MS. KATTY KAYThanks for joining us. I'm Katty Kay of the BBC, sitting in for Diane Rehm. Diane will be back tomorrow. In Italy, Mario Monti, a well-known international economist, has taken the place of former Prime Minister Silvio Berlusconi, who resigned over the weekend. Monti has the task of imposing new austerity measures demanded by the E.U., the European Central Bank and the IMF.

MS. KATTY KAYJoining me to talk about the political challenge of coping with Europe's sovereign debt crisis: Michael Hirsh of National Journal magazine, Liaquat Ahamed, investment manager and former economist at the World Bank, Heather Conley of the Center for Strategic and International Studies. Thank you all for joining me.

MR. MICHAEL HIRSHThanks for having us.

KAYAnd, Liaquat, happy birthday.

MR. LIAQUAT AHAMEDThank you. And happy birthday to you, Katty.

KAYThank you. What are the chances of that, both of us at the same time? The phone number here is 1-800-433-8850. Drshow@wamu.org is the email address. We'd love to hear from you. We'll be opening the phones in just a while. Questions and comments, very welcome. And, of course, you can find us on Twitter and on Facebook as well. Michael Hirsh, let's start with Mario Monti. He has a formidable task.

KAYI'm not actually sure who anyone in their right minds would want to run, you know, any of the southern European countries at the moment, but what exactly does he have to achieve?

HIRSHWell, on paper, he's superbly qualified: former vice president of the European Central Bank, economist, educated at MIT, certainly understands the economic issues. But what his caretaker government faces in the weeks ahead is much more, or at least as much, I should say, of a political issue.

HIRSHAnd as with all of these so-called technocrats that now seem to be taking the reins of power in these critical countries, particularly Italy and Greece, the question is, you know, are they going to have the political oomph and the political savvy to handle both the pressures coming from the people running the crisis -- Germany and France, the International Monetary Fund -- that are putting pressure on them for austerity and to deal with these emerging resistance that we're getting from their populations?

HIRSHRight now, clearly, in both these countries -- and the focus is on Italy and Greece right now -- you do have something of a honeymoon period. But, you know, is that going to -- how brief is it going to be? Is it going to be marked in hours or weeks? We don't really know.

KAYOkay. Heather, spell out for us a little bit sort of in measurement exactly what he has to achieve and how quickly he has to achieve it.

MS. HEATHER CONLEYWell, the Italian -- first of all, he's to form a technocratic government, and he's in the process of doing that now. I love his nickname the Italian press are calling him, Super Mario. I love that visual. He will have to be super to both get this technocratic government formed, but also to implement these austerity measures. The Italian parliament over the weekend adopted additional austerity measures.

MS. HEATHER CONLEYBut as we've seen in Greece, parliaments can adopt all the measures they would like. It's how they are implementing them. And the barriers, the unions that don't want to see these very preferred positions -- you are cutting, to Michael's point, you are cutting in to the political, you know, third pillars of many of these political parties, and so Super Mario is going to have to be super politically tough to implement these austerity measures.

MS. HEATHER CONLEYThe Italian government has invited the IMF in to supervise how they're implementing these measures, and that's the real question. They can promise, but can they deliver? And it's very unclear -- I think, how the Italians decide to go to early elections or whether they decide to go to early elections tells us how great a political vortex these austerity measures will be implemented, what environment they will be in.

MS. HEATHER CONLEYI think this will be incredibly difficult. Now, the pressure is on. They'll have to deliver. But as I said, you were touching some of the most difficult political stakes. And these groups, Berlusconi's own party, his former coalition parties are going to be very reluctant to give up these very important constituencies.

KAYLiaquat, he has to reduce Italy's debt by what, $2.6 trillion?

AHAMEDWell, it is...

KAYAnd also try and increase growth.

AHAMEDYeah. And that's what I would focus on.

KAYSorry, reduce the debt, which is $2.6 trillion.

AHAMEDYeah. The -- if you believe that the problem was only government profligacy, they're heading in the right direction. But as you point out, the other problem is growth. And over the last decade, Italy and Greece and all of the southern European countries have put themselves into a highly uncompetitive position 'cause they've tried to achieve German standards of living without German productivity.

AHAMEDTo reverse that process will take not months, but years. And the question is, will the financial markets give them the time because they've now raised the specter of the euro falling apart? So if you're a Italian or a Greek company, you can currently move your money costlessly (sic) from the local bank to a German bank, and you avoid the risk that it will be lower in value if the euro falls apart.

AHAMEDSo what we're getting is a silent bank run on the banking systems of Greece and Italy, and the ECB, the European Central Bank, is doing its best to act as lender of last resort. But we're talking about a giant wall of money. And at some point, the ECB may say, give up, at which point the whole thing falls apart.

HIRSHAnd at the same time, you're getting a run on sovereign debt since the Oct. 26 agreement on Greek debt, substantial haircut was assigned to the banks, you've seen a flight from what is perceived to be the weaker debt in some of these countries. So, you know, you're having -- the bank and the sanctity of the banking system and the questions about the banks are being raised at the same time as you're seeing the debt of some of these countries. And now there are even questions about France, you know, (unintelligible).

KAYHeather, let's explore that a little bit more and the knock-on effects on the rest of Europe. Italy is the third largest economy in the eurozone. If Mario Monti, Super Mario doesn't manage to be quite so super after all and keep the political classes with him in order to enact these austerity measures, what's the fallout from that?

CONLEYRight. I think the downward pressure on the three countries that already have the bailout package, we're seeing their borrowing cost increased. And I think, even today's news, we're seeing where stocks are declining on Spain's largest banks. October was the most significant month where Spain borrowed -- Spanish banks borrowed from the ECB. We're seeing this contagion already spreading, I think, very much to the French banks.

CONLEYI think we're seeing between the credit downgrades of France's most important banks -- and again, remember what the last summit required of European banks are having to raise core capital, Tier 1 capital, to 9 percent. In addition to this giant wall of money, they're selling assets. They are trying to, you know, maintain some semblance of economic growth. The system just cannot handle all of this pressure. And so what we're seeing now, it's almost -- it's gone beyond Greece. It's obviously Italy now.

CONLEYI think the next pressure point we're going to see is France and the French banks. Look what they did last Monday, historic austerity measures on top of what the Sarkozy government announced in August. Now, six months before an election, would you enact major spending cuts and increase in taxes?

KAYNot unless he had to.

CONLEYNot unless you absolutely had to. And I think this is a danger sign.

KAYOkay. The mood here in Washington this morning is a kind of sigh of relief that we seem to have got through the latest installment of the drama over there in Europe. But, Liaquat, judging from what the three of you are saying, perhaps, Americans are breathing a sigh of relief a little too early.

AHAMEDYeah, I mean, that's the history of this crisis that we buy ourselves time. And it has -- I mean, we have bought ourselves some time but -- so, I mean, what will happen during that time is hard to know. Ultimately, I think it requires -- the key player in all of this is Germany. And we have to get a sign from Germany that they're actually willing to foot the bill for the past, not the future, but basically this whole construct was put together because Germany implicitly gave everyone the impression that they were going to underwrite this whole setup.

AHAMEDAnd now, they've actually changed the rules, and they've said, sorry, we're not going to underwrite this whole setup. So the first thing is to argue about who's going to pay for last night's dinner and then to figure out some rules about who pays for dinners from now on.

KAYOkay. Let's talk a bit more about the contagion issue that Mike lift. I am businesswoman making paper products, for which there is a market in Europe. Why should I be concerned about what's happening in Italy this week and potentially in France next week?

HIRSHWell, I mean, first you -- the first thing you have to be very concerned about is who you're banking with. The big -- another big question hanging over this ongoing crisis is, you know, is there some bank -- a French bank, Italian bank, maybe even a German bank -- that's going to be the Lehman Brothers of this crisis. And we're suddenly going to discover, and I mean suddenly, you know, in a matter of hours that it has a lot of bad debt on its books.

HIRSHIt would be a banking version of, say, MNF Global, which went down abruptly last week, the American hedge fund under former New Jersey Gov. Jon Corzine because it took on rather without -- rather incautiously without any kind of hedging enormous amounts of European sovereign debt. So, I mean, that's -- to get to your question, that's who you're going to be wondering about.

HIRSHAnd I think to pick up on Liaquat's earlier point, you're going to be moving your money at your any average business person to what is perceived to be the most safe banks, and it's probably going to be in the northern tier, starting with Germany.

KAYLiaquat.

AHAMEDYeah, I mean, that's already happening. Money market funds in the U.S. have cut their exposure to European banks by a giant amount. And surprise -- I mean, this was a statistic that amazed me that European banks depend heavily on financing from U.S. money market funds. I mean, who would have thought that?

KAYSo what happens there over the next week has to be monitored very carefully here as well. Liaquat Ahamed, Heather Conley is also in the studio with me. Michael Hirsh is with me as well. We are discussing the European financial crisis and, of course, its implications around the world. The phone number is 1-800-433-8850. The email address is drshow@wamu.org. We'll be opening the phones in just a while. Do call us with your questions and comments. Stay listening.

KAYWelcome back. I'm Katty Kay of the BBC, sitting in for Diane Rehm. You've joined our discussion on the state of the euro, of course, the resignation over the weekend of the former Italian Prime Minister Silvio Berlusconi. He's been replaced by Mario Monti, a technocrat who is going to try and implement more austerity measures in Italy.

KAYHeather, we were speaking just before the break about the kind of potential (word?) effect here in the United States. And I do think there is a sense in which America was kind of slow to wake up, and perhaps The White House was slow to wake up to the severity of what was happening in Europe and in the eurozone. And now, I almost feel like they're kind of saying, we don't have to worry about that one anymore.

CONLEYWell, in some ways, they're like the European leadership. I mean, they're trying to buy time so they can focus on pressing domestic priorities here in the U.S. But I -- you know, I think the exposure here is significant. There was congressional testimony a few weeks ago by a colleague at Carnegie who said -- now again, these figures, I'm sure, are disputable. But, you know, there's $850 billion of direct exposure to sovereign debt, $400 billion in exposure to eurozone banks.

CONLEYAnd then the big unknown is approximate $18 trillion in indirect exposure. That's the credit default slots. That's this unknown market. And Europe represents 25 percent of U.S. exports. So you're -- if you're a businesswoman and you want to, you know, you want to increase exports so you can hire more people, Europe isn't buying. You're seeing where consumer confidence is at, you know, lows. You're also seeing absolute anemic growth, if not a rollback to recession. That's a problem for the American economy.

CONLEYAnd this has got to be of great concern to the White House because quite frankly, what happens or does not happen in Europe in taking effective control of this crisis, I think, will have enormous repercussions on the American economy.

HIRSHYeah, a couple of things here. One, there is a sense of helplessness about what to do on this crisis. We haven't had much of a say in the euro since the advent of the eurozone. You go to the con, G-20 summit, you know, a week or so ago and Obama is just one of 20 players, literally. There's no sense that he or Treasury Secretary Tim Geithner have any say in this matter. And yet, it is probably the single biggest determinant on who's going to be elected in 2012 if the economy is, as we think it is, issue number one for the American electorate.

HIRSHThe second issue is one that goes back very much to Liaquat's wonderful book, "Lords of Finance," which is how really intelligent and able people can still choose exactly the wrong set of policies. And this -- and I'm sure he'll want to talk about this. But there's a question of, you know, remember what's going on here. Here in the U.S., we're talking about deficit cutting. In Europe, they're talking about imposing austerity on already trembling economies.

HIRSHAnd there's an argue -- I mean, this is the precisely the wrong tact to take. You saw the new head of European Central Bank, Mario Draghi, come in and cut rates right away by 25 basis points, surprising people. But there's a question of how much power he'll do to continue that going against, you know, traditional austerity-minded thinking in the ECB, which is very dominated by the Bundesbank in Germany.

HIRSHSo the point is, you know, it's not just a question of having little control, but are we even pursuing the right policies? Or are we, in fact, pursuing precisely the wrong policies?

KAYLiaquat, let's talk about that a little bit more because that does seem to me almost the big economics question posed by the 2008 crash. What's the right balance between cutting and stimulating? And do you think that in Europe now, they are starting to get it right? Or is the austerity just going to put such a damn prone growth that we're not going to be able to get the deficit cuts that we need long term because there isn't going to be the growth to do it?

AHAMEDWhat you need is austerity in the right places and stimulus in the other places. And the key about financial crisis is you need an adult in the room who says, I will take responsibility for the stability of the system, and I will act maybe against my short-term interest, but in the interest of keeping this whole thing together. And the obvious place in Europe is Germany. And the problem in Germany is that Angela Merkel has a political problem, that it's hard to persuade thrifty Germans that they should be paying for the sins of feckless Italians and Greeks.

AHAMEDAnd I think the fascinating thing was that Europe thought for a while that they could go to China for assistance, and the Chinese responded, look, if you can't solve your own problems, why should we commit our own money? And if Germany isn't willing to commit money, why should we? You know, we're not foolish. We're not going to risk our own capital if you're not willing to have some skin in the game.

KAYHeather, isn't this the problem that we are, in Europe, facing a whole bunch of elections? We have elections coming up in Spain. Nicolas Sarkozy is facing reelection. Angela Merkel has elections coming up next year. We have elections here in the United States next year. And the political process is impeding what Liaquat is saying might be sensible economic long-term decisions.

CONLEYIt's exactly what we've been calling this crisis. It's where austerity and democracy collide, and we're seeing that collision in parliaments and even in our own Congress for the last several months. It is so interesting because at a time where you would think globally we must come together, we must seize the moment and resolve this because we're all going to be impacted if Europe melts down, it's at a time when all of the political leadership are turning inward.

CONLEYThey're renationalizing policy because they have their own electorates to speak to. Interestingly, German Chancellor Merkel, a recent opinion poll had her up by 3 percent. In Germany, she's very focused on domestic issues, whether that's nuclear power transformation. There's a huge crisis right now going on in a far-right extremist group, an anti-Semitic group that's been discovered over a decade.

CONLEYShe's very consumed domestically, and she thinks she has the right recipe, which is, I'm worried about the long-term stability and we'll get there step by step, and we're going to cut our way through this crisis. And I don't think she's going to budge. She said today speaking to party leadership in Leipzig that she's absolutely not going to support a Eurobond. She's not going to support this transfer. So you're seeing a renationalization of policy and a go it alone, you know, and that's the last thing we need to do. And that's what they're coming to.

KAYMike, I was speaking to a senior economist at the IMF just a couple of weeks ago who said to me that the difference between Europe and America is that in Europe, the political systems are actually harder to navigate because you're dealing with 17 countries in the eurozone. At least in America, you can see what the path could be to addressing America's long-term economic health, just the politicians aren't up to it.

HIRSHAbsolutely. Or as a Spanish economist said to me just the other day, at least we have an excuse...

KAYRight.

HIRSH...for our dysfunction, whereas, you know, what's your excuse? But, you know, this really goes to a much more fundamental issue, Katty, which we haven't really talked about, which is a essential -- existential issue about Europe. It was a -- most economists and policymakers would agree that it was somewhat misconceived at the start because you had this loss of your currency, which is traditionally been used during economic bad times to help you out of it by devaluation, and yet at the same time, no additional control or coordination of fiscal policies.

AHAMEDAnd what you're seeing now, the hope was, some weeks back, that the Germans particularly and others would begin to see their way towards some sort of fiscal coordination, including a common Eurobond.

AHAMEDWhat you need now in Europe more than anything else is some sense of confidence to the markets that there is control from the center, that there is going to be some dependable entity that's going to be able to take us out of this, whether it's an expanded ECB, which, you know, has been buying a lot of this debt in the secondary market, but where the Germans and others embrace this role in the future, or something like a Eurobond-issuing agency like, for example, the European Financial Stability Facility that was created that gained banking license and became an official and sort of permanent entity at the center of Europe.

AHAMEDSomething like that that would create a fiscal coordinating role is really what you need, and yet that goes to the essential politics here, what you're talking about. You still have 17 countries beginning with Germany that are refusing to acknowledge that, in fact, we are now -- in some respects, we have to be the United States of Europe. And they're not willing to go there.

KAYBut, Liaquat, you've described the euro as a bad marriage. Now, most bad marriages, there's a husband and a wife. And, frankly, you know, whatever you -- negotiations you have, the husband is never going to change that much, and the wife is never going to change that much either. Let's take Germany and Greece. I mean, the Greeks are never going to be German. The Germans are never going to be Greek. It's not going to happen.

AHAMEDWell, we have an example of a bad marriage in Europe, which is Northern and Southern Italy. And for the last 100 years, Northern Italy has been paying money to Southern Italy to keep it alive. So the question you have to ask yourself is, are the Germans willing to pay for the next 100 years to keep this construct alive? And my view is no. So they went in to the marriage with unrealistic expectations, and they don't want to break it up and sort of hurt the kids.

AHAMEDSo they would like to find a way of getting out of the marriage, and that may take several years. But I think we're headed down a different path, which is less European unity and trying to figure out how they sort of navigate out of this box they've got themselves into.

KAYIs there, Heather, within Germany, a generational split here? I've had all the Germans say to me, older Germans who work in finance, say, we must keep the euro together. And the implication, the kind of subtext, has always been we feel safer if our country is tethered to Europe.

CONLEYYou know, I think this is -- absolutely. There's a huge generational moment right now within Europe, and particularly within Germany. You're losing that generation, the Helmut Kohl generation. There was a -- called a romanticism about the European ideal. There was also historical understanding that Germany had to pay in support of a greater European ideal. And I think that is coming to an end, not dramatic end, but absolutely.

CONLEYI see where we are facing a change of attitude that -- you know, maintaining the sort of you must pay at all cost. This idea of European solidarity is just not appealing to a domestic German, who, for the last 20 years, has paid a transfer union, was called Eastern Germany. They still have a tax today that pays for infrastructure developments in Eastern Germany. They have been through that.

CONLEYThey have had lower wages. They've taken painful reforms under Gerhard Schroder. And now they feel like I've -- I'm finally reaching good economic growth, and now I have to pay it again. You know...

KAYAnd younger Germans just don't have that war guilt. I mean, they have much less of it than their parents do.

CONLEYThey -- it's certainly ebbing, absolutely. And I think, you know, you look at both sort of the Occupy Wall Street movement here in our own country. We're seeing the young people in Madrid and the rise of this group. And, look, this -- I wonder what the next generation, the leadership in Europe 20 years from now who's, you know, occupying Rome right now, what lessons are they taking from this crisis?

KAYOkay. We're going to go to the phones in just a second, but, Liaquat, I want to come back to one thing because you just spoke about, basically, in the long run, Germany wants to get out of this marriage. Does that mean you're looking at the end of the euro, and what are the knock-on effects of that happening?

AHAMEDYeah. I am looking for the end of the euro, and I think the way you will see it happen is that, at some point, you will see capital controls. They won't announce we're abandoning the euro. What they will do is one country after another will impose capital control. So you'll probably first see it in Greece, and then you might see it in Portugal, and then Italy. And that spells the end of the euro.

AHAMEDAnd then after that, they will spend several years trying to work out what a euro in Italy means relative to a euro in Germany. So that's sort of my scenario for the end game.

KAYYou are listening to "The Diane Rehm Show." I'm Katty Kay. And if you'd like to join us, do call. 1-800-433-8850 is the phone number. Or do send us an email to drshow@wamu.org. We're going to open the phones now to Tom in Tallahassee, Fla. Tom, you've joined "The Diane Rehm Show."

TOMHey.

KAYHi.

TOMI'm just trying to understand why -- other than the fact that we would lose short-term money, you know, from banks that have bet the wrong way or people who put money markets in the wrong areas -- why we would want to be cheering on the E.U.

TOMHistorically, we have always fought alongside the countries that were breaking up Europe. We didn't want to see Greater Germany unified, so that's what got us into World War I. And certainly we didn't want to see it unified in World War II under Hitler. And the same in reverse is also true. Britain and France always supported the South in the Civil War because they didn't want to see a unified United States.

TOMIt doesn't help us, on a competitive level, to see another -- you know, all these other nations team up and form a greater force as a competitor. And unless you're an ardent New World Order person and just like to see, you know, everything more unified, or maybe an ardent socialist and feel, you know, don't want to see these governments that have run their budgets into the ground by passing out favors for political, you know, gain, it just doesn't seem to benefit us at all to be cheering for the wrong team.

KAYOkay. Michael.

HIRSHWell, I wish it were that simple, but the caller's point goes to a much more important one, in fact to what we were talking about earlier. The price of not getting involved, not cheering on a unified Europe or a unified eurozone we saw paid in the blood of, you know, of hundreds of thousands and millions in the two world wars of the 20th century, which is what generated, politically, the perception of a need for a eurozone.

HIRSHYou got to remember, it wasn't just Hitler. It was Germany's role as the largest country in Europe, the strongest country, the fears of Germany. There was a very frank quid pro quo, at the time of the eurozone, that, OK, if Germany is going to reunite, in the aftermath of the Cold War, East and West -- and this was understood between Helmut Kohl and Mitterrand, the French president -- then Germany is going to become part of a eurozone. This was part of the political deal. It was an understanding.

HIRSHI -- you know, to slightly dissent from what was said earlier, I don't agree that younger Germans have simply left off their war guilt or that this new generation no longer feels a sense of obligation.

KAYAlthough polls show that their attitudes are changing.

HIRSHUnquestionably. But if you talk to a lot of European ministers, people, middle age or even younger, they feel the same sense of obligation, historical-political compulsion to keep this entity together. And I think if there is a solution -- and I don't know whether there will be -- it will be political and historical.

HIRSHIt will be for those reasons, that if, in fact, some of these institutions are created, like we were talking about -- where a fiscal coordinating entity that goes against the desires of a lot of the Germans, if the German politicians, whether it's Merkel or her successors, can manage to do that -- that it will be for these historical reasons, I think.

KAYBriefly, Heather, is a unified Europe more or less of an economic threat to the United States?

CONLEYIt's not a threat. It's a partner. It's a mass trade investment partner. And we have a great deal that we want to see Europe succeed. And even looking at the foreign and security policy, our NATO partners who are in Afghanistan, who are spending -- the European Union is the second largest aid donor in Afghanistan.

CONLEYIn fact, combined, the U.S. and Europe constitute 80 percent of global official development assistance. Libya would not have been possible without our European partners. We want Europe to be strong and cohesive, a global actor. And while they're totally consumed by this crisis, they cannot play that role.

KAYHeather Conley is senior fellow and director of the Europe Program at the Center for Strategic and International Studies. Liaquat Ahamed is the author of "Lords of Finance: The Bankers Who Broke the World." Michael Hirsh, chief correspondent of National Journal magazine, is also with me in the studio. We'll be taking more of your calls with your questions and comments after this short break.

KAYWelcome back. I'm Katty Kay of the BBC, sitting in for Diane Rehm. You've joined our program on the European debt crisis, its impact globally and what the future holds for the euro. Let's go straight back to the phones to Bob in Roanoke, Va. Bob, you have a question for my panel.

BOBYes. Thank you. To me, in what I've heard today and also what I've been able to read on the Internet, I have not heard anyone or read from anyone what I feel is the basic cause of both the problems in Europe and in the United States. And that's what I call a socialism light. Not true, full-blown socialism, but it's being played out on Occupy Wall Street movements. The entitlements -- you go to France, they think they're entitled to how many weeks of vacation every year and they only have to work, what, 30 hours and to get all these?

BOBAnd the people in Italy were rioting because they weren't going to get what they were -- thought they were entitled to because some socialist government, socialist-like government had promised them that, oh, we're going to give you everything. Well, you know, a big wake-up call to government. You first have to take it from somebody who has been willing to work themselves to the bone to get in order to turn around and give it to somebody else.

KAYOkay. Various points raised there. First of all, of course, we've had mixtures in Europe of center-left and center-right governments over the last few decades, so it hasn't -- certainly hasn't been, you know, just socialist governments. I can't think of a purely socialist government in Europe in the last few decades. But also, Liaquat, it raises the interesting question. What Bob was saying there, if you look at Northern Europe, which actually have some of the strongest social programs, they're also some of the countries which are seeing the strongest growth.

AHAMEDYeah, very much. I mean, the -- look. Let's take Ireland. Ireland was hardly a socialist country. It got into trouble because of the financial crisis, and they've got into trouble because it allowed its banks to grow too large and then had to bail them out. And its banks accounted for, you know, four or five times the size of GDP. And that's the reason why it had to take on all these government debt. So I think the sort of analogy that this all has to do with social welfare programs and entitlements is not correct in a broad sense.

AHAMEDNow, it is true that there are some countries -- and Greece is the worst culprit -- that did allow their social programs to exceed their ability to pay for them. And that's why they're in trouble. But that's not the problem in Spain. That's somewhat the problem in Italy. It's certainly not the problem in Ireland.

KAYAnd certainly not the problem in the United States, of course, which also, Heather, has built up large debt. But no one, I think, would call this a socialist country.

CONLEYRight. What the caller was noting is, in fact, the social compact between European governments and European people will be changing. This crisis will fundamentally change that. It's not only, you know, the very difficult process of taking away benefits, benefits that were assumed that they would be there for a lifetime. It's also Europe's demographic challenge, which is going to exacerbate these issues. They're not going to have enough workers to support their elderly population. That is going to be a challenge.

CONLEYBut yes, the 35-hour workweek in France will have to change. And we're seeing where retirement ages in Greece are going from 60 to 62, but in some are going from 65 to 67, actually higher retirement ages than here in our own country. So we are going to see a very different social compact. I think, transatlantically, we're going to have to do our business a little differently and our promise to the social welfare system will have to change, absolutely.

KAYAnd that's -- the big challenge, it seems to me, for political leaders in Europe is to keep their populations with them as they go through what are almost cultural changes, right, Michael? I mean, to -- for a Greek government to try to say to the Greeks, okay, you actually do have to now register your house as finished because that will mean you, of course, have to pay taxes on it, whereas in the past, you've had this attitude that tax was kind of a lifestyle choice.

HIRSHYeah. I mean, there's going to have to be an understanding in the Southern-tier countries, like Greece, Italy, that the social compact needs to be rethought, as well as in France. That's the political understanding that needs to be achieved there, and it's huge. And you're going to see more rioting in the streets. And there's a separate political understanding that needs to be reached in Germany. And again, this is the central player in all this. This is the reason for the eurozone, frankly, German history.

HIRSHAnd it is ultimately the solution in terms of the kind of political understanding that Angela Merkel, the chancellor, can reach with the German people over Germany's willingness to subscribe to a fiscal as well as a monetary union, one in which Germany and these other countries are no longer as sovereign as they were. They gave up a big piece of sovereignty with money. They've got to do it again on the fiscal coordination side and on the debt side.

HIRSHThere's little sign of that, but I think most people would agree that is the ultimate solution. And it's a huge political move to make for the German people.

KAYOkay. Let's go to Keith in Gainesville, Fla. Keith, you've joined "The Diane Rehm Show."

KEITHThank you. I have two questions and a comment. Can Germany economically afford for the euro to fail? If the euro fails, do any trade agreements with the E.U. -- are they still valid? And a comment I've made to some friends, it may be a bit obscure, one lira plus one drachma equals zero euros.

KAYKeith, Liaquat likes to take that.

AHAMEDOn the current arrangements, legally, there is no way to get out of the euro. And if countries get out of the euro in a very disruptive way, I -- we certainly see, you know, overnight, Greece stops -- the Greeks stop picking up the phone, stops sending their interest payments abroad and no one can get their money out -- then I could see the free trade arrangements in the E.U. fall apart.

AHAMEDBut if they come to the conclusion that this is a bad marriage, my analogy, and that they need to, if you like, move to a two-speed Europe, a Europe of Northern Europe, which is quite integrated, and then a Southern Europe, which has somewhat different arrangements, they will not want to jeopardize the free trade zone because that was responsible for the prosperity of Europe before we went into this problem.

HIRSHYeah. There was an analysis by Credit Suisse, the bank, some weeks back that suggested a breakup of the eurozone would cost no more than, say, four to 5 percent of GDP of the eurozone countries. And I do think if it happens, it will happen in the way Liaquat described. It will be a gradual process, a lot of pretense capital controls rather than being something abrupt, causing, say, a, you know, meltdown in the financial system because of all the holdings in euros.

HIRSHBut, you know, I would also caution that while it is a bad marriage, the Northern and Southern Italy example is an interesting one because that has remained a bad marriage. One can argue that the, you know, north and south of the U.S. is also a bad marriage that's remained in place (word?). That can happen with marriages. And I would suggest that this particular bad marriage might last longer than we think.

KAYOkay. Let's go to Kim in Boss, Mo. Kim, you've joined "The Diane Rehm Show."

KIMThank you so much for permitting me to speak my mind.

KAYYou're very welcome. Go ahead.

KIMThere's two underlying causes that really are the deepest things that affect all the others, and one is rather -- with the assembly line and then with the electronic age and now with the cyber age, the -- man's labor has not adjusted. They not adjusted -- not with education, not with things like the 30-hour workweek, which we've, you know, wobbly spot for. They knew back then that it wasn't as necessary to put out as much. And the second causal element is the consolidation of wealth.

KIMAnd so when you're talking about people that have been deprived of the public trust, their water, their minerals, their -- everything that should belong to everyone -- yes, there's a certain feel -- feeling of entitlement because the wealth was consolidated off the backs of many workers, and so they have not been -- now, they're no longer needed and there's not been any adjustment there also.

KIMAnd the only way people can be creative is to have some leisure. And I firmly think we have to go back locally and just go as local with everything you can do with your time, your effort, your energy, your products. And that's basically what I'm saying.

KAYOkay. Kim, I think you raised -- that first point you raise is a really interesting one. And I think that Jeffrey Sachs wrote a very good column in The New York Times this weekend, which explained this process of labor shifts and how we have moved from an era of brawn to an era of brain. And actually, perhaps, governments have been focused on the wrong things, and that in the United States, the debate has been about big government and small government, and maybe it should have actually been about education and investing infrastructure and trying to prepare our workers for this new economy.

KAYBecause, Heather, Kim is right. You know, some of these jobs aren't going to come back again, and this is both in the United States and in Europe. This is the overarching challenge, it seems to me, facing governments, is how do we deal with this reality and how do we find those jobs.

CONLEYRight. It gets back to that competitiveness question, which we talked about. That, yes, this is about reducing the debt burden, but it's also about how do you regain competitiveness. And this is where the Southern European states really have that lost decade, particularly Italy. They did not seek out the innovation and what they could do be competitive. And this is why we're seeing, in a way, the economic structures of Europe separating it because you have overwhelming German very strong competitiveness, export led. It produces, it manufactures...

KAYLot of investment in education.

CONLEYAbsolutely. Not that we could not fine-tune all of these and I, you know, the German education system could also be improved, but it's about how to be competitive in the 21st century. And what the euro allowed the south to do is borrow on German rates and not have to worry about that competitiveness, and they lost well over a decade. And now how do you catch up in the midst of just, you know, just deep and anguishing cuts to their spending?

CONLEYWhen government is spending, because so much of your economy, how do you readjust that, to Liaquat's point? It's going to take decades. This is not going to be an immediate process.

HIRSHI just wanted to say, I mean, getting back to what this caller said and a couple other callers, I mean, there's this kind of -- there's this meanest way of thinking out there that's emerging that the problem, you know, is government. And it's just falsifying, frankly, what happened in history.

HIRSHLook, what led up to this particular economic crisis was, in the main, one of the most laissez faire markets created in history, which was the marketing of over-the-counter derivatives overseen by Wall Street and the freeing up and deregulation of a lot of these institutions under the repeal of Glass-Steagall and other laws that created, effectively, a monster that ran amok. Government's role in that was a minor one.

HIRSHWe have not dealt with it that well in terms of pulling it back from that brink. But let's not forget what the cause of this crisis was. You know, there's this meme out there that's big government and big government only, and it's just really silly. And unfortunately, we've seen a number of policymakers, including New York Mayor Michael Bloomberg, who should know better, saying in recent weeks that the problem was, you know, government housing policies, mortgage policies here in this country, and it's simply not true.

KAYI'm Katty Kay. You're listening to "The Diane Rehm Show." And if you'd like to join us, do call 1-800-433-8850. Or send an email to drshow@wamu.org. I want to read you an email. It's coming from Marilyn for -- who writes us from Colorado. "With the wall-to-wall coverage of the euro panic of 2011, there's been no coverage at all in the U.S. of the impact of drastic cuts made by the conservative government in the U.K."

KAY"Please discuss how those cuts have pushed the U.K. back into a recession. And, of course, negative growth will not pay a country's debt." Liaquat, is Marilyn right? And what's the lesson there?

AHAMEDWell, the calculation in the U.K., what they did was they cut back on government expenditure and tried to raise taxes on the calculation that they would get a source of growth by their currency going down and they would get a little bit of an export boom. And so they would end up avoiding a recession because of the potential positive effect on exports. And unfortunately, with what is happening in the rest of the world, they weren't able to do that because they -- they're very heavily dependent on Europe.

AHAMEDA small country like the U.K. can consolidate fiscally and find some growth from exports, but the whole world can't do that, and that's the dilemma. And certainly a country like the U.S., is going to find it very difficult to grow its way out of this problem just through exports.

KAYSo what's the -- if you look -- so go on. You got the hotline to Barack Obama here.

AHAMEDWell, the solution is you got to go very slowly on government austerity now. You clearly have to do something about long-run entitlements. But when you’re growing at one to 2 percent, cutting back government expenditure dramatically or raising taxes dramatically is not the path to prosperity.

KAYOK. Heather, you have -- we have, what, about nine days left for the deficit super committee. And I'm sure they're looking at what's happening in Europe and looking at the lessons to be learned there. You, are now have the ear of the super committee.

CONLEYOh, my goodness, what power.

CONLEYPlease come up with a resolution. I guess that would be my message. No, it's very interesting watching this crisis from a transatlantic perspective. And the Obama administration has offered advice to the Europeans about this. You know, boy, that lender of last resort. How about that TARP project -- program that we did? And in some ways, it's a fundamental misunderstanding of the legal requirements and what Europe can do and what it cannot do, and it's cost some transatlantic frictions.

CONLEYBoth the German finance minister and the Austrian finance minister felt very compelled to tell Secretary Geithner to, sort of, mind his own business. We wouldn't need that advice from the Americans. So we're finger-pointing a bit. I think there are some in the White House that would like to point their fingers at Europe in saying, well, we'd really be much better economically if this uncertainty wouldn't be hanging over our head.

CONLEYBut, yet, we're facing very similar challenges. And rather than sort of coming together and thinking through some innovative solutions that, sort of, again, maintain a Western-minded approach to global governance, economic governance, to the path forward. We're -- the tendency, the political tendency, I think, is to point fingers. And when President Obama, last month, noted in a speech that Europe was scaring the world, many of my European colleagues, in reaction to that, said what, you think last summer's debt ceiling crisis didn't scare us? We both have our futures in each other's hands.

CONLEYAnd so don't point the fingers. You know, join hands and figure this out quickly because we need to develop a new approach here. The stakes are great.

KAYHeather Conley from the Center for Strategic and International Studies. Liaquat Ahamed, author of "Lords of Finance: The Bankers Who Broke the World." Michael Hirsh, chief correspondent for National Journal Magazine, thank you all so much joining me.

CONLEYThank you.

AHAMEDThank you, Katty.

HIRSHThank you.

KAYI'm Katty Kay of the BBC. I've been sitting in for Diane Rehm. Thank you all for listening.

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