and her panel discuss what it all means for Greece, the euro zone and the U.S. economy.
- Markus Ziener U.S. correspondent for Handelsblatt, a leading German-language business newspaper.
- Zanny Minton Beddoes business affairs editor, "The Economist"; formerly, economist at the International Monetary Fund.
- Nicholas Karambelas legal counsel for the American Hellenic Institute.
MS. SUSAN PAGEThanks for joining us. I'm Susan Page of USA Today, sitting in for Diane Rehm. Greek voters approved the pro-bailout party in parliamentary elections yesterday. EU leaders were pleased with the results, but they stressed that Greece needs to fulfill its austerity pledges to receive additional funding. The road ahead will be hard. Budget cuts in Greece already have pushed unemployment to 22 percent. At the G-20 summit in Mexico, how to contain Europe's economic crisis is also at the top of the agenda.
MS. SUSAN PAGEPresident Obama is attending. Joining me in the studio to talk about the election results and the future of the eurozone: Markus Ziener of Handelsblatt, Zanny Minton Beddoes of The Economist and Nicholas Karambelas of the American Hellenic Institute. Welcome to "The Diane Rehm Show."
MR. MARKUS ZIENERThank you.
MS. ZANNY MINTON BEDDOESThanks very much.
MR. NICHOLAS KARAMBELASThank you.
PAGEWe're inviting our listeners to join our conversation. You can call our toll-free number, 1-800-433-8850. Send us an email at firstname.lastname@example.org, or find us on Facebook or Twitter. Well, Nick, what happened in the election?
KARAMBELASWell, the most important thing is that no one party won a mandate to have the absolute right to form a government. That means that neither -- none of the parties got 151 seats out of 300 in the Greek parliament. That means that the parties must form a coalition government of some kind, and the New Democracy party, which got the largest plurality, will have the first chance of forming a government.
KARAMBELASThey would most likely try and form one with PASOK party, which is the socialist party, and between the two of them, they would have an excess of 150 seats. The Syriza party, which virtually came from obscurity, got the second most plurality and has already said it will not join any coalition with any party. The Syriza is a -- actually a coalition of 12 leftist parties and has been in the government -- in the parliament first time in the May 6 election.
PAGEAmazingly close results. So 30 percent for New Democracy, 27 percent for this other coalition who says it won't cooperate. Do you believe that the New Democracy party will be able to form a coalition government?
KARAMBELASWell, I think it should be very difficult. The -- as I said already, the Syriza party, which was second, said it will stay in the opposition. The smaller parties below the PASOK party, which was third, actually lost votes and lost seats in the Greek parliament from what they got -- they had gotten in the May 6 election. So even if it were possible to form a ideologically government with the smaller parties, there still wouldn't be enough to reach the 151 threshold.
PAGEAnd what happens if there is no coalition government formed by New Democracy?
KARAMBELASThen the Syriza will get a chance to form a coalition government, but they will not be able to as they've already said. Then PASOK will get a chance, the socialist party will get a chance to form a government. They've already said that their position is they want a government of national unity which includes the New Democracy, Syriza, the PASOK and then a smaller party called the Democratic Left.
BEDDOESWell, I think the expectation earlier this morning -- well, the hope was people with the markets reacted reasonably positively because the biggest -- the greatest plurality was won by the conservative's New Democracy, and the reason we had this second election -- the Greeks had an election just a few weeks ago, and no party was able to form a coalition government so that we had the second election.
BEDDOESAnd the fear was, as Nick said, that Syriza, this coalition of radical leftist groups would have the biggest number of votes, and they basically wanted to repudiate the terms of the debt deal, the rescue agreement with the rest of Europe. There was a huge sigh of relief kind of overnight and early this morning that the conservatives had actually got more votes. But I think now the sort of -- it's dawning on people really quite fast that, first of all, these guys can't govern alone. As Nick said, they have to form a coalition.
BEDDOESThe most likely coalition partners is PASOK, which is the socialist party, which have been their bitterest foes for the last few decades. I mean, this is like, you know, the -- I mean, it's more extreme almost than the Democrats and the Republicans forming a coalition. These have been the two big parties against each other in Greek politics, and now the idea is that they form a coalition. They probably, I think -- I'm no expert on Greek politics, but I'm pretty sure they will form a coalition.
BEDDOESQuestion is whether that coalition will last and whether they will be able to deliver the kinds of tough reforms that Greece needs to do to continue with the rescue bailout from the rest of Europe and whether and how much the rest of the Europeans will be willing to give them more time. And I think the concerns are now, Greeks have to form a government. Once they form a government, the IMF, the Europeans are going to be in town negotiating hard, and will they be able to come up with something that actually makes sense for the Greek economy?
PAGESo, Markus, what implications do you see for the effort to keep Greece in the eurozone, to keep the economic situation on the continent from becoming worse? What are the implications of this vote?
ZIENERI want to reemphasize, actually, what Zanny just said. There was a sigh of relief last night. It was incredible. And whether you now can interpret this as another kind of kicking the can down the road situation or whether it's really something that's going to solve the Greek problem, that's up to anyone to decide that. But I think that there is a chance now, really, to at least buy some time. I mean, we've been there before. Actually, we've been there before, a long time, 2010, actually the whole thing started.
ZIENERIt looks like we haven't really moved further on quite a bit. But now at least Antonis Samaras, who is going to, maybe, to be the new prime minister of Greece, he is a European. He's committed to Europe. And also, Nick is right what he says in terms of there's a huge gulf between political parties in Greece. I mean, there has been so much change. I mean, if you look at the biography of Antonis Samaras, I mean, he has been against the bailout. Now, he's for the bailout. He has changed his positions quite a bit.
ZIENERAnd, in fact, if this is not going to happen, this -- the solving of the crisis, the consequences are so dire that this is going to form and to forge a coalition, I think, that will help this far to Greece. I think the Europeans now have to see what they can do in terms of easing their conditions. I think there is already some talk to be a little -- to give a little more of concessions to Greece. But I think these concessions will be only minor because they might set a precedent that is not really desired.
PAGEWell, Zanny, you're a former economist with the IMF. Do you think the IMF will be willing to take steps, encouraging steps for Greece given the outcome of this election or not?
BEDDOESI think the Europeans and the IMF -- which together that's called the troika, the European Central Bank, the European Commission and the IMF -- work together, I think they will go. There will be a good faith effort to negotiate with the new government. My suspicion is that -- to use the phrase that Markus has used, that is constantly used in this crisis -- the can will be kicked down the road a while. There will protracted negotiations.
BEDDOESAnd I suspect that some kind of -- at least in the short term, some kind of agreement may be reached. But I think that underlying it, Greece's economic problems are so deep that they will -- if they can be solved with Greece inside the euro at all, they will be only solved with more debt reduction, official debt reduction. That's more governments within Europe basically forgiving more loans, turning them into grants, making them much longer term because the Greeks can't possibly pay what they owe governments.
BEDDOESAnd the Greeks have already had their private debt restructured. They need to have the money that they've borrowed from other countries restructured, too. And if that doesn't happen down the road, I can't quite see how Greece works. But just one thing, I think that Greece's election became a kind of huge, huge flashpoint, a huge source of concern.
BEDDOESBecause the worry was that if this radical coalition Syriza got in and Alexis Tsipras, who is their leader, who kind of came from nowhere -- none of us had heard of him two months ago. Maybe Nick had, but none of the rest of us had -- and if he kind of won outright or won a plurality that there was a fear that Greece would be kind of on its way out of the euro within days. And we'd have a sort of Lehman style moment. That's now not likely to happen.
BEDDOESBut I think the reason that there' sort of a sigh of relief in financial markets has basically gone -- if you look even now -- I think all of the gains this morning have already been undone, you know, unbelievably short half-life. It's because there are huge problems and huge concerns in far bigger European economies, particularly Spain and particularly Italy.
BEDDOESSo the idea that Greece didn't push us off a cliff right now, but, my goodness me, that's a huge amount of other really, really huge problems out there that need to be dealt with very, very fast. So I wouldn't want to leave any impression that this has, in some way, kind of removed the sense of crisis over the euro. It's right there. It's enormous, and the euro is in terrible, terrible trouble.
PAGESo not pushed off the edge of the cliff, but still standing at the edge of the cliff.
BEDDOESRight on that edge.
ZIENERYeah. I think the core of the issue is whether we go now down the road, rules first or rescue first. I think this is really something that has to be decided. I don't think this is something really we can -- we'll see a step forward at the G-20 summit beginning today. But even more -- but more so actually at the end of this month, I think, with the new leaders are coming together for their summit at the end of June, they really have to see where we are going.
ZIENERRules first means do we have to have a fiscal pact because we really help the countries who are in need? Or can we rescue actually before these rules are in place. And the German position is very well known. Germany is advocating to have rules first because, I mean, you don't lend money if you don't know the conditions.
PAGENick, tell us what's the mood in Greece now among Greek voters as they look at this situation.
KARAMBELASI think exhaustion. They've been going through this recession for almost five years. And I think the rise of the Syriza party is an indication of how the political class which has been self-perpetuating since the fall of the military dictatorship in 1974 shows the -- how the people are voting against the existing class. However, 80 percent of the Greek populous wants to stay in the euro and continue using the euro.
KARAMBELASSo even the Syriza party has said, no, we want to stay in the euro, but we want to get rid of the austerity measures that have been imposed on Greece. Also note, the other complication in Greek politics is this present situation is not contemplated under the Greek constitution. The Greek constitution is structured so there would be -- always be two main parties. The party getting a plurality of the vote gets an automatic 50 seats.
PAGEWe're going to take a short break. And when we come back, we'll talk more about the situation in Greece and the implications for the rest of the Europe and for the American economy. And we'll soon go to the phones and take some of your calls. Our lines are now open, 1-800-433-8850. Stay with us.
PAGEWelcome back. I'm Susan Page of USA Today, sitting in for Diane Rehm. And with me in the studio: Nicholas Karambelas of the American Hellenic Institute, Zanny Minton Beddoes, the economics editor of The Economist, and Markus Ziener. He's U.S. correspondent for Handelsblatt. That's a German-language business newspaper. Now, Markus said before the break that the issue was which comes first, rules or rescue, and the Germans are saying rules have to come first. What do you think, Zanny?
BEDDOESWell, I wish it was that simple, and I think that Markus encapsulated rather well the German viewpoint. But the problem for me is that the German viewpoint basically runs the risk that there won't be a euro to rescue if you worry too much about having of all of the -- and I play rules. I assume you also mean political union and broader kind of political moves.
BEDDOESI think the reason there is such concern about the future of the euro is that investors outside of Europe and even within Europe don't see the political commitment within Europe to do the additional integration that is needed to keep the single currency together. They have monetary union, and it's become increasingly clear that they need to have, for example, a banking union. They need bank supervision, joint deposit insurance. They need the kind of infrastructure for the banks to go with the monetary union.
BEDDOESAnd I think there's also a growing consensus -- not complete, but a growing consensus that they need some form of debt mutualization. They need have joint liability, if you will, some kind of a treasury bond that jointly issue debt. And I think the German view is that may be all well and good, but we can't possibly do that till we have rules in place, until we have political union. This is a project of very many years.
BEDDOESI think the market view and a view of many others is that the Europeans have to show very clearly that they're going in that direction, and they have to do it fast, otherwise investors will completely lose confidence in the euro or in the single currency. So this summit at the next week, the -- I don't know, it's the 24th or 25th, Europeans are constantly having summits.
BEDDOESBut it's -- it really is a big summit because at the end of this month, I think if the Europeans don't make clear that they are moving towards some kind of a banking union and probably that they're going on the road to some kind of a joint debt issuance at some point, if they don't go down there, I think there's going to be a very big loss of confidence. And we're already seeing it in Spain, in Italy, and that the whole project is under threat.
PAGEWell, Markus, we see in The Wall Street Journal this morning an editorial that says that Angela Merkel, the German chancellor, might have preferred an excuse coming from Greek's elections to get -- to cut Greece out of the eurozone. The editorial says, "The Germans are beginning to conclude that Greece maybe unreformable." Is that true?
ZIENERIf you look at the numbers and the consequences of Greece exiting the eurozone and the cost for Germany, I think they're so high. And there are a couple of numbers floating around. One says it's roughly $900 billion only -- if we were talking only of the losses Germany has to deal with on a broad scale. I don't think there's really much of a desire actually to have Greece exiting the eurozone.
ZIENERFurthermore, I think that Europe and the eurozone is much more than just a currency union. It's a political project that has its flaws, and if you're referring to The Wall Street Journal, if you look at what Paul Krugman had been saying this morning, I completely disagree in kind of looking backwards all the time and contemplating about the flaws that had been made. We're doing that now since two years, at least.
ZIENERI think we have to look forward. We have kind of correct the flaws. We have to have the political union. There was an agreement in December of 2011. The EU actually agreed on the political union. They signed it on -- in March, and now it has to be implemented. If 12 countries of the eurozone -- the European Union actually assigning the fiscal pact, we are on the right track. I think we have a plan, and they have to stick to that plan.
BEDDOESBut that plan is the -- what was agreed was something called fiscal compact, which was a whole load of rules. And those rules are important, but it seems to me that this is a very one-sided approach. The Germans want more rules. They want more control over country sovereignty, and I think that's perfectly understandable. But they're unwillingly to do what is necessary in terms of banking union and in terms of support.
BEDDOESSimilarly, it parallels. The Germans want more austerity. They want more budget cuts, and they don't understand that the short -- or at least, if they do understand, they don't put much weight on the fact that the short-term consequence of that is weaker economies and worsening debt outcome. So I think it's the sort of one-sided focus of the Germans that is frustrating for many others watching this debate.
PAGEWell, Nick, what do you think? And do you think Greece is really at risk of being kicked out of the eurozone?
KARAMBELASWell, let's clarify one thing. There is no legal mechanism for Greece to be -- to involuntarily or voluntarily leave the eurozone. That doesn't mean that the other 16 countries can't somehow come up with the way of doing that. But right now, Greece would have to withdraw from the European Union under the withdrawal provision of the Treaty of Lisbon in order to withdraw from the eurozone.
KARAMBELASNow, one thing that the -- that I suppose could happen is the European Central Bank could just stop providing Greece -- the central bank of Greece with euros. That probably violates some provision of the Treaty of Lisbon, and Greece could probably take it to the European Court of Justice. But by the time we all retire, there may be a decision on something like that. So I think we ought to keep that straight, that when we talk about exit from the eurozone, any country -- for any country, it isn't -- cannot voluntarily or involuntary do that.
BEDDOESI think that's one of the reasons that people are concerned about messy this would be. I mean, the -- it is true that there is no legal provision for a country to leave the euro. Although I -- you're the lawyer, but I believe there is a provision for a country to leave the European Union. But in -- I think the way it would happen is -- you're exactly right. The European Central Bank, which is essentially keeping the Greek economy alive by providing it with liquidity, could conclude that it would be unable to provide further support for the Greek banks, for example, if the Greek banks were deemed insolvent.
BEDDOESAnd similarly, if the Greek government did not fulfill the provisions of its agreement with the -- its rescuers and they provided no more money, Greece would have to default on its outstanding debt obligations. And then the European Central Bank would be able to say, it's a country of default. We're not able to provide it with liquidity. So there is a kind of mechanism for how it would happen.
BEDDOESBut it would certainly be uncharted territory and incredibly messy. And that's one of the reasons that people are so worried about it, is they're worried about the cost not just of Greece, which is a pretty small economy, but the knock-on effect, the contagion effect to other countries. If one country gets kicked out or leaves, you know, what happens to Portugal? What happens to Ireland?
BEDDOESWhat happens to Spain and Italy? And they're the two big economies that really the ones that everyone has to really worry about. You know, Spain's debt yields right now -- Spain's borrowing costs are at a completely unsustainable level. Actually, and, frankly, I think so are Italy's. And unless they come down, those countries cannot survive in the European Union -- in the euro.
ZIENERTwo remarks. If it comes to the conditions of lending money, Zanny, would you hand out money first and talk about the conditions later? I guess not.
BEDDOESNo. I would -- I'm sorry. Now, quick -- just -- I would -- the Europeans have to decide whether they want to keep the euro together. If you want to keep the euro together -- and I would submit that that is the right thing to do in terms of the reasons for the integration reasons, the political reasons for Europe -- you have to commit to creating the necessary conditions to do that. And I think that -- I'm not clear that the Germans are willing to do that.
ZIENERAnd, secondly actually, we are talking here about austerity, and if you look at how much money Greece was either pledged or actually has received, we're talking about multiple times of the Marshall fund money, actually -- the Marshall Plan money Germany has received after the Second World War in today's values. So I think talking about austerity -- I always think this is not right. It's actually -- and even if you talk about Germany and austerity, Germany is still spending money. We're just not spending the money to -- at that degree as we did then in the past.
PAGELots of implications for Greece, for Spain and Italy, for Europe as a whole. Let's talk about the implications for Americans who are so concerned about our own fragile recovery from the Great Recession. What does this likely mean for the U.S. economy, Zanny?
BEDDOESThat's a very, very good question 'cause it must sometimes seem that this is an obsessive subject for people around the world economy and how does it really affect things at home. I think there are two important channels, and the immediate one is that a weak Europe hits the U.S. economy because it means fewer exports. It might mean a stronger dollar, as people worry about the euro and put their money into the dollar. So it hits the U.S. economy that way.
BEDDOESThe second effect, which I think is much more powerful, is the financial channel effect. If there is uncertainty about the future of the euro, if there is uncertainty that this crisis might cause a financial catastrophe bigger than Lehman, which I think is totally possible, then there is -- you know, it hits stock markets, it hits -- people become risk averse. Global investors go pile into U.S. Treasury bonds. That's exactly what we've been seeing.
BEDDOESAnd that the kind of cloud of uncertainty is hanging over the global economy right now. And if you look at the world economy, it's not just the U.S. economy that appears to be sort of sputtering. If you look at China, if you look at the big emerging economies, there's a huge slow down going around. The world economy is in a pretty fragile state. And the eurozone, the periphery economies of the eurozone already in deep recessions, the eurozone as a whole slowing, slowing fast.
BEDDOESAnd if you have this financial calamity in Europe, because global financial markets are so integrated, it would hugely hurt the U.S. economy. So it's -- everybody has a stake in the Europeans -- a very big stake -- in the Europeans sorting this problem out, which is exactly what Treasury Secretary Geithner and indeed the president -- the point they're making at the G-20 summit now is that this is a big, big, big deal for the world economy. It's the single biggest cloud hanging over the world economy. And I would submit that if it goes badly wrong, it will be worse then Lehman.
PAGEMarkus, do you agree?
ZIENERI agree in general. I mean, there's an upside here to the story. I think the United States is benefiting quite a deal from low interest rates. Timothy Geithner talked about that the other day. Because of the low interest rates, because the dollar is considered to be a safe haven, given all the troubles in the eurozone, I think this is a real benefit in terms of saving money.
PAGEAnd given the implication for the United States, Nick, is there anything that the Greece government would like the United States to do? Or is there anything the U.S. can do to affect the situation there?
KARAMBELASI think there's very little that the United States can do other than encouragement and support for reinforcing the plan, the reform plans, et cetera. There isn't a huge American investment in Greece. There hasn't been in many years. So other than, as I said, other than encouragement, there isn't much that the U.S. can do. However, I would like to drill down on the word uncertainty. I think it's even worse than uncertainty, talking about the global situation.
KARAMBELASI think the assumptions upon which the economy has been built, the world economy has been built, are breaking down. For example, Cyprus, which is now teetering on the edge, is -- the banks had bought Greek bonds, the bonds of a European Union country. What more conservative investment could that possibly be? And now they are facing a situation where their banks are at risk.
PAGEI'm Susan Page, and you're listening to "The Diane Rehm Show." Let's go to the phones and take some of your calls, 1-800-433-8850. We'll start with Kareem, who's calling us from Miami. Hi, Kareem.
KAREEMHi. Good morning. How are you?
KAREEMI have two questions. First, you spoke about the editorial and the journal about Merkel possibly using this as an excuse of excluding Greece from the EU. My question up front is what about political fatigue in Europe? I mean, have we reached the point that the rest of the countries in the EU are over this? How close are we to that? Second, with Spain's economic situation kind of looming, what takes priority?
PAGEAll right. OK. Kareem, thanks so much for your call. Who'd like to take this? Markus?
ZIENERPolitical fatigue, absolutely. I mean, we're talking about the euro crisis now for such a long time, and I think there's a sense, particularly in Germany, that we have to get over it. We have -- somehow we have to go a step further. And I think there is a sense of, if this is not going to work, then Greece has to drop out of the eurozone. With all the implications and if this continues -- and that's why I think that the elections we saw last -- yesterday were so important -- we might not have a second chance in terms of Greece. This has to work. That -- otherwise, I think patience is really running out.
PAGEZanny, do you see political fatigue?
BEDDOESYeah, I see fatigue of all sorts. I think that there is certainly fatigue in Germany with Greece. And I actually think that there is something, and I'm interested that Markus didn't seem to accept this argument. But it seems to me that there is an argument that many Germans think it would be easier to do the kinds of reforms that are necessary to keep the euro together if we made an example of Greece and kicked them out, kind of get rid of a bad apple, and then it's easier to pull others together.
BEDDOESI've definitely heard that from many Germans. I'm not sure I agree with it because I think the risks of trying to kick Greece out are absolutely enormous. But there are two other kinds of fatigue that are worth focusing on. One is reform fatigue in countries well beyond Greece but in the periphery of Europe that are undergoing incredibly tough austerity measures, that are seeing unemployment go up and up and up. Their economies sink.
BEDDOESI really worry about the rise of extremist political parties well beyond Greece. I think this is a potentially enormous risk that the price of, you know, 70 years of European integration, of this European project, which has wrought unbelievable successes in a continent, you know, that's been -- centuries being riven by strife. I think that's really at risk.
BEDDOESAnd I think that one problem is that there is an assumption amongst many sort of elites in Europe that actually these periphery economies can undergo austerity year in, year out, have incredibly tough measures for a long time. And I worry about political fatigue in those areas. And I think there's also a political fatigue in Germany. But I think it is one based on an incredible sense that this is a problem in another part of Europe, not a problem of their own.
BEDDOESThe average German doesn't, I don't think, really feel this crisis at all. The German economy is doing remarkably well. German unemployment is at a 20-year low. This is a crisis that is happening to profligate people, they think, in the south of Europe. It's not their problem, and I think that's an unbelievably shortsighted view that German politicians ought to be dispelling. They ought to be saying, this is totally -- we're in this together 'cause we would be hit really, really hard if this fell apart.
PAGEMarkus, is that the way you think a lot of Germans feel?
ZIENERI mean, in terms of the economic situation and how Germans actually are feeling the economic situation, absolutely. I mean, we are kind of living in an -- on an island of economic prosperity. And so what's really going on around Germany and other countries is not really felt. This is absolutely true. On the other hand, I think if there's no one really -- who's trying to stick to certain principles, at least if you bargain something, if you negotiate, you can't really kind of clear all your positions in the beginning.
ZIENERIf -- I think you have to stick to a couple of things, and then you can sit down at the negotiating table, and you have to talk what you can compromise on. And I think in terms of Greece, we are going to compromise. I mean, there are already signs that we might ease the timeline for Greece to adopt the implementation of reforms. So I think there is something going to happen here.
PAGENick, what about Zanny's point about the risk of a rise of extremist parties? I mean, 22 percent unemployment in Greece, that's really tough. Do you have concerns about that as well?
KARAMBELASWell, yes, and I think Syriza is an indication of that. Also, the rise of the Golden Dawn party, which is a, essentially, a fascist party, for the first time entered parliament in the May 6 election, lost seats in yesterday's election, just a couple of seats. But we've seen the rise of those kinds of parties. And as I said, bear in mind that Syriza is made up of 12 parties that is held together by the fact that Mr. Tsipras has given them a place in the government.
PAGEWe're going to take another short break. And when we come back, we'll go back to the phones and we'll read some of your emails. Send us an email at email@example.com. Stay with us.
PAGEWelcome back. I'm Susan Page of USA Today, sitting in for Diane Rehm. With me in the studio: Zanny Minton Beddoes, economics editor of The Economist, Nicholas Karambelas, legal counsel for the American Hellenic Institute, and Markus Ziener. He's the U.S. correspondent for Handelsblatt. We've been taking your calls. Let's go back to the phones. We'll take Albion (sp?) calling us from Los Angeles. Hi, you're on the air.
ALBIONFine, yes. No one seems to really considered the possibility that the creation of the euro itself was premature, that it was designed to accelerate European economic integration. In fact, perhaps a protracted period of further integration was needed before the euro was introduced. And maybe the states involved should contemplate an ordinary -- an orderly retreat back to national currencies.
ALBIONAnd there are historical precedents to this, the issue of Germany itself. The Reich mark was introduced in 1870 following German unification on the basis of 50 years of the customs (unintelligible), you know, where real integration was promoted. And maybe that's what Europe needs, a protracted period of further economic integration before it has a national European currency.
PAGEAlbion, thanks so much for your call. You know, this shows how some fundamental questions are being raised by the continuing problems in Europe. What do you think, Zanny?
BEDDOESWell, I think the caller raises a very interesting question, and I think -- I don't think -- I think most people would agree with him that, with hindsight, the introduction of the single currency was, in many ways, premature. But the problem is, you know, we've cracked the eggs, and we've got the omelet. And so, you know, what do you do now?
BEDDOESAnd I think the two words that the caller used, which I scribbled down, orderly retreat, you know, if we knew of an orderly way to unpack this in a way that wasn't unbelievably costly for the countries involved, for the world economy, for the global financial system, then I think people would be thinking of it very seriously. The problem is that we're in a situation where he's absolutely right. We have a single currency that in many ways didn't -- was introduced because there was a political belief that it would spawn real economic integration.
BEDDOESIn many ways, it didn't. And it was a kind of half-baked plan because it -- there were many parts of it, for example, as I said earlier, the banking union missing, so we have this thing that can't survive in its current form. But we also are pretty sure that unwinding it would, in fact, not be orderly but would be unbelievably chaotic and very bad for European political integration, I would submit. And so the question that people are trying to grapple with, I think, is, is there a way to create the minimal economic and financial integration necessary to keep this thing together?
BEDDOESOr is it, in fact, going to have to fall apart? And I -- if it was simple and easy and cost-free to do, we would be talking a lot more about it, but I think the concern is that it would be unbelievably costly to -- for it to break up. And therefore, the question is can the Europeans, given their overriding commitment -- political commitment to integration, which I think is really still there, can they create the conditions necessary to hold the single currency together?
PAGEWell, Markus, what do you think about the historical examples that Albion cited?
ZIENERI think that the introduction of the currency union is actually the most important European goal that had been kind of implemented and achieved. And if this is going to falter, it's much more than just a currency union faltering. It's -- just step back for a moment and just imagine what's going to happen in Europe if we're all going to return to our local currencies.
ZIENEREurope will be a different place now. Then Europe will get back, actually, to very domestic, very national-driven policies. This is really not what we want. And, I mean, this could lead to a situation, which actually was -- particularly we wanted to avoid in introducing this currency union.
PAGEBut both of you seem to say this would be very serious but not impossible. It's not impossible that this is going to happen.
BEDDOESI don't think anybody can look at what's happened over the last two years of this crisis and conclude that it is impossible for the thing to fall apart. I think it clearly is possible, and I think that many of the reasons financial investors are fleeing countries like Spain and moving out of countries like Italy is because they worry about precisely that happening. And then, of course, it becomes self-fulfilling.
BEDDOESThe loss of market confidence in the periphery economies in Europe is in large part because there is a growing fear that the Europeans will not be able to hold the single currency together. So, you know, we can argue about what the probability is, but the probability is most certainly greater than zero that this thing falls apart. But I would just underscore what Markus said. The costs would not be just sort of thinking through. There would be huge costs in terms of wealth losses.
BEDDOESAs, for example, all of German investments in periphery economy were certainly worth a lot less than they thought they were because the countries of Southern Europe, if they introduced a new currency, those currencies would depreciate dramatically against the deutschmark or whatever the new German currency was called. Secondly, the German economy will be hit very hard because its currency would be very strong. It's a very export-focused economy.
BEDDOESIts exports would be hit enormously hard, so you'd have big balance sheet effects and big ongoing effects on German exports. You'd have huge financial reactions that we've talked about. And then I think it's hard to see how the single market which is, you know, the European Union has a free market in goods, in labor, in financial services that survives because one of the reasons the Euro was created was because there was a lot of uncertainty and aggravation over the periodic depreciations of currencies when the European countries had their own currencies.
BEDDOESAnd it was basically to guard against that that they created the Euro. So you'd have that. And I think there's a real risk that the single currency falls apart, that the integrated market, the common market, the integrated labor market falls apart. And those are the building blocks of euro. They're the building blocks of the European Union, so I think it's really not a hyperbole to suggest that there is a risk, not a certainty. There's a risk that the very European Union doesn't survive this.
PAGEMarkus, did you want to comment? Yes.
ZIENERYeah, I just wanted to add that actually the introduction of the currency union was not the first thing we did. I mean, there was a huge deal of economic integration in Europe earlier. So historically, actually, we had it -- we had the single market -- European market. We had a lot of integration on various branches.
ZIENERSo this is supposed actually a very logic step to get to this point. But the problem now is -- and I think this is the daunting task ahead of the Europeans -- we have to give up sovereignty in terms of introducing a political union, having a ECB and other bodies that are actually able to sanction other countries who are not sticking to these -- to the rules and to what has been agreed upon. And this is still ahead of us.
PAGEECB being the European Common Bank.
PAGEYes. Nick, here's an email from Mary Ann -- and we've gotten a couple of emails that are along this theme. She writes, "This is an insane situation. Greece has to accept even more severe austerity, more people out of work just so the bankers that fuel the great recession continue to get their billions in bonuses. How does Greece ever get out from under its debts if its economy continues to contract? We figured out how to get out of the recessions and depressions back in the '30s. Why the willful ignorance on the part of the eurozone?" Is that sentiment, do you think, is widespread in Greece?
KARAMBELASI think it is. I don't know about widespread, but it is certainly sentiment combined with just the exhaustion that is going on there. Also, bear in mind, if you take the broader view of what's going on in Greece, there's also, at the same time, there's a renegotiation or a revisit of the social compact between the government and the people.
KARAMBELASAnd this happens every 30, 35 years. It happened in the U.K. from the end of -- from the late '40s to the late '70s. And the change that is going on in Greece, while the euro is the main issue, it's also this kind of a change that is going on. So, whether there was a euro crisis or not, this would have been happening.
PAGEAnd some concern, I think, about unions in Greece and whether they're going to be willing to go along with whatever it is, a new government, if one is formed, calls for doing, that there might be strikes, the unions can make it very difficult. What do you think about that?
KARAMBELASThat's certainly a concern. Even if a coalition is formed, a coalition government, the question is, can it govern? And the unions have very vested interests in the way Greece has been operating and could continue to bring the country to a halt because in Greece, when you strike, you don't strike against your employer. You strike against the government and against the government policies in the labor market.
BEDDOESI mean, I think the email that you've just read, that raises -- it does raise a very important point, which is that the collective focus -- and it's not just in Greece, but it's across all the economies of Southern Europe particularly -- on fiscal austerity and on budget cutting is -- and I think the word insane was used. But it is excessive because it does become counterproductive after a while.
BEDDOESIf you all try and cut your budget deficits and everyone is doing it dramatically to supposedly improve their debt position, the economy shrinks enough, your debt position gets worse, so it becomes completely counterproductive. That said, I think we have to be a little careful about exaggerating the, you know, Greeks as victims, Greeks did nothing wrong thesis. You know, Greece is profoundly uncompetitive economy, and it went on an absolute bender over the last 10 years after joining the euro because they suddenly had incredibly cheap access to foreign credit.
BEDDOESAnd what happened? The Greek state spent massively, and Greek -- particularly rich Greek taxpayers paid no taxes. So in Greece's case, the German stereotype of profligate governments in Southern Europe is actually true because that -- the Greek government was enormously profligate. And the Greek economy is profoundly uncompetitive, and it needs a huge overhaul. It needs, if you will, a kind of Margaret Thatcher, let's say.
BEDDOESYou need a massive structural overhaul of the Greek economy, which would be -- which is very, very tough do without a cheaper currency. So they're setting themselves a very -- a hard task to do it within the euro, and I think that they will have to have some austerity. But the caller is absolutely right that the overt -- this excessive focus on austerity is both sort of insufficient and counterproductive.
ZIENERYeah. I just want to add that I was -- and I think many Germans were very happy when they heard what Christine Lagarde said a couple of weeks ago when she was talking about tax collection in Greece. And she was saying, well, please, start paying your taxes. And I'm happy that actually the head of the IMF was saying that and not some German politician. I mean, I don't know why she kind of backtracked later on, but that's absolutely right.
ZIENERI mean, how can you talk about implementing a reform program if you're unable to collect your taxes? And we've seen that all over the place in many European countries, not at least in Germany. I mean, there's so many Greeks, Italians, Spaniards coming, buying real estate in Berlin and other places to kind of save their money from a possible collapse of the euro. So instead of doing that, they rather should stick to the reforms they have agreed upon.
PAGEIs that fair, Rick -- Nick?
KARAMBELASWell, one of the things to remember about the Greek -- Greece is the tax avoidance and tax evasion is almost as much a result of the tax system in Greece. You -- often times, you are paying taxes on income you don't receive. So that is one of the reasons. And there are -- now, there are...
PAGEAll right. And what does that mean you're paying taxes on income you don't receive?
KARAMBELASWell, there is the concept what's called notional income. For example, if you built your own house, the tax imposed would be -- well, you -- if you had hired five workers, they would've paid X amount of tax, and so we're going to charge you that tax. And there's -- there are other issues in the Greek tax system. It's very antiquated.
PAGEI'm Susan Page, and you're listening to "The Diane Rehm Show." Let's go to Matt. He's calling us from Bridgeport, Conn. Matt, thanks for holding on.
MATTWell, thank you. I just have a question. I don't see how the euro can really function at least in this present system, which you have the austerity members measured, but you don't have the ability to print cash and control your own country's currency. So if the German economy is strong but Spain is weak, Spain cannot print money in addition to cutting back on spending as, say, the United States did to fuel our economy, to lower the value of the dollar. So our goods and services are now cheaper, so naturally people buy those services and our exports increase.
MATTSpain doesn't have that ability now because of the euro. It might be great for Germany, but Spain needs to lower the value of her currency, and so does Greece and so does Italy. But they can't because they're tied into a stronger economy, and you've lost that fiscal tool that you used to have. You have the austerity, but you don't have the other key component, which should be being able to simply print money in your own and devalue your own currency. I don't see how that can work.
PAGEMatt, that's a great question. What do you think, Markus?
ZIENERThe caller is absolutely right. That's the nature of the currency union. You basically don't have that tool anymore of devalue and depreciate your own currency and kind of depreciate your way out of your problems. And that's why we're all talking about slashing cost, slashing labor cost, wages, all of that, which is very painful. And -- but this is basically the only way of getting competitive and of making up for that lack of devaluation.
ZIENERBut let me just say one more word on Greece here. I mean, I think that Greece had the chance of having low interest rates because they were part of the euro early 10 years ago. And, actually, they squandered this benefit when they were paying low interest rates, and they were not really using that for reforms. So in a way, they are haunted by their own mistakes.
PAGEYou know, Zanny, Great Britain decided not to join the eurozone, and they're sort of very pleased now. Last week, they announced some measures to try to insulate itself from what's going on. What do they decide to do?
BEDDOESWell, the Bank of England and -- the government, the Bank of England and the chancellor both, in the same night, actually, gave speeches announcing the measures, and there were sort of -- there were two big ones. One is that the Bank of England is going to extend cheap funding to banks in case banks' funding cost are going up because of concerns about contagion from the euro mess. And so this is basically saying, we're going to make sure the banks have liquidity if they need it.
BEDDOESAnd the second about which there isn't yet quite so much detail is an attempt to -- again, with the treasury and together with the Bank of England to provide banks that lend with longer-term cheap loans. And it's a way to try and encourage lending, get the banks to lend to the private sector because the U.K., although it's not in the euro, as you know is undergoing its own very tough austerity plan.
BEDDOESAnd so on the government side, there's a lot of spending cuts, and the U.K. economy is basically totally stagnant. And the government's logic is that they want to have a private sector investment boosted. And that they want to try and encourage banks to lend. And now it's not at all clear whether this works. And this, I think, gets back to the whole question of, you know, how much fiscal austerity can you and should you have when your economy is weak?
PAGENick, we were thinking the world was watching these Greek elections as to whether it would be a kind of turning point in a situation that's been so difficult. Is it -- do you think a turning point or does it just leave us in the same meddle we were in before?
KARAMBELASIt totally depends on whether the new democracy party, Mr. Samaras, can form a coalition. And that's where we are right now in the short term, totally depending on that.
PAGEWhat do you think, Markus?
ZIENERI'm not so pessimistic. I think they're pretty much aware of -- that this is the last chance.
PAGEAnd, Zanny, we'll give you the last word.
BEDDOESI'm really pessimistic. I hate to say that even in the morning after a Greek election, it was not as cataclysmic as many people worried about. I just look at Spain, I look at Italy, and I just don't see the Germans willing to do what is necessary to keep this thing together.
PAGEZanny Minton Beddoes, Markus Ziener and Nicholas Karambelas, thank you all for being with us this hour on "The Diane Rehm Show."
PAGEI'm Susan Page of USA Today, sitting in for Diane Rehm. Thanks for listening.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Monique Nazareth, Nikki Jecks, Susan Nabors and Lisa Dunn, and the engineer is Tobey Schreiner. Natalie Yuravlivker answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information.
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