As the war in Ukraine grinds on, a look at the economic battlefield and how the conflict might permanently reshape the global economy. Diane talks to Sebastian Mallaby, senior fellow for international economics at the Council on Foreign Relations.
European finance ministers failed to reach agreement on how to disburse Greece’s next installment of aid. The euro-zone ministers continue to meet in Luxembourg today. In a statement released early Monday, they demanded that Greece approve stricter austerity measures and reforms. The ministers also announced that they won’t decide on the parameters of a second round of aid, until July. The news was a blow to Greece’s government. In the last week, the prime minister faced public protests, a failed attempt at a coalition government, and a shake-up in his cabinet.… A discussion of Greece’s deepening economic crisis and what it could mean for world markets.
- Zanny Minton Beddoes Economics editor, The Economist; formerly, economist at the International Monetary Fund.
- Ambassador Vassilis Kaskarelis Greece's ambassador to the United States
- Jacob Kirkegaard Research fellow, Peterson Institute and senior associate, Rhodium Group, a New York-based research firm.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. A little more than a year ago, Greece received a deal for $157 billion from the European Union. But early today, European finance ministers delayed the next installment of those funds. In the past year, Greece imposed strict austerity measures and reforms, but it has not been enough. The country now needs a second round of aid.
MS. DIANE REHMJoining me to talk about Greece's ongoing economic crisis and how it affects the world's economy, Greece's ambassador to the U.S., Vassilis Kaskarelis, Zanny Minton Beddoes of The Economist and Jacob Kirkegaard of the Peterson Institute for International Economics. Throughout the hour, we'll take your calls, 800-433-8850. Send us your email to firstname.lastname@example.org. Feel free to join us on Facebook or send us a tweet. Good morning to all of you.
MS. ZANNY MINTON BEDDOESGood morning, Diane.
AMB. VASSILIS KASKARELISGood morning.
MR. JACOB KIRKEGAARDGood morning.
REHMI wonder if, Zanny Minton Beddoes, you could tell us what happened on Sunday when the European finance ministers met.
BEDDOESWell, they met, as you said, part of a two-day meeting. At the end of, I think, it was a seven-hour meeting, they decided that they were not going to say definitively that they would give Greece more money right now, that they wanted a commitment from the Greeks that they would support a plan that had already been agreed with the Greek government, that the Greek parliament would support it and that they have the confidence that Greece would actually do this.
BEDDOESAnd tomorrow, Tuesday, there is a vote of confidence in the Greek government. And next week, there will be a vote on this package in the Greek parliament. And so, basically, the Europeans were saying, we're not going to promise that we'll give you the money until we see that you are actually going to deliver parliamentarily and do what you say you're going to do by passing this package in Parliament.
REHMMr. Ambassador, what is Greece asking for?
KASKARELISGreece is not asking something new. There are no new demands, let's say. We have a very difficult economic situation that we are facing and the government has tried to handle since early 2010. In March 2010, the government and our partners in Brussels have agreed that Greece has to adopt and implement a series of austerity measures. It's a long-term program, let's say. We have signed a memorandum of understanding.
KASKARELISThe government has passed new laws and has implemented these laws with extremely tough austerity measures for almost all the period of 2010. Now, in 2011, we have to handle another issue, which is the privatization of state enterprises, mainly -- this is the main point, actually. And as you suppose -- understand, this is a very delicate issue. It's a tough issue because unions are involved.
KASKARELISThe unions are very strong. And up to now, we didn't have any popular unrest...
KASKARELIS...serious popular unrest until recently. So it's -- we have arrived at a turning point. And the government has to convince public opinion that we have to continue and take the necessary decisions on these specific issues.
REHMAmb. Vassilis Kaskarelis, he is the Greek ambassador to the United States. Zanny Minton Beddoes, she's economics editor for The Economist. Turning to you, Jacob Kirkegaard, how did Greece get to this situation?
KIRKEGAARDWell, I think how it got into it was really the sort of culmination of, I guess, I think it's fair to say literally decades of economics mismanagement. And it essentially led to the (word?). Of course, Greece initially had a number of economics successes as it joined the eurozone in 2001. But in many ways, I think, the problem with that was that Greece entered the eurozone at a period in which there was kind of a euphoria about the euro.
KIRKEGAARDAnd, therefore, Greece did so without having actually fundamentally reformed its economic model and Greek society to survive inside a eurozone in which, you know, you share your currency with very efficient and export-oriented countries like Germany.
KIRKEGAARDAnd as what -- what essentially happened with the end or with the Lehman Brothers collapse and the global financial crisis was that financial markets, having, I would say, basically been asleep at the wheel for 10 years in which time they had lent freely to Greece at very low interest rates, they woke up and said, look, what's going on here?
KIRKEGAARDWe -- this Greece turns out not to be a clone of Germany, and therefore, this is a country that needs very thorough economic reforms. And that's the process that we're in now. But, right now, basically what we're -- I think it's not terribly surprising, in my opinion, that right now, we have this situation.
KIRKEGAARDBecause if we look back at the program as it was designed, the original program from May last year, it was actually an incredibly optimistic program because it assumed that Greece were able after only two years of hard economic reforms essentially to go back to financial markets and say -- and place debt with private creditors.
REHMYou're saying there wasn't enough time to accomplish what it needed to do?
KIRKEGAARDYes. I'm saying that that -- that this was an incredibly optimistic and accelerated time table. And, therefore, the fact that we're now in a situation where the European Union specifically needs to come up with more money to fully fund the original program is actually not too surprising, in my opinion. And that's essentially what the longer term struggle is about -- what are the conditionality for additional European taxpayers' money to flow to Greece.
REHMJacob Kirkegaard, research fellow at the Peterson Institute for International Economics. Do join us, 800-433-8850. Zanny Minton Beddoes, you want to add to that?
BEDDOESYeah, I think Jacob laid out how Greece got into this mess very well. And I think, at the risk of simplifying a little, Greece basically has two very big problems. It's completely uncompetitive. It's the most sclerotic economy, with respect to the ambassador, pretty much in the eurozone.
BEDDOESIt's very inefficient. It costs too high to survive within a single currency. It can't compete within that single currency. It can't grow fast without really big structure reforms. It needs to overhaul and to privatize a lot of things, open up a lot of industries that are very inefficient. It needs a thorough going kind of house cleaning, if you will, of its economy. At the same time, I think it's bankrupt.
BEDDOESIt's basically bust. It owes 150 percent of its GDP in debts. And that was fine when investors were prepared to lend very low interest rates when they thought that basically Greece was pretty much like Germany. Now, investors have decided that Greece is actually not like Germany. It's a slow growing, essentially bankrupt place. Their interest rates are going very up, very high. So that's why last year, the European Union had to come in and provide them with funds.
BEDDOESAnd the diagnosis made by the Europeans and the IMF, was that this was a temporary problem. They -- it was a liquidity problem. They needed some temporary money to get through the next few years while they sorted out their economy, and then everything would be fine. And I think one of the fundamental questions I've long argued is that Greece is not fine.
BEDDOESGreece is insolvent. And Greece, therefore, needs to have, I think, its debt rescheduled in some form at some point. And I think the big uncertainty underhanging -- overhanging everything that we're discussing right now is two questions. Will the Greeks be able to deliver on the economic reforms that they absolutely have to do? And will a sustainable way to reduce that debt burden be found?
BEDDOESAnd that's the other part of the discussions going on in Europe because the Europeans are terrified of that because European banks owe -- hold a lot of Greek debt.
KIRKEGAARDNo. I guess I just wanted to add -- and I basically agree with most of what Zanny said -- but I will just say that this issue about whether Greece faces a liquidity or a solvency issue, it sounds like it's a very easy thing to distinguish. But, actually, I would argue that it's not.
KIRKEGAARDAnd one of the things that we are talking about here is that, yes, there is an element of "kicking the can down the road" by postponing what is -- and I would agree with Zanny -- and a quite -- a strong likelihood that Greece will ultimately have to restructure some of its debt. But the issue here is that it's not so much kicking the can down the road to try to have Greece itself, perhaps, avoid that fate.
KIRKEGAARDWhat the European Union and the IMF are really trying to achieve here, in my opinion, is actually to basically make the broader European economy more resilient to such an event, so that in -- if and -- or when Greece goes into a restructuring process, then the risk of contagion spreading from Greece to other European countries and, first and foremost, here -- I would single out Spain -- is much more -- is much reduced compared to what you would do -- what could happen if you were to do a Greek debt restructuring today.
KIRKEGAARDAnd that actually is the broader advantage, in my opinion, of postponing, in some respect, the inevitable.
REHMNow, didn't we see a breakthrough in talks when Germany said we'll relax some of our demands?
KIRKEGAARDYeah, I mean, I think in many ways, this was -- it was presented in the press as German -- a German climb-down. But I think it needs to be put -- kept in perspective here that, actually, this was a climb-down from a position that Germany itself has created. So Germany -- the German finance minister, about three weeks ago, came up with his very far-reaching proposal that made it very easy for him to sort of say, okay, I'll just settle for 50 percent of that.
REHMAnd we'll talk further about that after a short break.
REHMAnd as we talk about the debt crisis Greece faces, Amb. Vassilis Kaskarelis is with me. He is the Greek ambassador to the U.S. Also, Jacob Kirkegaard at the Peterson Institute for International Economics and Zanny Minton Beddoes, economics editor for The Economist. We're going to open the phones very shortly. Here's an urgent AP message.
REHMIt comes from Luxembourg, where the IMF, the International Monetary Fund, is warning that Europe's dead -- debt crisis could have large global spillovers if bolder action isn't taken. The warning comes as the international crisis lender and the eurozone working on clearing the next euro 12 billion installment of bailout loans to Greece. The money is needed to keep Greece from defaulting on its debts.
REHMMr. Ambassador, what has Greece done, thus far, to try to get beyond this crisis?
KASKARELISGreece has done plenty of things, allow me to say. And this has been recognized by our European partners and by the IMF. In a very short period of time, as I told you before, the government has passed new laws and has started the implementation of extremely tough austerity measures. Just to give you...
REHMAnd replaced your finance minister.
KASKARELISReplaced the finance minister, but, in the meantime, the government has cut down 20 to 30 percent salaries, 15 to 20 percent pensions. They have increased retirement age. They have passed a law decreasing the number of municipalities by 70 percent. I mean, measures that -- when I refer to my interlocutors, let's say, at the Hill, they all tells me -- tell me that if this would have happened here in the states, we would have a real revolution.
KASKARELISAnd we've seen what happened in Wisconsin, and in Wisconsin the decision affecting people were very limited. So in a very short time, the government tried not only to implement these measures, but also to try to change the way of life and mentality of ordinary Greek people because everything is interconnected.
REHMBut, clearly, not enough, Zanny, and not enough for Germany, not enough for the IMF, and one wonders about the comparison between raising the debt limit here in this country and what's happening in Greece.
BEDDOESYou know, Diane, I think that's a really interesting parallel, and it's one that both -- I've been thinking about quite a lot because it seems to me, on both sides of the Atlantic, we have potentially disastrous situations because of political brinkmanship, which don't need to be disastrous. In both cases -- certainly in the U.S. debt limit case, but I think even in the Greek problem, if you will, and the Greek issue, there is a way out, and there is a way forward.
BEDDOESBut political brinkmanship, both domestically in Greece and particularly within the eurozone, between the European Central Bank, between the Germans, they're creating huge amounts of uncertainty. They're making this as complicated as they possibly can, and they're raising the stakes to an unnecessary degree.
REHMHow is that political brinksmanship working in Greece?
BEDDOESWell, I would defer to the ambassador. But from the outside -- and I'm no Greek specialist -- I think there's two kinds of brinkmanship going on. I think, clearly, as he very eloquently described, the Greeks have actually done a lot. And it's often forgotten in this that the Greeks have done quite a lot of reform. And the economy is hurting, and people are hurting. And these are very politically tough things to do.
BEDDOESAnd they've just got in their reform stage. They've got to the kinds of reforms which really hurt the party, the ruling party's political base. And so there's a lot of optimism -- opposition to doing this. And, I think, within Greece, there's a very -- a big calculus going on. You know, they're saying that if I owe the bank $100, it's my problem. If I owe them $1 million, it's their problem.
BEDDOESI think there's a bit of that going on because the Greeks, frankly, are in a rather strong position because, if the Europeans, as they keep saying, say that a default by Greece would be the end of the world, a catastrophe, then the Greeks can say, well, sorry, we actually can't do very much more, and dare the rest of Europe to not give them any more money.
KIRKEGAARDWell, just quickly. I mean, again, when you're looking at the Greek domestic situation from the outside, it really is, to me, quite striking that there has been -- given the dire straits of the Greek economy and Greece itself right now -- that there has been no national unity government. I mean, I regard that as a really seminal failure of the Greek political class.
KIRKEGAARDAnd I really -- I think -- I do want to single out the fact that you, right now, have the main Greek opposition party basically opposing -- at least in public -- opposing the IMF program and the associated reforms, which everyone knows that Greece has to implement, while going around and telling the Greek population that we're opposed to this. We want new elections. And after those elections, when we are in power, we're going to go and renegotiate this IMF European reform program, which is, you know, flat-out a lie.
KIRKEGAARDYou know, this is the kind of political brinkmanship that you see. And I -- it is really -- when you read the European -- the Eurogroup's statement today, where they, again, call for national unity in Greece, it is striking that -- especially when you also compare it to what we've see in Ireland and Portugal. In Ireland, after the election, you actually had a new majority coalition.
KIRKEGAARDWe have a -- similarly, just a few weeks ago in Portugal, you had a strong vote in favor for a candidate from the center-right party that actually campaigned on implementing the entire IMF program. So the domestic politics in Greece and the rest of the European periphery is, really, strikingly different.
REHMExplain to me how Angela Merkel's statement that the private sector would not be forced to share in the second bailout, how did that affect this negotiation?
KIRKEGAARDWell, I mean, that statement certainly was crucial because it was sent -- it was intended to allay the fears or sort of solve the crisis between the European Central Bank and Germany in particular, where the German -- as I said earlier, the initial German proposal by Finance Minister Schauble, about three weeks ago, would essentially have been tantamount to a Greek debt restructure or default, if you like.
KIRKEGAARDAnd this was something that the ECB was very strongly opposed to. Now, what Angela Merkel is now saying that is essentially -- well, we want something associated with what they refer to as the Vienna Initiative, which is not -- you do not restructure existing bonds. But what you do is you ask banks and other private creditors when they have their existing Greek government debt paid out at par as these bonds expire.
KIRKEGAARDWell, they don't take their money and leave Greece. They actually buy new Greek government bonds obviously at rates much lower than current market rates. So it is going to be a very tricky legal and political issue whether or not you can actually carry out such a voluntary debt rollover without it being declared a default by the credit rating agencies.
BEDDOESYou know, there's a lot of kind of complicated details about, you know, Vienna-Plus Initiatives, and the -- but it seems to me that, at core, there are two basic -- two choices. If you agree, which not everybody does, but if you agree that Greece's debt is unpayable, there are -- or at least not completely payable -- there are two choices.
BEDDOESEither the Europeans have to transfer money to Greece so that Greece can pay off its bondholders, or the private bondholders have to take a hit. And the problem in Germany and the core of Europe is the Germans, in particular, but the North Europeans broadly, their people, the electorate, does not want to give large amounts of money to Greece.
BEDDOESAnd at the same time, the kind of elites are terrified about the fact a Greek default would hit banks in Northern Europe. And so they don't want either a default, nor do they want to give them the money. And so we have this kind of kicking the can down the road that continues.
REHMAnd, Mr. Ambassador, you must be awfully concerned about the protests in the street about how the people themselves are reacting, how they're feeling, how they feel the pressure put on them.
KASKARELISActually, yes, I'm very concerned. But I would like to point out that, for over a year, people have not reacted to the tough austerity measures. But we have arrived at a turning point. People are tired from the fact that corruption and tax evasion is not handled the right way. And I strongly believe that people react to this specific fact nowadays.
REHMAnd when you talk about corruption and tax evasion, are you talking about throughout Greek society or only a portion thereof?
KASKARELISThroughout the Greek society, but a portion of the society is in a better place than the others, let's say. The -- just to give you an example, because I have served for six years in the European Union before coming to Washington, I remember that we had submitted to the commission, economic data, according to which the -- in the Ministry of Finance, we had audited and ready for collection some 40 to 50,000 cases representing 60 billion euros.
KASKARELISSo can you imagine if there would be a mechanism to collect this money in Greece, we wouldn't have needs -- all these money coming from Brussels. And this is a point that I wanted to make before on the uncompetitiveness of the Greek economy raised by Zanny, is that you have -- it's a very sui generis case because you have rich people in a poor country. We have to restructure the system. We have to implement laws and change the mechanism.
REHMAnd do you believe the Greek people are prepared to do that?
KASKARELISI believe, yes, that Greek people understood, last year, that this is it. We have to change. And this is why there was no popular unrest for over a year -- actually, a year-and-a-half. We have had a couple of demonstrations with some thousands of people, but that was it. So this gives you a picture of the situation in Greece.
REHMAmb. Vassilis Kaskarelis, he is the Greek ambassador to the United States. And you're listening to "The Diane Rehm Show." We have many callers waiting. I'm going to open the phones. First to Jacksonville, Fla. Good morning, Lynn. You're on the air.
LYNNGood morning. Thank you. I won't mince words. I think, for too long -- I've been watching this since last year as well -- that many private investors, particularly hedge funds and large banks, have continued to operate as if there is no such thing as risk. They bought the bonds at very low par values, so that there would be high yields. It is time for the Greek people to play poker with them.
LYNNIt says -- your panelist from The Economist had said there, you know, if you owe the bank $100, it's your problem. If you owe them, well, in this case, over 400 billion, it's their problem. It's really time to step up and help private investors to realize the sting of risk. They weren't paying any attention, and they just think someone's going to protect them.
REHMAll right. Zanny.
BEDDOESWell, I agree very much with the caller. But there is a sort of complicating wrinkle, which is that most Greek debt is held by European banks. Some of it is held by hedge funds, but a large chunk is held by European banks. And so, if you have a default on Greek debt, if you write down the value of Greek debt considerably, some European banks are going to be hit very hard.
BEDDOESAnd that's one of the concerns -- that's one of the reasons why European policy makers don't want to see a default. It's complete self-interest. It's actually not huge altruism that is driving, say, the German focus on avoiding default. There's a lot of self-interest in this. There is a belief that it is -- it will be less painful for their own domestic banking systems and less risky for the eurozone as a whole to put off or to avoid a default.
BEDDOESBut I -- basically, I completely agree with the caller. I think there has to be a restructuring, and you can do it in an orderly way. It doesn't have to be chaos.
REHMAll right. To Dallas, Texas. Good morning, Max. You're on the air.
MAXHi. Yes. Great show. Enjoying the subject matter, and I'm going to join the experts. I lived in Greece, studied there when I was a student, art history. And I was really wondering what you all felt about the relationship between what's going on in Greece with the economy and how they're approaching that issue of the economy with privatizing the health care and dealing with the debt, and compare that to what, I guess, is going on in America and how we're dealing with our own economy and health care and other issues like that.
REHMThanks for calling. Jacob.
KIRKEGAARDWell, I think that, as the ambassador and others have said earlier in the program, I think -- I do think that privatizations in Greece has to play a very large role in put -- in turning the Greek economy around. And I also don't think that it's really -- despite the sort of overlap in terminology implied by the caller, it's very different when you talk about privatizing health care or Social Security in the United States.
KIRKEGAARDNobody is talking about that kind of privatization in Greece. What you're talking about is basically selling off very large numbers of state-owned companies and a lot of state-owned land in Greece, you know, the state-owned telephone companies. The Greek government owns most of the railway systems, the post office and these types of things.
KIRKEGAARDAnd I think that's crucial, but I -- but it is a very different type of privatization program than anything that is, you know, debated occasionally in the United States.
KASKARELISI fully agree. And, actually, if I can add to what I was saying before, is that if you put together tax evasion and privatizations, you can even avoid default because the amount of money that we've flowed to the budget, it's huge. We have taken, last year, 110 billion euros as a loan from our partners in the IMF. And if we manage to sell or to privatize some of the state enterprises and collect taxes, we arrive at the same amount of money.
REHMAmb. Vassilis Kaskarelis, he is the Greek ambassador to the United States. We'll take just a short break here. When we come back, more of your calls, your email, your tweets and your postings on Facebook.
REHMJust before the break, we were talking with Amb. Vassilis Kaskarelis, the Greek ambassador to the U.S., about some of the measures that could be taken to avert a debt crisis, to avert default in Greece. And yet, Zanny Minton Beddoes, one of the things he was talking about was taxing where appropriate.
REHMYou were talking about the number -- this is such a small but significant factor, the number of swimming pools declared in Greece and the number that apparently actually exists.
BEDDOESYeah, I'm going to get the exact number. It's not quite right. I don't remember the exact number, but it's something of the order -- in Greece, I think, you have to declare on your tax returns if you have a swimming pool. And Athens has, what, six million residents. And I think it's something like, you know, 300 people declared a swimming pool.
BEDDOESAnd, actually, there's -- if you took an aerial photograph of Athens, it's quite clear that there are many thousands of swimming pools in Athens. And so there are clearly only a tiny fraction of people who have swimming pools declare them. And it's sort of symptomatic of a really entrenched sense amongst affluent Greeks that, you know, only patsies pay taxes.
REHMIt doesn't matter.
BEDDOESYou know, you're a patsy if you pay taxes. Nobody pays taxes. What's taxes?
REHMSo if you imported laws, as the ambassador suggests, from the United States, imposing fines on those who don't pay taxes, how long is that going to take, that kind of reform, Jacob?
KIRKEGAARDWell, I think the problem is that, you know, you can import the laws. But I think, in many ways, actually, the laws are there in Greece already. The problem is that the Greek legal system is not imposing them. And the Greek tax collection -- the Greek version of the IRS is not actually going after these people. And, now, time is at a -- is really at a premium.
KIRKEGAARDBecause even if you had identified these, as Zanny said, these many thousands of Greeks in Athens that have undeclared and have not paid taxes on their swimming pool, if it were to, say, take four to five years to go through the legal system to actually force these people to pay up, then it will be too late because the revenues would not be flowing at the time that it's needed.
REHMBut how large is the tax problem, overall, Zanny?
BEDDOESI think the inability to raise revenue is a big problem. I think it's very politically important because, as the ambassador was saying earlier, part of the reason, I think, there is growing political resistance to these austerity measures is a sense that ordinary people are suffering from the spending cuts. And rich people are not suffering because they're not paying anymore taxes.
BEDDOESSo -- and this is a naive journalistic view, but I think what they basically need to do is lock up, you know, some prominent Greeks. Have some prominent Greeks done for tax evasion very prominently, and that will send a very, very powerful signal. It will solve the problem.
REHMDo you see that happening, Mr. Ambassador?
KASKARELISYes. I think this is approaching. I mean, we will come at a certain point that you will see such photos on Greek media and newspapers.
KASKARELISBut I would like, if you allow me, to raise a directly linked issue, and this -- what we are discussing -- and this has to do with the ability of E.U. to handle such crisis. The E.U. because a lot has been said recently that the E.U. is falling apart, that Greece is defaulting, that Spain is at the brink of default. So what I would like to point out is that in the European Union, decisions are taken in a slow motion.
KASKARELISAnd the reason is very simple because you have 27 member states, 27 representatives sitting around the table. And all the decisions are taken with consensus. So you have to spend long hours, weeks, sometimes years. It took a couple of years to arrive at the adoption of the new, what we call constitutional treaty after two failed referendums in France and the Netherlands.
KASKARELISSo what -- why am I saying that? Because since last year, most of my interlocutors here in the States are telling me that it's a matter of weeks for Greece to default. And since last year, I was -- I'm keeping -- telling to everybody that this is not the case. Actually, this could be the case. If you base your assessment on purely economic data, you are right.
KASKARELISBut you have, always, to include to this equation the political parameter called European Union, which is a complex parameter, but changing, totally, the overall picture.
REHMAll right. We have an email from Collin in Florida, who says, "Why does Greece's financial situation have such a significant effect on the U.S.A. stock market. It has a relatively small footprint and influence on the world and America's financial health." Jacob.
KIRKEGAARDWell, I think the issue here is really one of contagion. As we talked about it several times, it's not Greece itself. It's what it could potentially do to the European banking system, as well as larger countries in the eurozone, such as, first and foremost, of course, Spain. If you had an "accident or an uncontrolled credit event" in Greece, that would seriously potentially undermine the confidence in the European banking system, as well as some of the other larger countries in the eurozone.
KIRKEGAARDAnd if that happens, well, then quite clearly that the exposure of U.S. financial institution -- now, I probably don't think it will happen, but if it were to happen, that's what financial markets in the United States is fearful about -- its contagion, not Greece itself.
REHMAll right. To Blue Ridge Summit, Pa. Good morning, Steve.
STEVEGood morning. I have a question about entitlement programs. I haven't heard anything mentioned about that. Historically, to what extent have the liberal entitlement programs such as retirement been a factor in this current financial situation?
BEDDOESWell, in Greece's case, Greece's entitlement programs are a part of their fiscal problem. But Greece, actually, over the past year, introduced -- raised the retirement age -- and the ambassador will correct me if I get the amount wrong -- but really very significantly, and there was a big overhaul of the retirement plan.
BEDDOESAnd one of the interesting things is that, you know, if you compared this back to the U.S. -- and I think there are very big differences, but very interesting parallels about how countries are forced to do very dramatic fiscal adjustments. And the Greeks did do a lot of things, as the ambassador said, that, you know, if you tried to do them in this country, there would be a revolution.
BEDDOESThere was -- there's been a huge amount done in terms of belt-tightening, in terms of dismantling things that they can't do. But as we've been discussing, they need to do a heck of a lot more. But, I think, to your point, it wasn't only entitlement programs. I mean, here in the U.S., basically, the fiscal problem is essentially an entitlement program problem. Greece has many more fundamental problems with its economy.
BEDDOESIt is a very rigid economy. It needs to be overhauled. It needs to have more competition. It needs to become more competitive. Those are -- the U.S. has many problems, but it doesn't have those ones. So, I think, on the fiscal side, you can make some comparisons but not more broadly.
KIRKEGAARDWell, I guess I would just add to Zanny, and perhaps disagree slightly with it, and saying that in the case -- in Greece, the revenue problem from, you know, rampant tax evasion from, you know, a large part of the, at least, affluent segment, but I would contend that the revenue -- I believe there is a revenue problem in the United States as well, which is partly responsible for our fiscal situation.
KIRKEGAARDAnd we need to remedy that revenue -- that revenue problem just as we need to raise more -- collect more taxes in Greece.
REHMTell me, Mr. Ambassador, what the normal retirement age in Greece was and now is.
KASKARELISIn some cases, the early retirement was 55, in some cases. But the vast majority of workers used to work for 35 years. And this is also the case for the civic servants. And anyway, now, the retirement age has increased...
KASKARELIS...across the board...
KASKARELIS...to 60 -- between 62 and 65.
BEDDOESJust another little vignette. As I understand it, you could take early retirement if you worked in a dangerous profession. And dangerous professions included hairstylists, hair colorists because hair colorists would be exposed to very dangerous chemicals.
REHMInteresting. All right.
KASKARELISThis is exactly the example that was used last year at the Senate during a long debate. And a senator has spent over a minute of his intervention explaining how the system works for Greek hairdressers. And the point, of course, was not Greek hairdressers or when they take their retirement. It was just to criticize the policies adopted by this administration. And the bottom was, you see, this administration is leading us the same road that Greece is.
KASKARELISBut that's -- I mean, that's a different (unintelligible).
REHMBut, Mr. Ambassador, tell me what difference you believe a brand-new finance minister can or will make.
KASKARELISThe new finance minister is an old politician, very experienced, with a lot of party power, let's say. So it will be easier for him to not to impose but to convince members of the ruling Pasok Party to vote for the medium term plan and to vote for the adoption of new laws providing new austerity measures.
REHMAnd how will the people respond?
KASKARELISThis is a question mark. I hope that the people will respond positively. Up to now, people, as I told you, have supported the government efforts not because they belonged to this specific party, but people in Greece understood that we have to adopt changes. And that was the approach up to now. So I hope that people will react the same way during the next months.
KIRKEGAARDYou know, I think I would just say that the problem that the new Greek finance minister and the entire Greek government faces is the problem that all governments that are faced with these kinds of reform, crisis-induced reform demands faced, which is that you never get any political credit for avoiding a much worse outcome. That's really the key here.
KIRKEGAARDBecause if the alternative of doing not -- of not implementing the Greek IMF reform program would be a messy Greek default, which would mean, you know, the collapse of the Greek banking system and, in a sense, the collapse of the entire Greek domestic economy.
REHMJacob Kirkegaard of the Peterson Institute for International Economics, and you're listening to "The Diane Rehm Show." Jacob, when we talk about the euro, how do you expect the instability right now going on in Greece to affect the euro?
KIRKEGAARDWell, I don't think there's any doubt that, in the short term, because of all the uncertainty and the potential for contagion, that is going to weight negatively on the euro. But at the same time, I think that this crisis as a whole, as it had unfolded in the last couple of years in the eurozone, is actually a long term benefits -- significant benefit for the euro because it is -- the case is that, as a result of this crisis, what we are seeing in Greece now, a lot of very deep, far-reaching long term structural reforms being implemented.
KIRKEGAARDThat's true in Portugal. That's true in Ireland. That's also true in a more voluntary fashion in Spain. We've seen retirement ages being raised in France and other things. So that the fact that European politicians now know what will happen if you have too long a period of irresponsible fiscal policies has actually meant that, I believe, that in many ways, this crisis has not been wasted, that the response has actually been quite forceful in the long run.
KIRKEGAARDIt doesn't mean that Europe is in any way out of the crisis yet. It hasn't been solved yet. But a lot of long-term structural and beneficial measures have been taken. And the other thing that I just want to add is that this crisis has also -- will also result in significant additional economic integration at the eurozone level, something that was missing when the euro was first introduced.
REHMAmb. Kaskarelis, has the criticism against Greece been fair?
KASKARELISWell, up to a center point, yes. But it has driven out of proportion for a very simple reason, is that hundreds of billions of dollars have been invested on the default of the euro last year. And that's the time the case -- I mean, Greece was the weakest link of the eurozone, so all the pressure from these interest groups were focused on Greece. But the real reason is the default of the euro. This is what I strongly believe.
REHMSo do you believe if the IMF does come true with all the money, that Greece will be able to pay it back?
KASKARELISI believe, yes. Not the IMF, but our European partners mainly because the IMF is covering only a part of the loan. But I believe that in the long term, yes.
REHMLast words, Zanny.
BEDDOESI don't know where to have a last word on. I guess to respectfully disagree with the ambassador, I think, there is almost no way that Greece will pay this money back. And it will either/or become official lending which will then turn into grants from the Europeans. And very briefly on -- I love Jacob's optimism about Europe, but I -- and he's clearly right that this crisis is going to fundamentally change Europe.
BEDDOESBut I think there's at least as big a chance that it changes it towards something very, very dangerous than that it changes it to a greater fiscal union. And we may have countries that are not part of the Euro in five years' time.
REHMZanny Minton Beddoes of The Economist, Jacob Kirkegaard of the Peterson Institute and Amb. Vassilis Kaskarelis, the Greek ambassador to the United States. Thank you all so much.
BEDDOESThank you, Diane.
REHMAnd thanks for listening, all. I'm Diane Rehm.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth and Sarah Ashworth. The engineer is Tobey Schreiner. Katie June-Friesen answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales.
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