Greek Prime Minister George Papandreo has agreed to resign after ironing out the details of a new unity government. The move is expected to help facilitate a debt agreement with the European Union to save Greece from default. Greece’s financial crisis has threatened to spread to other E.U. countries, like Italy. Italian Prime Minister Silvio Berlusconi is also facing pressure to resign though he says he won’t go. The IMF has agreed to monitor Europe’s third biggest economy as fears mount over Italy’s finances. Diane and her guests look at new concerns over the future of the Eurozone.
- Rachel Donadio Rome Bureau Chief for the New York Times
- Jacob Kirkegaard Research fellow at the Peterson Institute and senior associate at Rhodium Group, a New York-based research firm.
- Sudeep Reddy Economics reporter, The Wall Street Journal.
- Robert Scott Is an international economist and director of international programs at the Economic Policy Institute.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Greek Prime Minister George Papandreou is on his way out after an agreement with the opposition party leader to create a new unity government. As the parties continue to hammer out details, Europe is looking to keep the financial crisis from spreading over the weekend. German Chancellor Angela Merkel warned the crippling debt would continue for at least a decade.
MS. DIANE REHMJoining me in the studio for the latest on the eurozone debt crisis: Jacob Funk Kirkegaard of the Peterson Institute for International Economics, Robert Scott of the Economic Policy Institute and Sudeep Reddy of The Wall Street Journal. We will take your calls, comments, questions, 800-433-8850. Send us your email to firstname.lastname@example.org. But, first, joining me by phone from Rome, Rachel Donadio. She's with The New York Times. Good morning to you, Rachel.
MS. RACHEL DONADIOGood morning.
REHMI gather you just got back from Athens. Tell us about the current situation there.
DONADIOWell, the current situation is that today we're expecting Greece's Prime Minister George Papandreou to make good on his pledge of stepping down so that there can be a new unity government, that is a coalition government between the governing socialist and the center-right New Democracy opposition. Both Papandreou and opposition leader Antonis Samaras agreed to form this government yesterday.
DONADIOAnd today, they've been in talks to figure out who might lead it. The idea is that this would be a caretaker government led by a non-politician that would be in power for probably three or four months to help the Greek parliament push through these austerity measures that it needs to approve in order to get the next round of foreign aid from the European Union and the International Monetary Fund that Greece needs in order to put off default.
DONADIOOf course, a default -- if Greece defaulted on its debt, that would drag down the euro and create, people fear, a kind of credit event that would put the world market into turmoil. But this news of a unity government has come after an extremely tumultuous roller coaster week in Greece.
REHMAnd what can you tell us about his likely successor, Lucas Papademos?
DONADIOThe idea is that Lucas Papademos could indeed take over and guide this government. He's a former vice president of the European Central Bank. He has also been a former governor of the bank -- of the National Bank of Greece. He's been teaching at the Harvard Kennedy School, and he's seen as a well-respected technocrat and very good economist. The question facing Mr. Papademos, if indeed he does become prime minister -- we're not sure yet -- is, what can he actually do? How much can he actually accomplish?
DONADIOThe parliament is -- you know, Greece is a fascinating example of where austerity and democracy collide, that the people have lost all faith in their politicians. They're stuck with high, high tax hikes and wage cuts. The economy has totally dried up. And so this government is going to be charged with something that would be extremely difficult for any government, let alone a brief caretaker one, which is to push through measures that are deeply unpopular but that economists think will ultimately help Greece in the long run.
DONADIOThat is making the labor laws more flexible, firing some public sector workers -- Greece's public sector is very large -- and doing other privatizations of things. Of course, the problem in Greece is that the transformation or the cuts are coming faster than the modernization of the economy. If you fire public sector workers, they don't have much of a private sector to go back to.
REHMSo what is the practical effect on small business in Athens, say, and the rest of the country?
DONADIOThe practical effect is that no one has any money. The VAT or tax has been hiked up, and businesses are going out of business right and left because people don't have any money to spend. I mean, what's happening in Greece is that the austerity measures have just dried up an already bad economy, and I predict weeks and months that are going to be extremely ugly in Greece. I mean, I think only businesses that are small enough or big enough will survive, but the ones in the middle are in great difficulty.
REHMAnd, of course, attention is also focused now on Italy facing financial woes. What do people in Italy feel about the situation?
DONADIOPeople in Italy have no idea what is going to hit them, if indeed the debt crisis hits Italy, because what this means is that interest rates on Italian bonds have reached a record high of 6.6 percent. That means that Italy will need to be spending more of its money to pay its debt, and that will cause a liquidity and, one hopes, not a solvency crisis in the country. But, really, the news of the day today is whether or not Prime Minister Silvio Berlusconi will step down as George Papandreou is doing in Greece.
DONADIOThe fates of these two countries are deeply intertwined. The markets seem to think that the Italian government has lost all credibility. It's not able to make good on its pledges of reform, and the markets seem to be demanding, you know, that Berlusconi step down. The markets seem to be dictating a lot in Europe right now.
REHMSo do you believe that in the end Berlusconi will step down?
DONADIOI think that it seems unlikely to me that he can continue to hold on to power at this point. And I think that if this were just an internal Italian political situation, he would last as long as he could, if not longer. But because there are these wild card factors of the international markets, and because the International Monetary Fund is now monitoring Italy, very rare for a country of Italy's size, I think that Berlusconi's days are numbered.
REHMRachel Donadio of The New York Times, thank you so much for joining us.
DONADIOThank you. My pleasure.
REHMAnd turning to you now, Jacob Kirkegaard, is a unity government in Greece likely to be able to pull things together?
MR. JACOB FUNK KIRKEGAARDWell, I think that the thing is that, politically, yes, they have -- they will clearly have a large majority in the Greek parliament. And, I mean, they will not, in my opinion, have a particular problem in pushing these measures through the Greek parliament. The question, of course, is, well, what is the effect that these measures are going to have in the Greek economy? Because I think it's equally clear that, as the reporter was saying from Athens, Greece is looking at a period, a prolonged period, in fact, of extremely tough economic conditions with continued recession, et cetera.
MR. JACOB FUNK KIRKEGAARDBut at the same time, I think the last couple of weeks have really shown that at the end of the day, given that the alternative, which was articulated quite clearly by the European leaders that either you, you know, you get on with this program or you go back to the drachma, I mean, the prospect of leaving the euro, that prospect is actually, in my opinion, at least, infinitely worse for Greece domestic economy than any austerity measure you can imagine coming out of the Europe -- the IMF.
REHMRobert Scott, what would happen if Greece left the eurozone?
MR. ROBERT SCOTTI think Greece would go through a period of tremendous collapse. It would last relatively short period of time. We look at the example of Argentina. They did exactly the same thing in 2001. The economy collapsed for about a quarter, and over the next 10 years, it suffered -- it enjoyed a period of tremendous prosperity. They grew at 7.5 percent a year for 10 years, third highest gross rate in the world in that period.
MR. ROBERT SCOTTI think the core problem that Greece and Spain and Portugal face is that they have become uncompetitive with the rest of Europe because of -- they've had much higher rates of inflation in those countries, and that's an external problem. It's not their -- it wasn't caused by anything internal within those countries.
REHMSo, Jacob, can a new prime minister bring about the kind of change, alteration in the economy that's needed?
KIRKEGAARDWell, a new prime minister, even if he's a caretaker for a couple of months, isn't certainly not going to be able to do that because this is a sustained period that requires stability for a number of years. So a caretaker government for a few months is really only a very transitional development. But I'd like to go back to what was just said about Greece's prospect outside the euro area because I disagree fundamentally with the idea that Argentina is a good example for Greece to follow because we have to understand that Greece doesn't have the prospects of Argentina.
KIRKEGAARDOr Greece isn't going to have the dumb luck, if you like, that Argentina had, which is an enormous commodity-driven boom of their economy right after they defaulted. The fact is that Greece has, by far, the lowest export ratio, about 10 percent of GDP only in the euro area for their goods sector. They don't actually, unfortunately, make much that the rest of the world wants to buy. So the idea that they're going to grow strongly by deflating their currency, in my opinion, is a fallacy, and they will not have the kind of growth boost from leaving the euro area.
REHMSo you're talking about Argentina's ability to export oil, for example.
KIRKEGAARDYeah, I'm talking about -- I mean, Argentina has been really driven heavily by their capacity to export commodities, food commodities, in particular. Greece doesn't have any kind of large commodity items like that, so they face an entirely different and much harder situation outside the common courtesy.
REHMWhat do you think about that, Robert Scott?
SCOTTWell, I think it's remarkable that, amongst economists, it seems to be that somehow changes in the exchange rate are the only kind of a price change that doesn't matter. I think Greece will become more competitive if it goes back to the drachma...
SCOTT...if it gets out of the euro.
SCOTTIt can lower its prices relative to the rest of the world. And the best way to see that is if you compare the performance of the United Kingdom versus the performance of Greece. United Kingdom has big debts. They have the same kind of financial crisis that the rest of Europe went through, yet they had the interest rates that are only a couple of tenths of a point above those in the United States, 2.2 percent. Greece is paying, on the other hand, over -- well over, what, 25 percent right now on its 10-year (unintelligible).
REHMSo, in effect, you are saying that Greece would be able to make a big and quick come back should it leave the eurozone?
REHMRobert Scott, he's an international economist, director of international programs at the Economic Policy Institute. We'll take a short break here. Do join us, 800-433-8850.
REHMWe're talking about what's happening in the eurozone, with Greece's Prime Minister George Papandreou expected to resign by the end of the day, perhaps after the formation of a unity government. Here in the studio, Sudeep Reddy. He is economics reporter for The Wall Street Journal. I know you've just returned from covering the G-20 summit in France. It ended without agreement on a Greek bailout. Tell us why.
MR. SUDEEP REDDYWell, it ended without the big deal that was hoped for from European leaders to come up with a solution for definitively resolving this crisis. There was a high -- there were high expectations, unrealistic expectations that they'd be able to come out of this with something big. What we really saw were some small measures in terms of firefighting. We had -- right before the crisis, the Greek prime minister talk about this referendum and scare everyone in the eurozone. So, just as the G-20 summit was starting, European leaders were able to resolve that and get him to go back.
MR. SUDEEP REDDYAnd, of course, we saw that -- and with his decision to step down. And then we saw, on a smaller scale, something emerged with Italy. The focus is shifted to Italy for good reason. As we've watched Portugal and Ireland and Greece fall down and face their own turmoil, everyone's concern all along is, what happens if this spreads to the bigger countries? Italy is the third largest economy in the eurozone after France and Germany. It's the third largest bond market in the world after the United States and Japan.
MR. SUDEEP REDDYAnd it's just not conceivable that the current fire power that they have in the European Union is enough to realistically deal with a problem like Italy has. And so to see what they came up with at the G-20, which was to have the IMF go in, an international organization go in and look at, at least, measures, monitor its books and its progress will at least provide the potential for an independent voice to look at this and provide some reinsurance to bond markets.
MR. SUDEEP REDDYThe problem is it might actually show something that a lot of people don't want to see, and that's the fact that Italy may not be making enough progress on its measures. And that could scare bond markets further and advance this rapid decline we've been seeing in the situation.
REHMSo does Italy have the same possibility that Robert Scott mentioned, namely returning to its own economy?
REDDYAbsolutely not. If this were to spread to Italy -- and you even have the questions of Italy having to break off from the eurozone -- that's effectively the beginning of the end for the eurozone. You're not going to have the third largest economy in Europe break away and actually keep the eurozone as a working concern because the contagion would be so severe by then throughout the banking system, and probably around the world, if Italy were to go not far from where it is now, but beyond this danger zone that it's in that you would actually be facing a full-fledged financial crisis in Europe, if not one around the world.
REHMDo you disagree with that, Robert Scott?
SCOTTWell, I think there's an open question as to whether or not the euro is going to continue to be a viable institution. The problem is it's a common currency. It's not a common country. It lacks the economic institutions that we have or that the U.K. has. It doesn't have a central bank that's willing to be the lender of last resort. They simply won't adopt that function. It doesn't have a central fiscal policy. It's got one common exchange rate. So countries like Greece, Italy can't adjust when their prices get out of loan.
SCOTTSo what Europe's opting to do right now is to emphasize deflation. That's the only way in which these poor countries are allowed to recover from their problems. And that's -- they're facing a decade or more of slow growth as a result. Europe has 16 million unemployed, as we do here in the United States. Nobody's talking about job creation. They're all talking about deflation. That's unacceptable for the population.
KIRKEGAARDNo, I mean, I don't necessarily disagree with that. But I think the important thing is to still keep an -- I fundamentally disagree with the aspect that, actually, Europe does not focus on job creation. The reality is that Europe has actually created far more jobs in the last decade than in the United States. And the reason for that is that the majority of the European employment issues really has to do with structural impediments in the labor markets.
REHMWhere have those jobs been created?
KIRKEGAARDOh, I mean, they have been created. I mean, you look at places like Germany, you look France, you look at -- you should stop looking at the unemployment rate and looking at the employment rate, and you will see that the employment rate in the European Union has actually gone up quite dramatically in the last decade.
REHMBut in a very few countries?
KIRKEGAARDNo, it's fairly widespread. It has actually, of course, been concentrated up until the crisis in a place like Spain. But as I say, I'll come back to the point that the unemployment problem in Europe is really much more structural in nature than is the case in the United States.
REDDYThat leads to the issue that European countries do need to make these important structural changes, whether they're changes in their labor codes, or in some cases, you see these moves to quickly lay off workers and to try to deal with the short-term issues. And until you deal with underlying structural problems in these economies, you're not actually going to see any prospect of a serious recovery.
REDDYAnd that's the problem they're all facing. There are not easy decisions that you can move through quickly. And if you don't make big decisions and make them very soon in the underlying trajectory of the economy, you're going to see them fall apart. And you see this already with the protest on the streets of Greece, and you'll see them once Italians wake up and see the problems ahead of them.
REHMHow large is the public sector in Greece as compared to that in Italy, Bob Scott?
SCOTTI don't have the exact figures. I think the Greek public sector is somewhat larger than Italy. It's a poor, developing country. I think that's a -- it's a core issue. But I want to go back to the earlier question about where the jobs came from. I think you got two fundamentally different economies in Europe. You got an export-led economy in Germany that's creating jobs through manufacturing.
SCOTTThe rest of the economy, particularly in the south, has been creating jobs through construction of housing. There's been a huge spectacular boom of housing, which is then fueled by an infusion of foreign capital, and that collapsed. And that's why these countries are fundamentally in the kind of trouble they're in.
REHMThat's where Goldman Sachs comes in, I presume?
REHMSudeep, what about that huge public sector in Greece and how that compares to other countries within the eurozone?
REDDYWell, there's clearly a divide in the spectrum between where Greece is and where Germany is. And the Greek people have been relying on their government a lot more for their economy, and they've come to the point where they have to make decision whether that's going to fly. And that's, in some ways, what this referendum was going to have to be about, was do you want the structure of an economy that's going to have to participate in the eurozone or do you want something fundamentally different?
REDDYAnd Germany is at an opposite end trying to build a manufacturing-led export economy and doing very well with it with some intense discipline on the fiscal front and doesn't like the fact that other economies are handling themselves differently and really relying on a public sector that is essentially being funded by European and international bailout at this point.
REHMJacob, Angela Merkel had some tough talk over the weekend.
KIRKEGAARDYeah. No, I mean, you know, when saying that the crisis is going to last at least a decade, I happen to largely agree with her because it comes back to this point that Europe's issues is structural in nature. It has, at least in my opinion, three or four overlapping and sort of mutually self-enforcing crisis. It has clearly a fiscal crisis in parts of the periphery. It has a clear competitive crisis in the same periphery.
KIRKEGAARDIt now has a banking crisis in, you know, spreading gradually to outside of also, I mean, obviously Ireland. We all know that that was a banking crisis. But we saw a Belgium bank collapse just a few weeks ago. And then it has this other crisis, which is essentially that it needs a new rule book. It needs to have a new set of governing institutions that can essentially make it more -- a more coherent unit because the problem is that, so far, it has had a monetary union without a fiscal union and without a fiscal agent at the center. And that is critical in a crisis.
REHMSo can Italy's financial problems be addressed in similar ways as those in Greece, Jacob?
KIRKEGAARDNo. I mean, I think the reality is that Italy is way too big to bail out. It's not realistic. But I think there's also a couple of other important distinctions to make, which is that, yes, Italy has a high debt, but it also actually has fairly stable finances. It has a primary surplus, so it doesn't need an awful lot of more austerity. And also, Italy is actually quite competitive. It has a fairly large manufacturing sector and is quite close to external surplus.
KIRKEGAARDAnd then also, it has very low private sector debt and, in fact, a very high levels of household debt. So it is in a very fundamentally different and arguably, in my opinion, much better situation than the other peripheral countries.
REDDYItaly is, in some ways, facing a credibility crisis with bond markets, and if it can deal with some of those issues, then it might have a chance to live another day. One official who's involved in all these talks told me that the other European leaders wake up in the morning, first, to look at Italian bond yields to see where they've gone beyond the danger zone and, second, to read the reports overnight of what the prime minister, Berlusconi, has been doing in terms of his personal exploits.
REDDYThere is a lack of credibility not only with European leaders, but with bond markets about whether this is the type of leader, who is already facing all these fraud and corruption charges, is going to be the type of person who can actually drive the tough reforms that will not be popular and deal with some of these big, big issues. And right now, the clear signal from markets and from investors is that he is not the person to do that.
REDDYAnd he's -- you could tell at the G-20, there were a number of leaders who were giving him the cold shoulder. They weren't really -- it was pretty obvious that he is not at the center of things. He's become kind of a sideshow for Europe, and they're getting more and more frustrated with what they're dealing with, of not getting somebody who's going to provide a realistic hope to the outside world about what's happening.
REHMDo you see him stepping down fairly soon?
REDDYIt's -- it really is a matter of time when you've come to the point where it's become an international crisis and you have people looking at him this way. Perhaps he's going to have a moment of political reality and make tough decisions that he might have been avoiding for that reason. But if he doesn't do that and do it very, very quickly -- you saw, over the course of the week, how the Greek prime minister was doing something that he thought, in theory, was pure and democratic and would be great to have a referendum, and a week later is about to leave his post.
REHMBut wouldn't the resignation of two of the E.U. leaders -- that is, Papandreou and then Berlusconi -- wouldn't that, in fact, weaken the E.U., Robert Scott?
SCOTTWell, I think it would. I think it, again, brings up the question of what is causing structural problems in E.U. The business community and many economists I talked about it, it's a morality play. It's about structural unemployment. It's about uncompetitive workers. In fact, what's happened in the southern half of Europe is that they've had a decade of speculative investment in real estate. That's driven up wages and prices.
SCOTTThat's why workers in these countries can't compete with those in Germany, in particular. And so the prescription that's been recommended is a decade of stagnation to bring down wages and prices. That's a morality play, whereas the real problem is that Europe simply refused to regulate the financial markets. Now, there is an alternative. Europe could simply agree, through the Central Bank, to go through higher levels of inflation for five or six years.
SCOTTThat would be another way for the countries in the south to realign themselves. Inflation in Germany could have stable prices in Italy and Spain and Greece. You wouldn't have to go through stagnation.
REHMSo, in short, you do not believe that the resignation of these two leaders would further weaken the E.U.
SCOTTI think the problems are deeper than that. It's core.
REHMAnd you're listening to "The Diane Rehm Show." We've got lots of callers waiting. We'll open the phones now, 800-433-8850. Let's go first to Sotiris (sp?) in Washington, D.C. Good morning. You're on the air. Sotiris, are you there?
SOTIRISYes, yes. Yes, I am here.
REHMGo right ahead, sir.
SOTIRISJust -- I wanted to sort of bring back the discussion to Greece and talk specifically about the fear of many -- of me being as a Greek -- and I'm not a Greek -- is that -- my fear is that Europe is just going to try to cover up the mess that is going on in Greece. And I think the mess is beyond this financial crisis, and this has been going on for decades, not just the last decade. It has been accented.
SOTIRISIt has brought up to the surface what has been going on for years: the cronyism, the political support, the job creation and so on and so forth. And what I think the bigger issue is -- and it goes back to productivity -- is that this elite group of politicians. And I think that's why they're not liked in Greece 'cause suddenly Greece has realized that it is a small group of families that have been taking care of themselves.
SOTIRISAnd I speak of Siemens and the whole Goldman Sachs fiascoes and all those kind of situations, goes back to this sort of elitism that we are trying to be a king, and, in essence, we're really an agricultural economy. And any -- and speaking of exports, anything that has -- we -- that we needed to do to help exports in the agricultural economy in Greece has just gone on the wayside. And, really, the politicians are working around what we call in Greece the ring or daktylios, which is around what is Athens today, and not caring so much of what we really produce is agriculture and tourism.
KIRKEGAARDNo. I mean, I largely agree with the caller. I mean, I think Greece is facing much more than an economic crisis. It's facing a very fundamental crisis of politics because I -- I completely agree that Greece has had, essentially, since it became a democratic state in the '70s, this sort of dynastic, kleptocratic and, actually, in the words of George Papandreou himself, systemically corrupt political system.
KIRKEGAARDAnd I think this is part of the reason why, you know, the Europeans, as part of the agreement that they struck a couple of weeks ago, has essentially now put Greece under administration. You're going to have a permanent Troika presence in Athens to oversee the implementation of the program.
REDDYThat's exactly right. There's going to have to be some international supervision for at least the next decade, and it's going to be some very close supervision because, even the European leaders who have taken a look at this and the IMF and the outside institutions, they see that every step that they've prescribed is moving along so slowly. They're not able to deal with the core problems in Greece, whether it's tax paying and not getting people to step up and actually do that.
REDDYYou've got, now, people and businesses paying off the tax collectors to avoid the higher taxes that have been assessed, and that's just a core problem that you're going to have to deal with. And until you deal with some of these underlying issues, you're not going to actually see faith from the international markets that Greece is on a correct path. So, in some ways, the caller is right that Europe is trying to deal with Greece in a quick way so that it doesn't spiral out of control.
REDDYAnd they understand that some of these longer term issues are going to have to get resolved, but they're trying to manage a fire right now and keep it from growing into something much larger.
SCOTTI have no argument about the fact that there is corruption in Greece. That's a chronic problem, been there for decades. The question is, how do they get out of this situation they're in now, and who's going to bear the cost? Right now, Europeans are recommending changes that are going to basically extract payment for the banks to pay off those bonds. It's going to come out of the highest of Greek workers. Is there a better way to create more jobs and more rapid return to growth in Greece?
REHMRobert Scott, Sudeep Reddy, Jacob Kirkegaard. We'll take a short break. When we come back, more of your calls and comments.
REHMAnd we're back. Sudeep, during the break, you were talking about a Facebook message posted by Prime Minister Silvio Berlusconi.
REDDYAmid all of the rumors this morning about whether the prime minister would be stepping down, he or someone on his team went to his Facebook page and denied that and said that rumors of his demise are wrong. And this was as he was going and apparently meeting with his family to discuss whether he would actually resign. And so it's almost laughable that we'd see something like this at Facebook at a time like this when bond yields are surging to record highs. But that kind of underscores how silly the situation has become innately at this point.
REHMHere's a question from Ed in Troy, Mich. He says, "Why hasn't the euro dropped closer to parity with the dollar in the last several months with the problems in all of these countries? When the euro started, it was one to one with the dollar. Over the last decade, with the U.S. in two of the longest wars in our history, the spread has gone up to 1.45 per euro. It is still 1.38 per dollar." How come, Jacob?
KIRKEGAARDWell, I mean, I think that the answer to that is that there is sort of an ugly man's contest going on. I mean, part of the reason that the dollar -- the euro hasn't weakened so much against the dollar is the weakness of the dollar. I mean, if our economy here in the United States was growing rapidly, it will be a different story. I mean, if you look at the euro vis-à-vis other major currencies, you know, it has dropped much more. I mean, the Swiss franc is a classical example of that.
KIRKEGAARDBut I think, I mean, I take, fundamentally, a more positive view about Europe. I think what -- a lot of what is happening here is actually structurally necessary and is going to, at the end of the day, make Europe a stronger, you know, unit. And therefore, I tend to take -- at least, part of the reason for that is that, you know, this is -- a view that is verified in the foreign exchange parties.
REHMAll right. To Robin in Melbourne, Fla. Good morning. You're on the air. Robin, are you there?
ROBINOh, yes. I'm sorry.
REHMGo right ahead.
ROBINI'm sorry. I'm standing. I've been waiting patiently. Thank you for taking my call. Listen, I have a comment from the perspective of a person who's been married to a Greek man for 30 years. And we have been visiting Greece. My first trip was in 1983, and we've gone pretty much every year since 1995. And the biggest mistake they made was going on to the euro because they lost their number one source of income which was tourism. They were the Mexico of Europe.
ROBINAll the Germans used to flock to Greece, and they enjoyed -- all the Mexicans used to go -- excuse me -- all the Germans used to flock to Greece because, for example, a beer was equivalent of 32 cents. And then when they went on to the euro, it became one euro, which is now, what, okay, $1.38 you said today.
ROBINThat's just quite a bit of a difference.
REHMWhat do you think, Jacob?
KIRKEGAARDI mean, I don't -- I complete actually agree that it was a mistake for Greece to enter the euro at the time that they did. They were clearly not ready, and, arguably, they cooked their books in order to qualify. But, you know, reality is that they're in now, and I take very strong reservations, as I said, earlier with the idea that you can leave the euro from Greece. And it will actually be a good idea because leaving the euro isn't like devaluing your currency.
KIRKEGAARDYou're introducing a new unit of account, which means that, the second there is a rumor that Greece is going to leave the euro, you're going to have an absolutely catastrophic capital flight. Everybody who has any euros in Greece are going to take them out and put them in a German Bank. And then, you know, you also will have a new currency that is going to depreciate very rapidly, which inevitably, given the amount of imports that Greece has, will lead to, you know, very high levels of inflation.
KIRKEGAARDWe all know what high inflation does. It hurts disproportionately the poorer income groups in Greece. So this idea that, again, as I said, there is a pot of gold on the other side of the drachma rainbow, I just regard it as a fallacy.
REDDYYou have to think through all the steps of what it would entail to leave the euro. First, on the fundamental level, you actually have to print bank notes or bring them back or stamp the existing notes, all of them that are in the country, and make sure that people aren't hiding their existing euro notes. Lock off the border so that you can't move the currency over borders and then, somehow, magically build up the banking system with the new currency and not have the rest of Europe fear it at the same time.
REDDYAnd what we've seen already, with what's playing out now is the playbook, anyone could have predicted six months or a year from -- ago. And that's -- you had Portugal, Ireland and then Greece, and this is just spreading across the continent. People have already moved their attention from Greece, and they're focusing on Italy. And now you're in this moment where you're at the biggest country in the crisis, and somebody's going to have to deal with that.
REDDYAnd so we've gone well beyond these moments where you could actually contemplate a structured, controlled, clean exit because, even if it were theoretically possible, you've now moved well beyond this. And if you start talking about Greece leaving, then you're going to have the same thing, the same discussion come up in Italy where it's just not really possible to do at this moment.
REHMTo Nick who's in Cincinnati, Ohio. Good morning.
NICKGood morning, ma'am. My name is Nick. Love your show. I'd just like to say that I was in Greece recently, about three weeks. I usually go about every couple of summers. And the thing that was amazing to me is that people still believe that, you know, the unemployment there is tenable. I've seen reports where, between the ages of 18 and 25, the unemployment rate is approaching 50 percent.
NICKAnd I'd like to say that in the summertime, you know, there's a simplification of the economy where people bartered the land, producing some goods. People can scratch out a living, even if they are unemployed. I think that once the wintertime hits, once, you know, young fathers see their children, you know, cold and hungry on the streets, I think that the solutions they are going to implement is going to be outside of parliament. You know, real starvation hasn't really started to hit quite yet. But I think it will.
REHMDo you expect that, Robert Scott?
SCOTTI think if you look at the overall levels of unemployment throughout Europe and realize they're going to be concentrated in areas like Greece with tremendous austerity and government cutbacks that are being demanded by the European Union, it's going to have tremendous human cost. And I think those are going to be unacceptably high. And they're going to go on for a decade. Predictions from the -- even the IMF or the GDP per capita won't recover until at least 2018, and those are very optimistic.
KIRKEGAARDWell, I mean, I think I'd take a different take on the politics of Europe because, I think, if you look at, actually, the times at which Europeans have had the chance to go to the ballot box, we could look at their election results and what they've actually voted for. And it's very clear that they have, in my opinion, unambiguously rejected the populist route. We've had now elections in two countries under IMF programs, Ireland and Portugal, and in both cases, they did have electoral opportunities.
KIRKEGAARDThey could have voted for populists, but they didn't. They actually voted for the parties that were most closely aligned with the IMF program. They got rid of the incumbent government, but they actually voted for people, politicians that were very clearly in favor of staying the course of reforms, austerity in, sort of, the IMF way. And I will safely predict that the same will happen in Greece.
KIRKEGAARDIt will either be PASOK, New Democracy or other parties in Greece that will be supportive of the IMF program because, at the end of the day, people in Europe have a lot to still lose. These are still quite, you know -- I mean, I don't dispute this about the hardship et cetera, et cetera in Greece. Absolutely there is. But, you know, this is not, you know, poverty and starvation on the street. I mean, we're not there yet, and we're not even close. But I would predict that if you were to actually try to leave the euro in the case of Greece, that's when you started talking about such scenarios.
REHMLet's talk for a moment about the effects on the U.S. economy of what's happening in the eurozone, Sudeep.
REDDYWell, if you look back at the course of the entire year, you can point to a handful of things that have been restraining the U.S. economy beyond our own structural, longer-term issues here. If you look to -- earlier in the year, you had oil prices rising very quickly from the Arab Spring revolutions. You had the disaster in Japan and what that did to supply roots -- supply chains around the world. And you had the European crisis reigniting the same way it's done in prior years and causing this shock to our markets. And you'd see markets go down in this cycle.
REDDYAnd then once there's more hope for Europe, you see them pop back up. That kind of environment is really destabilizing if you are a business owner or a business leader trying to make decisions about what to do with your own employment, with your own business, not just in the U.S., but around the world.
REDDYYou have multinational corporations seeing this chaos and thinking, why would I go and make decisions, planning for growth, planning for a much brighter when you have a mess like this, and U.S. companies looking at the stock market dropping like this and wondering whether this is going to turn into another 2008, where credit dries up, not just in the core piece, but around the world and leads to this downward spiral.
REDDYAnd after all the wrenching pain we've gone through in '08 and '09 with mass layoffs, with people losing their shirts in the market, why would you want to step up in a moment like this and make the bold decision that everything's going to turn out okay, when it clearly looks like there are a lot more challenges ahead?
SCOTTThe fundamental thing that's driving demand in the U.S. and in the world economy is prospects for future growth. And Europe here is opting to cut government spending, especially in the South, but throughout the economies. That's going to reduce growth in this region. And, furthermore, the banking solutions that are being proposed now for Greece and for, perhaps, for Italy are really Band-Aids. This is a core problem that's going to keep coming up again and again and again.
SCOTTAnd, I think, Paul Krugman recently predicted that there would -- likely to be a run on the banks in Italy in the not-too-distant future. And that could further destabilize European economy. So I think prospects are very weak.
REHMDo you agree with that, Jacob?
KIRKEGAARDNo. I mean, I think, that there is a short term, long-term issue here. I mean, I certainly agree that Europe's short-term growth prospects are very dire. And it's quite likely that you'll have a short-term, relatively shallow recession in early 2012. But I will come back to the point that Europe faces a structural growth issue, and Italy, no more than any other country.
KIRKEGAARDAnd the solution to this long-term structural growth problem really is a set of very fundamental structural reforms of labor product markets and the kind of reforms that we have actually only started seeing being implemented in the southern periphery of Europe as a result of this crisis.
REHMIf Angela Merkel is talking about a decade of hardship for Europe and the eurozone, is the same to be said for the United States, Sudeep?
REDDYEven if we were to see job growth in the United States that's double or triple what we've been seeing, you're still looking at the end of the decade before you have a full recovery from the crisis that we've gone through. So from where we started to where we end up in an optimistic scenario, that's easily a decade. It seems highly unlikely at the track we're on that we're going to see some rapid turnaround before we come to the end of the decade because we just have too many things hanging over us.
REDDYAnd that the hole that we've dug is so deep from the recession and the financial crisis that, even in a rapid, quick turnaround, it's still so far we have to go to pick up from that.
REHMSudeep Reddy of The Wall Street Journal. And you're listening to "The Diane Rehm Show." And let's go now to Raleigh, N.C. Good morning, Phil.
PHILHello, Diane. Thank you for taking my call.
PHILI was calling to see if anybody had mentioned Iceland and their example and how the people had used direct democracy to work through their crisis? And, of course, they're still working through it. But I wonder, does it seem this story is ignored for a reason? Thank you for taking my call. And I'll take my answer off the air.
REHMThank you. Jacob.
KIRKEGAARDI think the case of Iceland is an interesting one. But I think one needs to be very careful with drawing too many conclusions from a country that is lavishly endowed with natural resources. In the case of Ireland, (sic) it only has 220,000 people, inhabitants. And I think it's also -- yes, they have had rapid or relatively rapid growth. They haven't had, you know, the kind of economic slump that we have seen in Greece, for instance.
KIRKEGAARDBut I think if you look at other metrics, they've had, you know, a 60 to 70 percent rise in the price level, which you can have in a country as rich as Iceland and with, essentially, a social welfare state without a lot of social implications, but if you look at their net national income per capita, basically, if you control for their ownerships of foreign assets, they had declined about 30 percent, much, much more than you have seen in some of the peripheral countries. So, again, there is a degree of apples and oranges. And I just want to be careful with drawing too many conclusions from Iceland.
REHMAll right. So if we see transition in Greece, if we see transition in Italy, what's next, Sudeep?
REDDYThe big question is what these new governments are actually going to do and what kind of mandates they have once they take over. If you get governments that are going to be committed to international bailouts, to taking some tough, difficult measures, then there might be some more hope. But the moment you actually have technical governments come in, they might realize that the politicians were facing their problems for a reason. There is a deep distrust on the streets of Greece about what's going on.
REDDYFundamentally, if you were to have the debate, you might say that they'll choose to stay in the euro. But for people who aren't politicians to step into an environment like this and deal with all of the great difficulty socially that are going on and that are certainly going to pick up in Italy as problems get worse, that's going to -- adds to some doubts about whether we're actually going to turn the corner under a new government or maybe just get by a few months before some of the fundamental, deeper problems will come to the surface again.
REHMWhat's your view, Bob Scott?
SCOTTWell, I think we've been talking a lot today about structural problems within Europe. I think we hear the same kind of complaints here in the United States. The analogies, I think, are quite clear. People talk about structural employment in the United States. The problem is that we have, basically, six unemployed people for every job opening here in this country. We have a problem of inadequate demand, and yet what we're seeing proposed for our future budgets in the U.S. is more austerity.
SCOTTWe're looking at the same thing in Europe, more austerity in the face of massive and growing unemployment. I don't think this is a solution that's going to work in the short run or the long run until we come to some kind of agreement -- around policies to actually create jobs.
KIRKEGAARDNo. I mean -- again, I mean, I largely share the view -- the diagnosis of the U.S. economy. But in the case of Europe, again, I would take a look at European employment rates. And, I mean, the fact is that as deep -- the recession in Europe was deeper in GDP terms than here in the United States. But, actually, employment rates only fell about 1 to 2 percent, which basically took them back to about 2005 levels.
KIRKEGAARDThe reality is that in the United States, employment rates are back to where they were in the early '80s, which, of course, is, you know, before women fully entered the workforce. So for U.S. male workers, it's basically the worst ever. So we shouldn't -- I mean, there really is a material difference here. I just want to highlight that.
REHMJacob Kirkegaard, Sudeep Reddy, Robert Scott, thank you all so much.
REDDYThank you, Diane.
REHMAnd thanks for listening. I'm Diane Rehm.
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