MS. DIANE REHMThanks for joining us. I'm Diane Rehm. German lawmakers vote tomorrow on a plan to boost Europe's bailout fund, but many believe even more money will be needed. Yesterday, the great parliament raised property taxes, a deeply unpopular move but only part of what's required to qualify for the next round of rescue funds.

MS. DIANE REHMJoining me in the studio to talk about the European debt crisis and its worldwide implications: Scheherazade Rehman, she's professor at George Washington University, David Smick is a macroeconomic consultant, and Patrick Welter of Frankfurter Allgemeine Zeitung -- that's a German daily.

MS. DIANE REHMBefore we begin our conversation here in the studio, we're joined by Alkman Granitsas on the phone from Athens. He's Athens bureau chief of Dow Jones Newswire and a contributor to The Wall Street Journal. Good morning to you, sir.

MR. ALKMAN GRANITSASGood morning.

REHMTell me what the reaction has been to yesterday's vote.

GRANITSASI'd say the reaction to yesterday's vote has been a sigh of relief. The vote -- is deeply unpopular and is causing grumbling in the population. But, first and foremost, the vote yesterday was seen as kind of a vote of confidence in the government. The current -- the socialist government currently has just a four-seat majority in parliament.

GRANITSASAnd many people are wondering when these austerity measures might actually force -- might actually cause an open revolt in the government. That, of course, would mean the government would come down, and there would be -- have to be elections here in Greece, which is about the last thing the country needs right now in the middle of a crisis.

REHMSo you think there has been a sigh of relief. But what do these new taxes mean to average Greek citizens?

GRANITSASWell, that's a different part of the equation. And there is a great deal of unhappiness in Greece right now, not just with the property tax but with a variety of measures that the government has taken or says it will take in the next couple of weeks in order to qualify for that next aid tranche, as you mentioned. In the case of the property tax, specifically, what it is is a tax that averages about four euros per square meters.

GRANITSASSo if you have a 100 square meter apartment, you're going to pay 400 euros of taxes. But it ranges. It goes from a low, poor neighborhood of 50 cents per square meter to a high of, I think, about 16 euros in probably the ritzier parts of town. The thing is it's -- the tax that's coming on top of a series of other taxes, everything from sales taxes, jewel tax, cigarette taxes, personal income tax and everything.

GRANITSASA series of taxes that have taken place in the last -- have been implemented in the last couple of months, and this is just the latest and perhaps the drop that -- sorry, the straw that breaks the camel's back for many people.

REHMBut I gather there are even more measures to come.

GRANITSASThat's right. I mean, this is only part of it. What the government has already said is it's going to essentially lay off tens of thousands workers in the civil service, so that's one thing. Obviously, civil servants aren't very happy about it. They've also said they're going to cut pensions, particularly for people earning generous pensions.

GRANITSASThere's going to be a new tax also on the working poor. The taxable income threshold has been reduced, or will be reduced, by more than half. So all of these come on top of already cuts -- deep cuts in pension, deep cuts in civil service salaries, new taxes, left, right and center. So the latest austerity measures are being treated with, understandably, a great deal of unhappiness.

REHMNow, in yesterday's Wall Street Journal, there's a photograph of a woman in Thessaloniki burning emergency tax notices to protest what's happening in Greece. Are you seeing any other protests on the streets today?

GRANITSASOh, most definitely. The main event today in Athens is that we're in the third day of a mass transit strike and the worst of the three days. So we've had traffic snarls, chaos on the streets here for -- all day long, particularly during the morning rush hour. On top of that, tax officials are striking because they're about to get their salaries cut. Customs officials are striking.

GRANITSASFinance ministry officials are striking. Tomorrow, doctors are staging a walk out, nurses on Friday, some journalists tomorrow -- it's everyone.

REHMSo what is that going to mean for order within the Greek society?

GRANITSASWell, that's a very good question. We're very much living day by day here. As I mentioned at the beginning, one of the issues is whether or not the current government, which is very unpopular -- it only has about a 15 percent approval rating -- is going to last much longer. And even though nobody's happy with the government, they also recognize that some of these austerity measures are unavoidable.

GRANITSASAnd they're quid pro quo for Greece getting more aid and basically avoiding a default. So nobody's happy about the measures. No one's happy with the government, but nobody is really entirely sure they want to see another round of elections in a period of political uncertainty. The main opposition party, for example, is against the austerity measures.

GRANITSASAnd that raises questions about whether or not Greece will be able to secure aid, even if there is a change of government. There is a lot of uncertainty. And, like I said, we're living very much day by day right now.

REHMWell, I want to thank you so much for joining us, Alkman Granitsas, on the phone with us from Athens, where he's bureau chief of Dow Jones Newswire and a contributor to The Wall Street Journal. Thank you so much.

GRANITSASThank you.

REHMAnd turning to you now, Scheherazade Rehman, President Obama said earlier this week that Europe's debt crisis is scaring the world. Do you feel that same way?

PROF. SCHEHERAZADE REHMANAbsolutely. I think it's scaring President Obama, and it's scaring the rest of the world. Look, a eurozone rescue will not save the American economy, but a eurozone crisis will be the straw that breaks the American economy's back. The Obama administration is hoping for either of two scenarios, that, within the next six weeks, the Europeans get their act together and produce a package so the markets feel more confident about what happening over there.

PROF. SCHEHERAZADE REHMANThat, I believe, is highly unlikely. And the second scenario is this, that they're hoping the Europeans can then kick the can down past the 2012 elections so that we can move past this. At the World Bank and IMF meetings last weekend, there was one agreement, and that was that the world economy is in a very dangerous phase right now and the eurozone at the epicenter of this crisis.

PROF. SCHEHERAZADE REHMANAnd the whole plan here is -- for the Europeans -- is to make it clear, if they want to want to restore confidence in the markets and say, we can handle the crisis. And Greece is like no other country in the eurozone. They have a particular problem -- so that the contamination is not moved to countries like Italy.

PROF. SCHEHERAZADE REHMANIf you combine the world's inability to shake off the economic downturn, the lack of growth that we're experiencing on both sides of the Atlantic, with the contagion to Italy, this is a very different scenario. It's a very scary scenario. This is not 2008. The U.S.' ability to jumpstart our own economy is severely limited.

PROF. SCHEHERAZADE REHMANThe Fed is running out of tools, and China is no longer available now to stimulate its own economy. What's good for the world is no longer good for China because of inflationary pressure, so...

REHMPatrick, how do you see it?

MR. PATRICK WELTERYeah, I completely agree. It's -- the development in the eurozone are very scary to the world economy. That's for sure. I wonder whether the Americans looking -- whether they are looking too much to the eurozone right now, as well as the Europeans looking too much to the American economy and American politics.

MR. PATRICK WELTERIt seems to me there is, to some degree -- and this is how it was felt, at least in Germany -- that there was some kind of blame game going on over the transatlantic because the American administration seems to emphasize very much the problems in Europe, which are serious. Absolutely, they're absolutely serious.

MR. PATRICK WELTERThe Europeans -- this is my impression from the world -- from the annual meeting of the IMF and the World Bank. The Europeans are blaming on the other side, the Americans, for having a huge debt problem, for having had this discussion about coming to near -- to a near default during the summer and for blaming them that they started the crisis all in -- all in 2008 because at that the time, the U.S. was the epicenter of the crisis.

MR. PATRICK WELTERSo there is some kind of blame going on over the Atlantic. But taking that away on both sides of the Atlantic -- taking that away, yes, Europe has a serious problem for the world economy right now. And you might wonder how it -- how it's going to work out.

REHMBut do you see the European debt crisis as something that's temporary that will come to a finite conclusion with a good outcome?

WELTERI'm not sure -- the question is, how do you describe a good outcome? I have the feeling, after a lot of talks over the weekend, that the European governments are moving closer to accept that Greece is going to default in the end. When this is going to happen, if it's going to happen during the next month or so, during one or two years' time, we're going to see.

WELTERBut if you look at the latest developments -- there was talk about leveraging this rescue fund, which is not needed for Greece. But it's needed to build up a firewall to secure Spain, Italy and other countries. So there was a talk about having a higher participation or higher debt restructuring by the private sector so that banks would even lose more on their -- on the capital they have invested in Greece.

WELTERIf you take all these bits of pieces together, you get the -- you could capture the idea that they are coming closer to the fact that Greece is going to default and maybe quite quickly.

REHMAnd we'll talk more about the possibility, or even prospect, of a default by Greece after we take a short break. We will take your calls, 800-433-8850. Send us your email to drshow@wamu.org.

REHMAnd welcome back as we talk about what's happening in Europe and, obviously, its effect not only on what's happening here in the U.S., or whether those two issues go both ways. That's what we're talking about this morning. Here in the studio, David Smick. He's a global macroeconomic adviser, founder and editor of The International Economy magazine. Scheherazade Rehman is professor at George Washington University.

REHMPatrick Welter is economics correspondent for Frankfurter Allgemeine Zeitung. And we are going to open the phones very shortly. You can also join us on Facebook or Twitter. David Smick, I understand you've spent lots of time with meeting European financial leaders. What are they saying now?

MR. DAVID SMICKOkay. Let's begin with Greece. If you step back, you know, 30,000 feet and look down and say, what's going on with Greece? The rest of Europe is trying to buy time. They want to give the Greeks the next 8 trillion euros, basically to buy time. That'll buy some stability through mid-December. They have no -- the rest of Europe says, there's no way the Greeks are going to comply with any of this austerity. I mean, their...

REHMAnd they won't be able to pay it back.

SMICKTheir debt is 120 -- was 120 percent of GDP before these programs. It's 170 now. It's crushing the economy. It's unworkable. So the question is -- you cannot have a default. But they need some time to plan how to have an orderly kind of resolution of the Greek problem, and that...

REHMWhy can't they have a default?

SMICKBecause of the unknown, because there's so much counterparty risk among banks that no one really knows who's -- it would create, potentially, a panic. So they're -- you know, what they're hoping to do -- they're going to capitalize this new rescue fund, the EFSF, at 500 billion euros. And the first thing they'll do, once they get the money, is start planning on how to use part of that to stabilize the Greek situation with no illusions.

SMICKYou basically backstop it. They -- and -- but then the question is, what about the rest of the banks and the rest of Europe? Now, there -- the key thing to watch is the politics in Germany because, in Germany, if you say -- first of all, if you say you're going to rescue, save the euro, save the monetary union to avoid a third war, third world war, the German people say, yeah, we'll support that.

SMICKIf you say, I'm going to bail out, you know, banks, European banks, they say, no way.

REHMNot doing that.

SMICKSo what the Germans are going to do is they've got to get through this vote coming up...

REHMTomorrow.

SMICK...tomorrow. They've got -- and it looks like the chancellor might even get a -- what they call a chancellor's majority, which is a majority of (word?) own coalition. So once they get the funds, then the question is, can they leverage the funds? Can they build this up? And the fact that the U.S. officials were lecturing in the last week has been a disaster for this process.

SMICKBecause the German officials say, you know, we can't follow through on a leveraging policy if it looks like it was dictated to us by Washington. Now, let me make one other question. There's a lot of fear that there's a -- we could have a Lehman-type shock to the system. And I don't think -- I mean, I think there's kind of good news and bad news here. The good news is I don't think that's going to happen, for this reason.

SMICKThe central bankers have learned a lot, and the European Central Bank is going to flood the -- they already are, but they are going to provide unlimited liquidity to the banks. They're not going to let -- like, Lehman, where you just let the thing drop...

REHMFall.

SMICK...and suddenly you've got, you know, a contagion that just, you know, shatters the world economy. Now, let me get -- just end with this. I moved around, and I talked to countless officials and experts at the -- this past weekend's meeting. And I decided to ask -- present one line to see what the reaction was. And I said, so the U.S. and the eurozone are going to be Japan.

SMICKBy Japan, you know, two decades, you know, of subpar growth, mired in debt. And it was remarkable. Everybody agrees. So the danger is not a massive, you know, Lehman-like collapse like we had in 2008. It's that the entire industrialized world slips into zombie land, to a slow funk of -- not crashing into a recession -- very low growth and significant debt, which is basically what the Europeans -- they're about to have an explosion in the -- in both their debt and guarantees.

REHMAll right. And turning to you, Patrick Welter, to what extent is the German government willing to foot most of this bill?

WELTERThe German government, as such, is very willing to foot the bill. The problem in Germany is much more if the population going to pay for this bill. You have to remember, since beginning of the euro and even in the years before, the euro was never popular in Germany. There was a very short time in 2002 when the bills and the coins were introduced, and there you got a majority of Germans being in favor of the euro.

WELTERBut for the rest of the time, since the mid-'90s till today, the majority of Germans are highly skeptical of the euro.

REHMThey want to go back to the deutsche mark?

WELTERA lot of them would like to. If you have a real vote, I wouldn't guess about the outcome because you always have the idea that the Germans in general are very positive towards Europe. But if you have polls asking them about the euro, the majority is highly skeptical. And what they see right now is that all the promises given to the German population before the introduction of the euro are broken.

WELTERI mean, there was a promise that the ECB is never going to buy governmental debt.

REHMThe European Central Bank.

WELTERThe European Central Bank is never going to buy governmental debt. That's exactly what the ECB, the European Central Bank, is doing now. There was a promise that the eurozone will never become a transfer or a bailout union, and this is exactly what's going -- what's happening now.

REHMBut let me ask you about what David Smick says. On the one hand, you have Treasury Secretary Timothy Geithner going over there. And the headlines the next day were Europe rejects Geithner's plan. Now, we're hearing something different, that the people in charge in Europe are starting to listen to Timothy Geithner. What is your view?

WELTERI mean, I agree that it wasn't helpful that Mr. Geithner showed up in Wroclaw, in Poland, at the meeting of the E.U. finance ministers. That was definitely not helpful because the United States, at this time, are not in a position to give advice to any other country in the world. And there was no will to listen to any advice coming from the United States because you have your debt problems as well.

WELTERBut, on the other hand, in the end, what you see right now, it might have had a small positive impact because, now, they are talking exactly about leveraging the rescue fund. There were several models being discussed in the government. Nothing is -- in the circles of the government, nothing is decided right now. They just don't know exactly which way to go and deal with the big problem.

WELTEROne option is to include the European Central Bank and just leverage -- which means the ECB, the European Central Bank, is going to pay even more, going to buy even more governmental debts and going to spend even more money in bailouts. And that's at least part of the European Central Bank -- for example, the German president of the Bundesbank, they are absolutely against that.

REHMSo is Angela Merkel moving forward with strength behind her or not?

WELTERIt's getting more critical for her. It's getting very critical for her. I suppose that she's going to win the election in the parliament now, for sure, or the opposition is in favor of this proposal and the critical voices that are coming from the governmental party, from the parties which are involved in the government.

WELTERBut even the latest numbers I've seen after some straw polls, she will get enough votes, maybe even from her own coalition, to get the proposals through (word?).

REHMScheherazade, what would happen if Angela Merkel did not get that vote? What would happen if Greece defaulted?

REHMANI think what you'll see, as David mentioned earlier, is a cascading effect that will contaminate all the European banks. And that would lead to something much more serious than we are facing even today, and that is a contagion into Italy.

REHMSo it cannot happen.

REHMANAbsolutely. I mean, the threat is absolutely on the table. And a contagion into Italy would require a rescue that, I believe, will be on a scale that will be hard to imagine. And that's what's really scaring the markets. I believe that Angela Merkel will get the funding, the increase -- the okay to increase the funding. The question is levering this properly.

REHMANHow many times, over the last 18 months, we have had these hope rallies that this time the Europeans will get it right? And then each time, it has ended in a disaster. This last week was different. The markets crashed very badly, about the same as in 2008. And there is real wealth erosion happening in both sides of the Atlantic for taxpayers, and I think this cannot go on endlessly.

REHMANAnd unless the European Central Bank convinces the market that it is a lender of last resort and everyone's safe, this will not end.

SMICKWell, the...

REHMDavid.

SMICKA couple of points. The European Central Bank is about to undergo a transition, a new president from Italy. And you will have a majority of the members soon who are from -- a majority of the executive board who decides most things. They're going to be from debtor countries. The Germans will be isolated, as will the French. It's kind of hard to imagine. That's why I go back to the question.

SMICKThis is no longer -- the good news. This is no longer a liquidity, or even a solvency problem, because, you know, the government and the central banks are going to just open the taps. But it's going to be a question of the credibility of monetary union.

SMICKThere is a -- a German academic told me that they've already kind of rolled out. What would it mean if Germany saves -- backstops this effort, leveraging effort, and saves Italy, has to come in for not just Spain and the other weak countries but also Italy? Well, what it means, because in Germany, you know, if you had a guarantee like, you know, a government guarantee, like Fannie Mae or…

REHMRight, right.

SMICK...that's part of the budget. That's part of your debt. It means that Germany's debt-to-GDP ratio, if it's Italy, will go to 240 percent, which is going to be -- which is basically higher than Japan's. That's why when I say, are we all becoming Japan? People kind of -- they don't say, oh, that's ridiculous. They go -- they kind of sadly go, yeah, well.

REHMBut the question becomes, which would be worse for the world, the European Central Bank's backing up this kind of infusion of funds to Greece or Greece defaulting?

SMICKThey can't have a Greece -- a Greek default. It's just such -- they can have a controlled kind of ring fencing of Greece so that it -- but to just have an uncontrolled default would be -- it would be ricocheted around. They just don't -- you can't control that kind of situation. It would be dangerous.

REHMDavid Smick. And you're listening to "The Diane Rehm Show." Scheherazade, do you want to make a point?

REHMANYes. I think that one of the things to add here is if the European Central Bank does not step in now in a timely fashion with its new governor, who is an unknown quantity at this point, Germany cannot shoulder the burden of all of this. Understand that Germany is the economic powerhouse for the eurozone and Europe. Put too much pressure on this economy, if this economy stalls, as it has and continues to stall, no one is growing in Europe.

REHMPatrick.

WELTERI'm -- concerning the European Central Bank, they are already flooding the markets with liquidity, and they've made it pretty much clear that, for solving short-term liquidity problems of banks, they are going to step in, whatever it takes. This is not the problem. The problem is much more of -- with the ECB. Are they going to solve governments? I mean, they are going to solve -- to save banks. The question is, are they going to save governments?

WELTERAnd this is where the problems get in. And this is where you have a huge -- you would have a huge outcry in Germany if this is going on, that the ECB is going to solve governments. And taking that altogether, it's not only -- as David said, it's not only starting to be a problem, a real risk for the European monetary union, this is going to spill over to the European Union as such.

WELTERAnd if the European Union is going to be shattered in some kind of non-controlled default of Greece, then you might wonder, what is the outcome for the European Union as such?

REHMBut isn't that a kind of doomsday scenario, that that kind of breakup could truly happen at this point?

WELTERThis is the risk. My scenario...

REHMIt's a risk.

WELTERMy scenario is much more that the governments, in the end, it will take one -- it might take one or two years, that they will -- that we will see a controlled default of Greece, maybe Greece being thrown out of the European monetary union, and that they will build a huge firewall to try to save Italy, Spain and other countries and to keep the European monetary union without Greece together.

REHMDavid.

SMICKYou know, real quick point. You know, you try to say, what's in their thinking? Where is the leakage going to come from this? It's probably going to come with the weakening of the euro. Now, if you say -- if you're going to have your currency weakened, this is probably the best time because the dollar is such a turkey.

SMICKSo if it weakens against the dollar, you know -- but it's unlikely to go into freefall.

REHMI don't like calling the dollar a turkey.

SMICKI'm sorry. But, I mean, the U.S. had such -- you know, has a partisan food fight going on over fiscal policy, so it doesn't have credibility internationally. So if you're going to have it happen, this is the time. And it'll be -- it'll affect the credibility of the euro. They're -- they -- you have to pay somewhere.

SMICKSo if you're going to have your debt-to-GDP ratios go through the roof 'cause you're going to -- you have to throw money and liquidity at this crisis, you lose somewhere. You're probably losing the credibility of the euro. But this is probably, you know -- and, also, when you have a currency and your currency weakens, the threat usually is high inflation, higher inflation. Import prices go up.

SMICKBut in this case, you're seeing a global slowdown, but even in emerging markets, so commodity prices are going to come down. So it's unlikely that the -- you know, the European Central Bank is going to see, you know, an increase in headline inflation in the next year or two, so...

REHMScheherazade.

REHMANYeah, I don't think that the Greeks will be thrown out of the eurozone. This is not a political solution to so much effort that has been put into creating this union. I think what you will see is the eurozone differentiating Greece from everybody else in the eurozone, saying this is a unique economy...

REHMWalling it off somehow.

REHMANThat's absolutely right. Walling it off to convince the markets that the problems are unique. They're not in Spain. They're not in Portugal. And they sure as heck are not in Italy. That's what's going to happen, but not a throwing out of Greece.

SMICKYou can't be a little bit pregnant. If you let the Greeks out, suddenly, others suddenly say, hmm. You can't control that. I agree with you.

REHMAll right. We'll continue our discussion after a short break. We've got lots of callers waiting. And we'll be happy to hear from you.

REHMAnd welcome back. It's time to open the phones, 800-433-8850. Let's go first to Indianapolis. Good morning, Joseph.

JOSEPHGood morning.

REHMHi.

JOSEPHI understand that the Greek and Italian people dislike paying taxes and often don't. There are already taxes on the population, but the governments are lax about collecting. I've not heard any talk about trying to enforce collections. Are there no versions of the IRS in these countries that can impose fines and penalties instead of imposing brand-new, more taxes?

REHMScheherazade.

REHMANLook, there are the equivalent of the IRS in these countries, and you're right. The perception is the tax collection is quite difficult in some of these countries, which is why, you know, it's late. The Greeks are imposing a property tax, but they are charging that tax through your electricity bill so that if you do not pay it, you won't get any electricity. So they're trying to find better ways to encourage the population to pay taxes as they should.

REHMBut it's truly a cultural shift for them, is it not?

REHMANAbsolutely. And I think that when you play in the developed Big Boys Country Club, you have to shift the rules structurally in your economy.

REHMTo David in Chesapeake, Va. Good morning. You're on the air.

DAVIDHi, Diane. Thanks for taking my call.

REHMSure.

DAVIDYou know, this is -- your show is great, and this is a really good topic. But this is probably the most frustrating topic I've heard to date. You know, this was discussed on another -- a couple of NPR shows, probably six -- five, six weeks ago.

DAVIDAnd when it first came out, you know, everyone was -- at the time, the experts, you know, basically were looking at the U.S., as that, you know -- the things that happened during the Bush administration and, you know, with our economy and all the fraudulent activities, with the mortgage industry and investment industry, you know.

DAVIDAnd then they look at the European market and Italy and Greece, and it was pretty well thought out and decided that, you know, Greece and Italy, basically, and some of those other European countries basically followed suit on what was going on within the United States. But you know, look, if they're doing it this way, this is how we're going to do it.

DAVIDAnd, you know, we can basically steal money out of our own system, just like the U.S. is doing. And it was actually tracked by the FCC, monitoring both national and international financial systems. And the fraudulent -- there was a fraudulent activity that was going on, and they tied U.S. officials to Greece and to Italy and to France and several other countries.

DAVIDAnd then, you know, they come out with this stuff, and the FCC turns around and destroys thousands of documents. But then you never hear about it in the U.S. media. Now, everything is being turned to Europe and Greece and Italy as though they're the problem and they're causing or slumping our U.S. economy.

REHMAll right. Thanks for your call. Patrick.

WELTEROkay. Just would like to say this is not a problem of fraud. This is not a problem of overdone financial deregulated markups. The problem in Greece and Europe is just that the Greece government and the Greece population has lived over its means for the last -- at least for the last decade, maybe even longer.

REHMTell me what that means. Help me to understand how a government like Greece can live above its means.

WELTERWhen Greece ended -- Greece has had a high deficit. They made a lot of debt to finance, and it was easy for them to make this debt. And there was an incentive to go even into further debt because with entering the eurozone, the interest rates in Greece went down far like a stone because they got the -- they bought in, in the end, the reputation of the other eurozone countries.

WELTERSo the interest rates went down very drastically, so it was much easier to get -- go into a debt spiral. And that's what happened. And so for the last decades, Greece was enjoying these advantages of very low interest rates. The political pressure by the other European governments to bring down the deficit, to control the debt, didn't work out. So, in the end, now, we see the outcome.

REHMScheherazade.

REHMANLook, the fact of the matter is when the Greeks joined the eurozone, all of a sudden, they could borrow at very, very low cost. And the governments did exactly that. And, in turn, in order to raise the standard of living for the Greeks, wages went up, benefits went up, and this was going on for almost seven years. And they were living well beyond their means and to the point where the Greeks today are highly incompetitive (sic) -- uncompetitive.

REHMANTheir salaries have to drop more than 30 percent in order to reach the European average. So they were living beyond their means because they had easy access to money.

SMICKAnd just to add to that, before the crisis, if you were a worker in Germany and you retired, you would receive a retirement income of about 44 percent of your previous income. In the U.K., that number would be about 28 percent. In Greece, before the crisis, you received 94 percent of your income, and in some cases, retired at 50.

SMICKAnd so the question is not, why the Greece do this? They got away with it. Why didn't the rest of Europe? Why didn't the bankers say, we got Greek -- the sovereign debt, it's based on this illusion. They can't afford that forever. What if the conditions change? And so, in some ways, they lived that illusion, but it was not sustainable.

REHMAll right. To Orchard Lake, Mich. Good morning, Fred.

FREDYes, Diane. Great show. I listen to this every day.

REHMThank you.

FREDI just have one question. Everything that has just been said is absolutely true. You know, sometimes, you can look at an infrastructure -- take many countries, like the European countries -- like a cancer. There's a problem there. There's a disease there, and the disease is it's been let go. Now, you have a problem. How are you going to attack that disease? Well, maybe all this, like they said, could -- has to come to fruition. But how do you do it?

FREDWhat about improving on the infrastructure, to begin with, through education, opening up plants over there, starting businesses, just like what's taking place in the United States? You can't cure by giving all the time. It's the unemployment that's going to be the problem. Then you can tax. Then you're capable of taxing. Then people are willing to accept the responsibilities. I'm going to take my answers off the air.

REHMAll right, sir. Thanks for calling. David.

SMICKLet me just make a point. You know, James Carville had a famous line back when President Clinton was in office. He said, boy, if I believed in reincarnation, I'd like to come back as the all-powerful bond market. But I think Carville was wrong. He should have asked to come back as a Wall Street or a European banker.

SMICKNow, we just saw -- there's a book out that suggests that the president, two years ago during the crisis, suggested that the treasury go in and break up (word?), but the financial system said, we can't do that. And it's very interesting as we look ahead and say, what have we learned about this crisis bureau both today in Europe and then before, is that we have banks that become too big and too powerful.

SMICKAnd here you have a crisis in Europe. And what's really at the heart of it? We can't let the Greeks default because they could potentially send the European banking system crashing down because, you know, the contagion -- we don't know -- and the lack of transparency -- and at some point, we have to have a reform of the global financial system.

SMICKWe're already seeing a financial de-globalization process. Nobody trusts each other within the system. But at some point, can the average person be held hostage by, essentially, situations where people say, well, we got to worry about the banks? What if they crash? Well, at some point, you know, the banks, you know, shouldn't be allowed to move into this kind of position.

REHMPatrick.

WELTERJust on the point, we can't let Greece default because -- due to the risks for other banks. I mean, the fundamental mistake, I think, in the whole Greek crisis made right at the beginning was that the European governments started to bail out the Greek government. What they should have done right at the beginning, in my understanding, they should have said the Greek government has to handle its debts as it can do.

WELTERAnd we are going to save the banks. And we are going to save not the banks for being banks, but we are going to save the financial system. So if you put it in one line, save the banks, don't save the governments. And this is the big -- in my understanding, this was the biggest mistake done -- being done in the eurozone crisis right from the beginning, early 2010.

WELTERAnd it would have solved a lot of problems if you would have let the Greek government live with the debts, doing a restructuring of the debts and just trying to make sure that the financial system in Europe is going to be safe.

REHMIs there likely, as an outcome of this crisis, to -- is there to be a closer political tie among all these European countries that would go along with the economic ties that this so-called eurozone has created, Scheherazade?

REHMANI think so. I think -- look, clearly, a monetary union such as this has shown its weakness because it's incomplete. There has to be more fiscal conversions, and by default, that means more political cooperation between the governments. So it's coming. It has to come. It's time.

REHMIt has to come, David?

SMICKI'm -- I -- the question I have is why -- if you're Germany and you're one-third of Europe and you're all-powerful, why would you allow your central bank, the ECB, which was supposed to be modeled after the Bundesbank -- it's now -- has the majority of countries from the Mediterranean, from the weaker countries, that run the executive board?

SMICKAnd I keep saying, that doesn't make sense to me. Is the European Central Bank going to become German's whipping boy in the future for anything that goes wrong? Well, Germany...

REHMBut don't you have to do something?

SMICKBut will Germany pull back as opposed to integrate, which is what -- well, they really need -- they need political and financial integration. But will Germany actually -- is this the sign that Germany has become -- is going to become detached? Perhaps our guest from Germany can illuminate.

REHMPatrick.

WELTERI think if you look at polls, you can see already that the German population is going to be detached much more from the European Union.

REHMPush back.

WELTERAnd if you think it looks easy from an American point of view to say we need some kind of fiscal coordination, we need some kind of government corporation in the eurozone for it -- to make it work, just make the following comparison: in the United States have one language, and you have nationwide TV channels. So you have a nationwide discussion, political discussion about what's going on in Washington, D.C.

WELTERYou will never see that in Europe for decades to come because people don't speak a common language. You don't have a common political debate for all the 340 million people in Europe. I'm not able to discuss political issues in Brussels to the guy from Bulgaria or Romania because we don't speak the same language. So there is a fundamental problem if you integrate centralized policy, economic policy.

WELTERFirst, the policy at the Brussels levels, people won't be able to control it, and people will be very dissatisfied with that. And so if you go further that line, in my understanding, you will further the risk that the whole E.U. is going to break up.

REHMScheherazade.

REHMANI see it slightly differently. I think that if they don't cooperate more fiscally, we will see future crisis down the road, and that's one that we want to avoid. Look, I understand completely from the German bureau's point of view who have made deep sacrifices over the last decade to promote economic stability and growth while at the same time Greek salaries and benefits have been going up, wants to join the euro.

REHMANObviously, this is very distasteful for any individual who's been making these sacrifices. But I think the road is clear now. They've signed the agreement. The eurozone is here to stay, and they have to move forward integration.

REHMScheherazade Rehman, and you're listening to "The Diane Rehm Show." Back to the phones. This time to San Antonio, Texas. Good morning, Doug.

DOUGGood morning, Diane. I have a question going back beyond 2010. There was an article in Der Spiegel back in February of 2010 talking about the euro crisis back then and how Goldman Sachs had helped Greece to mask its true debt back in, like, 2002. If that had not happened, would we be in the state that we're in now?

DOUGAnd the question is, if Greece goes under, is Goldman Sachs holding paper, collateral default options as they did with AIG, on Greece going down?

REHMScheherazade.

REHMANI think there is no doubt that Goldman Sachs' involvement in hiding Greece's debt for so long has played a role, a key role here.

REHMHow much of a role in this crisis?

REHMANIf we could have seen this crisis of debt in Greece, not seven years down the road but two years down the road, it might have been slightly more manageable.

REHMPatrick.

WELTERI just would like to drop in -- if you talk to Greek central bankers, if you talk to people from the European statistic law offices, if you talk to government officials in Europe, everybody knew in 2001, when the decision was made to -- that Greece entered the eurozone. They knew exactly about the debt problems in Greece at that time.

WELTERThere had been some cheating with the numbers later on, but these were not the most important factors. And they knew right from the beginning that there was much more debt than you could see in the official numbers. And if it...

REHMDavid.

SMICKWell, I think if you look at the beginning of monetary union, there's one other country that everybody knows fudged the numbers, Italy. You know, Italy couldn't make it the last minute. You say, how did that happen? Well, everybody looked the other way, and they fudged the numbers. I go back to the question of the whole -- of, can you have political and financial union along with monetary union? And I agree. Theoretically, it was a huge flaw.

SMICKIt was a huge mistake to think you could have a monetary union. But the question is, can you put the genie back in the bottle, which means, can you tell the Germans -- particularly the German export sector, which is world-class in its ability to kind of be competitive -- I mean, they reinvent themselves almost -- whatever the exchange rate.

SMICKIt's a very impressive operation both in luxury automobiles but also machine tool equipment, all the sophisticated -- what do you -- do you tell these people, well, you can't be so competitive, you've got to be kind of more like the average? It's very tough to do that.

REHMWell -- and there's one other question from Jay on Facebook, who says, "If these austerity measures lead to people being laid off, how does this help any economy? It's like biting the hand that feeds you." Scheherazade.

REHMANYou're absolutely right. Slow growth is a result of these austerity measures. The markets demanded austerity because they saw all the southern countries, like Greece, and they were not facing the same problems. And now, we are reaping the benefits of austerity, and that is no growth in Europe.

SMICKAlso, the PASOK Party in Greece is, you know, in control now. Saying to them, cut a third of your public sector labor force, would be like telling the Tea Party, we want you to increase taxes, to grade -- increase taxes to the 80 percent top marginal level and double government spending.

REHMAnd it ain't going to happen.

SMICKThey say, that will destroy ourselves.

REHMDavid Smick, Patrick Welter, Scheherazade Rehman, thank you all so much.

REHMANThank you.

REHMAnd thanks for listening, everybody. I'm Diane Rehm.

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth, Sarah Ashworth, Lisa Dunn and Nikki Jecks. The engineer is Tobey Schreiner. A.C. Valdez answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org. And we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.