MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Citizens in France and Greece went to the ballot box last weekend. In both countries, they said no to German-imposed austerity measures. Joining me to talk about economic pain in the eurozone and its political implications: Markus Ziener, U.S. correspondent for Handelsblatt, Justin Vaisse of The Brookings Institution, Mark Weisbrot of the Center for Economic and Policy Research, and Stella Dawson of Reuters.

MS. DIANE REHMI invite you to join us as well, 800-433-8850. Send us your email to drshow@wamu.org. Join us on Facebook or send us a tweet. Good morning to all of you. Thank you for being here. Good to have you here. Thank you. Stella, if I might start with you. Certainly a big change for France, but the situation in Greece is perhaps even more dire. Talk about that.

MS. STELLA DAWSONYes. It's certainly the more pressing and immediate concern. There were celebrations in the streets when the electorate by 70 percent threw out the austerity measures that the EU and the IMF have imposed on Greece in order to help them bring down their debt and their deficit and bring them back to financial markets and rebuild their economy. But the difficulty is that the two parties that negotiated that deal failed to receive sufficient votes to form a government.

MS. STELLA DAWSONThe first attempt to form a government failed yesterday. No party has received more than 18, 19 percent of the vote. We're now on to the leftist coalition, which is attempting to form a government -- likely will fail as well. That takes us on to the third group that is the second coalition party that imposed the bailout measures that have been rejected so soundly by the Greek people. So it's very likely that there is a failure to form a government.

MS. STELLA DAWSONWhy does this matter? Greece is running out of money again. It has until about the mid or the end of June before it needs to receive more EU/IMF bailout money. And if they fail to form a government, it means that they are not going to be able to continue to proceed with the reforms that they've promised to make.

MS. STELLA DAWSONThere are 77 measures of pension cuts and spending cuts that have yet to go --health care spending cuts as well, that have yet to go to the Greek parliament in order to be able to qualify for the next batch of money for the EU/IMF. It looks highly likely at the moment, unless they can form a government, that they are going to fail to do that and Greece runs out of money.

REHMSo that would mean that Greece would renege on its obligations.

DAWSONAbsolutely. Yes. It's already totally dependent in order to finance its government budgets, pay its civil servants, pay its pensions on that money from the EU and IMF. If it cannot meet the terms, and if the EU or IMF do not loosen those terms, then it's out of money.

REHMStella Dawson, she is U.S. specialist, economics editor for Reuters. And turning to you, Justin Vaisse, during his acceptance speech, Francois Hollande promised to behave like a normal president. What does that mean?

MR. JUSTIN VAISSEFrancois Hollande has campaigned on his contrast with Nicolas Sarkozy. He emphasized that where Sarkozy was impulsive, unpredictable, sometimes ostentatious, he would more behave like the sort of traditional standard definition of the French president, which was said by Charles de Gaulle in the '60s, in that he would be precisely predictable, thoughtful, less impulsive, and that he would be, for that reason, a better partner for his international counterparts.

REHMWhat is France's economic status at this point?

VAISSEFrance is not in recession or as are, I think about now, 11 European countries. Growth has been on a par with that of Germany in the recent years. But the situation is much more dire in terms of unemployment, which is close to 10 percent, in terms of deficit, which has reached 5.2 percent in 2011, and the debt is now nearing 90 percent of GDP. So the situation is not catastrophic, but it's not good either. And there is a hope that by embodying the sort of pro-growth, the new pro-growth consensus in Europe, Francois Hollande could precisely give a jolt to that situation.

REHMJustin Vaisse, he is senior fellow at The Brookings Institution. And turning to you, Markus Ziener, apparently Germany's chancellor Angela Merkel has promised to welcome President Hollande with open arms. What's at stake between the two countries?

MR. MARKUS ZIENERWell, what else could she say, actually? I mean, there isn't really much room for it left instead of embracing Francois Hollande. I mean, she was putting basically all her political weight behind Nicolas Sarkozy. That was unprecedented. So she had a -- there was a lot of -- at risk. There was no need actually for her really to go that far, but she did it. Also at the same time, you have to understand that the party of Nicolas Sarkozy is basically the counterpart of the conservative party, the CDU in Germany.

MR. MARKUS ZIENERSo, yeah, for her, it's a blow. It will -- we'll see whether it's a really huge blow or not. I'm not so sure. I think there are already signs to see that the two of them really want to make -- want to mend offenses and whatever on bad blood might have been spilled during the campaign. I think they have to come together. I mean, there's no other way as to coming together for the two of them.

REHMThere was some talk this morning that Angela Merkel might be ready to compromise. What does that mean?

ZIENERWell, compromise means -- first of all, I think they have already agreed to meet later this month, already ahead of...

REHMYes.

ZIENER...another major meeting, so I think we're going to see some kind of adjustment, I would say. I don't think we're seeing a reversal of the policies that have been agreed upon in March when the fiscal pact was concluded and when it was signed by 25 of 27 members.

REHMBut what would adjustment mean?

ZIENERAdjustment means that there will be programs for growth and -- which doesn't mean that we're going to see big stimulus, but I think we -- there will be the effort actually to find funds. And there are funds unused that can be targeted more for -- to stimulate economy. And I think the most pressing question is, and it has been -- we talked about that earlier -- is unemployment. And there has to be done something about that.

REHMMarkus Ziener, he is US correspondent for Handelsblatt. And finally, turning to you, Mark Weisbrot, it would seem that you feel that there needs to be some easing of this tightening and that that would be good for all involved.

MR. MARK WEISBROTOh yes. I would go further than that. I would say there needs to be reversal of these policies 'cause they failed miserably. And, you know, some of us who -- I mean, I started writing about this for the press three years ago and said exactly this would happen. I'm not the only one. Paul Krugman, Joe Stiglitz, a lot of economists have said. And it really isn't that complicated. I mean, there's a lot of complicated politics and things we can talk about, but the economics is relatively simple.

MR. MARK WEISBROTYou cut spending when the economy is weak or in recession. You tighten the budget, raise taxes, and it gets worse. And that's exactly what happened. And the countries that did that the most shrank the most. And so, you know, Greece cut 8.7 percent of GDP out of its budget in the last two years. That would be like our entire federal budget deficit of $1.3 trillion disappearing in two years. You can imagine what the United States would look like.

MR. MARK WEISBROTPeople here wouldn't tolerate it. So the voters of Europe are not tolerating it. They're really the only check on this kind of really -- I don't know how to describe it -- irrational, terrible economic policy that's been making thing worse. And it isn't going to get better. I mean, I think, sure, they will adjust. I mean, Christine Lagarde, the head of the IMF, has already said, you know, they have to make some adjustments.

MR. MARK WEISBROTBut the question is, is it going to be enough? Europe is already in recession. So if they keep putting on the brakes, the recession is likely to get worse. And then you also have the possibility, which the IMF has been worried about, and I think the Obama administration, which has an election in six months, is even more worried about, is that they -- if they push it far enough, they could actually get a serious financial crisis as well, financial meltdown with the biggest banking system in the world, much bigger than ours.

MR. MARK WEISBROTSo these are the kind of problems that they're kind of playing with fire, and they really do need to reverse course. And the voters have sent them a very strong message.

REHMMark Weisbrot, he is co-director of the Center for Economic Policy and Research. Do join us, 800-433-8850. Send your email to drshow@wamu.org. Join us on Facebook or Twitter. Markus Ziener, can you give us some examples where you believe austerity has actually worked?

ZIENERWell, I will do that, but let me first just respond to what Mark...

REHMCertainly.

ZIENERI'm not so sure whether the interpretation of the results we have seen on Sunday is really the one we just heard. I mean, if Nicolas Sarkozy -- and that's actually what Stella said earlier. I mean, if Nicolas Sarkozy wouldn't have been such a divisive figure and -- things might have turned out differently. I mean...

REHMSo you think it was more a personal vote than one on the economics?

ZIENEROf course, also on the economics, but, I mean, it was not a landslide win for Francois Hollande. It was a clear win, but it was not a landslide. So I think the margin was still such that he could have won. So that's the one thing. Secondly, we had local elections in Germany where the conservative party lost their handle on one minor state in -- a local state in Germany. But that was, by no way, actually a real blow to Angela Merkel.

ZIENERThe conservatives did much better than in the beginning expected. Now, turning to austerity, I mean, you have to reform labor markets. You have to reform your social programs. You have to do all these things. But the problem is doing that in the midst of a crisis is very difficult.

REHMMarkus Ziener, U.S. correspondent for Handelsblatt. We've got to take a short break here. When we come back, we'll talk about these issues and how they could affect the U.S. Stay with us.

REHMAnd we're talking about the recent presidential and parliamentary elections both in France and in Greece, where, in fact, voters have said no to the kind of austerity measures in place. You just heard Markus Ziener talk about the fact that there was some basis for the rejection of Nicolas Sarkozy on the fact that he is who he is and behaved as he did. Justin Vaisse, what was your response?

VAISSEI agree with Markus. I think that the personal factor was very important. I agree that Hollande did not win with a landslide. And to sort of arbitrate between Mark and Markus, I would say that one should keep in mind that Francois Hollande -- so he ran on that idea of renegotiating the fiscal compact treaty, which was agreed to in December and signed by 25 European countries in March.

VAISSEHowever, he made it clear that all the disciplines -- the new fiscal disciplines imposed in that treaty, he would keep them in the treaty. The idea is not to do away with what is largely perceived by -- I think, by many in Europe as a necessary step towards resolving eurozone crisis. However -- and that's where the sort of growth -- new European consensus for growth comes in. What he wants to do is rebalance these fiscal consolidation measures with measures in favor of growth.

VAISSEAnd, of course, the difficult thing -- and now, I think, he has the support of, I would say, the markets, Mariano Rajoy in Spain, Mario Monti in Italy, but basically most of European leaders. The tricky thing, of course, is how you do that without deepening the deficits and...

REHMStella Dawson.

DAWSONAbsolutely. How to do it without deepening the deficits is the critical component. But I'd slightly disagree that this was not about economics and rejection of austerity. We had already seen that move towards growth happening even before these elections. Both Italy and Spain had had to eat the -- ease their deficit to GDP ratios that the EU has set upon them because they found that it's putting them onto this constantly tightening and tightening their budgets, and their economies get worse and they go deeper and deeper into recession. So that movement was happening already.

DAWSONWe've seen also in the United Kingdom, which also went down the austerity path and has been kicked deeply into recession. So there's a balance here. What we're talking about and what's being recalibrated at this point is the pace of economic reforms. Everybody agrees that Europe does have to reform its economies. Germany is the stellar economy in Europe. And it is a model for how they would like to go. But in order to get there is going to take much longer.

DAWSONIf you do it too fast -- and this is what the IMF Lagarde said yesterday, very critically, if you move too fast in that direction, you could kick your economy more deeply into recession, cause even more damage, and then you create -- you fray the social fabric. You create the riots in the street, the unemployment problems that then leads to the political upheaval. We're now at a political point in this crisis.

REHMMark Weisbrot, it would seem that even within the U.K., you are seeing this kind of reaction that too quickly is too much and putting the U.K. into what people are saying is a double-dip recession.

WEISBROTYes, well, you know, we could argue about whether -- why Sarkozy was defeated. I mean, he certainly had a lot of strikes against him. He also tried to -- I mean, he also raised the retirement age, which was unpopular and unnecessary, and he, you know, went after the 35-hour workweek. He presided over some significant redistribution of income to -- towards the rich, which hadn't happened for 20 years in France.

WEISBROTAnd so I think there are a lot of reasons to vote him out. But we have a pattern here. I mean, there have been at least seven or eight governments that I can count, just thinking in my head right now, that have fallen as a result of these austerity policies. So we do have a pattern in Europe. And it's the voters who are getting it right, and the leaders are getting it wrong. And again, I -- you know, I think my view is the majority view in the economics profession.

WEISBROTIt may be the -- it may not be the majority view among political leaders or a lot of pundits who worry about debts and deficits, but that -- you know, this isn't the time to be worrying about debts and deficits, even in Europe. You know, I mean, France, OK, we mentioned -- I think Justin mentioned their debt is 90 percent of GDP, but their interest burden is only about 2.4 percent of GDP. That's what they're paying annually. That's really what matters.

WEISBROTA lot of people think we have a huge debt problem in the United States. Our interest burden is about 1.4 net interest on the federal debt, 1.4 percent of GDP. It's about as low as it's been in the whole post-World War II period. So we don't have a debt problem here either, except in the long run, of course. That's because of health care cost. So all of these things, I mean, are really being, I think, mis-framed.

WEISBROTThat isn't a question of finding the right balance between austerity and growth. It is a question of not pouring gasoline on a fire when you're in recession. You have tens and millions of people unemployed.

REHMHere's a Facebook posting from Christopher, who says, "This is a serious election for everyone around the world. This is the first step to showing the 1 percent that it's time for them to stop. The austerity is not working. Look at Ireland. If this president succeeds, it will change the world's view on what government should be doing. It should be helping the people, not the most wealthy. If it fails, the upper class and governments will double the austerity as punishment for rising against them." How do you see that, Stella Dawson?

DAWSONThat's very -- quite a powerful statement.

REHMIt is, indeed.

DAWSONYeah, I would disagree with Mark that it's not about balance. I think it is critically about balance. Look back to the 1990s in this country, where President Clinton came up with a plan to reduce the budget deficit. The decisions had been started under President Bush Sr. on how to put the country into a path in reducing its budget deficit. Once he laid out a clear path and interest rates fell, and we ended up with a budget surplus by the end of President Clinton's presidency.

DAWSONThat's the type of path that Europe has to adopt and, indeed, the United States has to adopt, where you lay out a very clear path of how you're going to get over the medium term to a low budget deficit.

REHMIt's so fascinating that all of these steps that various people have in mind seem to hunt for -- try to reach the same objective. But you're shaking your head a big no, Mark Weisbrot.

WEISBROTYeah, I mean, you know, my colleague Dean Baker has written about this, and you can read it on our website at cepr.net. But that isn't really what happened during the Clinton administration. We had that longest period of growth in -- longest expansion in U.S. history because of two major things. One was the stock market bubble, and the other was the Federal Reserve changed its policy in the second half of the '90s and allowed the economy to keep growing instead of raising interest rates when unemployment dropped all the way down below 4 percent.

WEISBROTAnd so that's what did it. It didn't have anything to do with deficits. And, again, I mean, look at interest rates. I mean, first of all, interest rates are very low in the world today. And, you know, the main problem with interest rates in Europe is that you have, you know, Italy and Spain and, of course, Portugal and Greece and Ireland, even worse. You know, you have these high interest rates because of markets, basically are bidding them up. They're selling the bonds.

WEISBROTSo the European Central Bank actually has the ability, which they used in November when Italian interest rates went over 7 percent, to push those interest rates down. Long-term rates, they can push it down. And that's what the Federal Reserve has done here in the United States, so that is really where the solution lies. The central bank has that capacity, and they're going to have to use it.

REHMMarkus Ziener, is there any reason to believe that austerity measures that have already been prescribed can actually improve prospects for Greek workers?

ZIENERI'm sorry to say that, but if you look at Germany, it did work. I mean, the reason for that is, I think, they were actually put in place about 10 years ago, so in a time when we didn't have to face a crisis and where it was actually the environment where we could do that. But let me say something about what Mark just said about deficits, and he said that there's no -- that no time to worry -- that's not the time to worry about debt and deficit.

ZIENERI mean, I'm not a deficit hawk, but I can really not believe that piling up so much debt and deficit is a good thing. If you talk to companies, they are really much -- very much afraid that, at some point down the road, they will be haunted by this huge debt and deficit because someone has to pay for it. Whether it's through raising taxes, whether it's through inflation, we don't know, but it's not really going to do a lot good for confidence.

REHMJustin Vaisse.

VAISSEWell, you know, I wish financial markets didn't exist. But they do, and they do for a good reason, which is that pretty much all governments have used them to finance their activities. And so governments have piled up debt, especially in the last two years, where debt have gone up. And so there's a very concrete reality, which is that in each of these countries, of our countries, there's an agency which is in charge of basically raising money with these markets.

VAISSEAnd the problem is that the signal sent by the buyers of this debt is complex. It's ambiguous. On the one hand, they say, you know, we are worrying that you are borrowing too much and that you won't be able to pay us back. But then, on the other hand, they are saying, well, you know, if you keep cutting and you have no growth, how will you pay me back? And so it's this balance that needs to be resolved for this agency, for the government.

VAISSEAnd I think that if, on the one hand, it's necessary to rebalance the measures towards growth, we really cannot just wish away that pressure of the markets, and I do think that structural reforms are necessary. And I think there's a pretty good consensus about what that new balance -- where that new balance needs to be, including with the German SPD -- that is, the socialists, whom Angela Merkel needs in order to ratify herself the fiscal compact treaty.

REHMThis new balance, Mark Weisbrot, how do you see it?

WEISBROTWell, I don't agree. I think that, again, you know, there's a time for worrying about deficits and debts, and it's not when the economy is in recession. And thank God we didn't do that here. We had a stimulus.

WEISBROTAnd the head of the central bank, who is a Republican, not a leftist, you know, not only lowered interest rates to zero -- which, by the way, the European Central Bank still didn't -- still hasn't done -- but also committed to keep those interest rates low for years and engaged in quantitative easing -- that is, creating money in order to push long-term interest rates down. And that's one of the reasons we have low interest rates here, but it's much more important in Europe to do the same thing.

REHMAll right. So if you were Francois Hollande, going to a meeting with Angela Merkel, what would you be saying?

WEISBROTI would advocate for exactly those policies. I would say the European Central Bank has to do more of what the Federal Reserve has done. Just step up to the plate and do your job, which means put a ceiling on interest rates of the bonds, the sovereign bonds, including Italy and Spain, which, of course, are the too big to fail debts that they have. And that -- you see, this is what causes the crisis. It's the fear that these interest rates are going to spiral out of control. And the confidence fairy isn't going to do it because people have lost confidence in the confidence fairy.

REHMMark Weisbrot of the Center for Economic and Policy Research. And you're listening to "The Diane Rehm Show." Stella Dawson, what options remain on the table for Greece to keep from falling apart?

DAWSONWell, firstly, Mark is absolutely right. The ECB could come in and cut interest rates. There's perfectly room for them to do that. That, though, is not going to be enough alone. It could cut interest rates. It could be interest rates down at zero throughout the economy. If people are not willing and they're not confident, they can't -- in the economy, they're not going to go out and buy.

DAWSONSo there has to be a bigger solution than that, which means reforms to the economy in order to create growth. So what's going to happen in Greece? The meeting between Hollande and Merkel is going to be very important to send the signal of whether they can reach some type of compromise where they put alongside their fiscal compact a growth compact.

DAWSONI would very much expect that that would be the case. It's not likely to be very large. If that could be accompaniment by the ECB, then lowering interest rates is going to send a positive signal because then the markets will have a sense that Europe is not going to get trapped in this downward cycle of constantly tightening budgets and going deeper into recession.

REHMHow high would you place the chances that Greece might have to pull out of the eurozone?

DAWSONWell, Citibank yesterday raised its estimates from 50 percent to as high as 75 percent. My experience of having worked in Europe is that it's very easy to underestimate the deep, deep political commitment to this enterprise.

REHMAnd if Greece were to go, who else would go?

DAWSONThe next country to be attacked would be Italy. Spain and Portugal will also be in question, and Ireland. Europe has invested much too much in this over many, many years and the political commitment to Europe and, indeed, to the Greek people. I think that's critically important as well. Even though 70 percent rejected austerity, 80 percent still wants to stay in the euro. They will find a political solution to this.

REHMA political, without an economic, solution?

DAWSONWell, that's the politicians who have to come up with a way in which they can stimulate growth without giving up on the budget targets, which is why, I think, what they need to do is to say that, yes, we're not going to change the fiscal compact. But if you don't meet it this year, if you don't meet the 3 percent deficit-to-GDP ratio this year or next year because the economy has deteriorated and gone into recession, that's OK. Just continue on that path, and we will give you a little bit of rope and a little bit of relaxation and allow you a longer time period to reach it.

REHMDo you see that happening, Markus?

ZIENERYeah, I could envision that. And I really want to emphasize that it's -- what I think is here underreported or maybe not entirely understood is really the huge political commitment to the euro and to the eurozone. So I think it really has to happen much more than just the economics to make the whole (unintelligible). But let me say just one word about the interest rates because that's coming up all the time. I mean, the low interest rates in the United States is -- only on first glance, it's really an indication that things are on track here.

ZIENERI mean, it's -- first of all, it's -- there's basically no real alternative to put your money. So that's why there's still a high demand. And, secondly, I mean, you have to look at the interest rates for the bills with flexible rates, who will adjust later on down the road when maybe interest rates going up. And here, buyers are really ready to pay a premium for that because they actually expect interest rates to go up, to go -- inflation to go up. So that's the real story behind it.

REHMAnd very quickly, Mark Weisbrot, last week Floyd Norris in The Wall Street Journal wrote about the different paths taken by the U.S. and Europe in the face of this financial crisis. Do you believe that that's a valid comparison?

WEISBROTYes. That was a very good article. And I think that -- again, I mean, we do have some of what Europe has. We have it at the state level, and that's been the biggest drag on our economy, all the layoffs of teachers and everybody else and state -- I mean, that has really hurt our economy. But on -- but we haven't done what Europe is doing at the federal level, and that's why we're not as in much of a mess as Europe is, and especially the eurozone right now.

REHMAll right. And when we come back, it's time to open the phones. We'll take your calls, 800-433-8850. Stay with us.

REHMAnd it's time to open the phones as we talk about the financial situation throughout Europe in light of French and Greek elections last weekend. Let's go to Houston, Texas. Good morning, Brad. You're on the air.

BRADHi. I just wanted to point out that it's absurd to use the alternative to austerity as calling it a growth. The issue at hand is not that. It's saving versus spending. And Austrian economists have known about this for a while. This is exactly the scenario one would have anticipated if you subscribe to Austrian economic belief. And, I mean, this is -- to look at Paul Krugman as anything other than somebody who intentionally and -- decreased housing interest rates and as the leader of Enron would be absurd. This is exactly what you would expect.

REHMPaul Krugman as leader of Enron? Do you want to respond to that?

ZIENERYou know, I don't know what the caller is talking about, but I think what he's trying to say on the economics is that he's opposing the standard view in economics, that if you cut spending and raise taxes and tighten your budget during a recession, that it makes it worse. He's trying to say that it wouldn't make it better.

REHMAll right. Here's an email from Phil, "Recently expressed public dissatisfaction with austerity plans in France and Greece should also be considered in light of what has taken place in Latvia over the last few years. In 2009, the prime minister cut expenses drastically to meet the demands of IMF lenders. The Latvian people sucked it up and did what was necessary to survive. Latvia has now completed its IMF bailout program and is on a path to economic well-being.

REHM"Certainly, there are still challenges ahead, but the willingness of the people to do what was necessary has paid off. French and Greek people need to accept a lower standard of living to help themselves work through tough economic times." Justin Vaisse.

VAISSEI -- you know, the interesting thing in the way the remark or the question is framed is that, basically, you need to swallow a bad medicine. And that is a very sort of moral aspect to that. You -- your welfare state is bloated, is too big. You need to cut pensions. You need to accept high unemployment, and then things will be better. I mean, I'm not ascribing these views exactly to the person who sent the message 'cause that's what you hear often. Well, actually, yes, there is a debt problem, which has been created largely in the past two years.

VAISSELook at countries like Spain and even France who had levels of debt that were quite sustainable. What happened was the 2008 financial crisis and the -- yes, very few French budgets had been balanced. But the debt was still around 60, 70 percent, which was quiet sustainable. So there's no -- it's not like there's a systemic sort of breakdown of the system, and it's -- I think it's a quite misguided view to see welfare benefits and pensions and others as the culprit here.

VAISSEI think there's a problem which requires a new fine -- more fine tuning, a better balance between fiscal discipline and growth. And I think growth is the right word here, but it doesn't mean changing things completely.

REHMMark Weisbrot.

WEISBROTYes. Well, I'm glad the caller mentioned Latvia. I wrote a couple papers on that experience, and I have also a debate on our website with a prominent opponent -- proponent of that view that Latvia was a success. But, really, it was a disaster. They lost about a quarter of their GDP, the worst in the whole world during the recession. And they're only growing at about 2.5 percent right now. They have, you know, huge unemployment. Ten percent of the labor force has left the country. Unemployment would be even higher.

WEISBROTSo it was a complete disaster. And, you know, this is relevant to Greece and the others, too, because the idea here is that you have an internal devaluation. That's what they're saying, is that's what they're trying to do to Greece, for example, and the other eurozone countries. They're trying to say, you can't change the exchange rate by leaving the euro, which is the normal way that countries would get out of this kind of situation.

WEISBROTAnd they say, so you're going to lower your real exchange rate by cutting labor costs, by having enormous unemployment that pushes down wages. Latvia did all that, and they sank into a mess. And they really -- and they're -- they never really got any significant change in the real exchange rate.

REHMSo you would disagree with the comments I read?

WEISBROTYeah, it was a terrible, terrible failure. And it still is.

REHMAnd still is, in your view. All right. Let's take a caller in Berlin. Good morning, Dave. You're on the air.

DAVEYes, hello. Very fine. It's sunny here. And one of the things I'd like to ask people to talk about a bit is that the conservative finance minister Schauble also recently emphasized how important it had been for the German labor unions to keep an eye on productivity increases and the importance of wage increases in Germany now -- in Germany and to help the EU -- the importance of wage increases now in Germany. Do you have a comment on that?

ZIENERYes, of course. I was very much surprised actually when I saw that statement by our finance minister. I mean, you really have to kind of see that. I mean, there's a conservative finance minister asking for rising wages. I mean, that is unheard of, at least in Germany. But I think that's a very good point in indicating that the Germans are not the austerity guys only. But I think there are still a couple of other things happening.

ZIENERAnd, by the way, let me just say this, there were -- we had two stimulus packages. We had the cash-for-clunkers program. We had the short-labor program on top of all the automatic stabilizers, like pensions and health care and all that kind of thing. So it's not like Germany is not spending any money.

REHMAll right. To Tallahassee, Fla. Hi there, Bill.

BILLGood morning.

REHMMorning.

BILLYeah. Early in the 1800s, not long after the country was founded, Alexander de Tocqueville, a Frenchman ironically, toured this country and basically said democracy can live -- last until people realize they can vote themselves free stuff. He said it a little more eloquently than I, but that's basically what he said. What's happening in Europe, you've got a French -- the French president campaigned and says he's going to lower the retirement age from 62 to 60, and the retirement age is in the 50s in Greece. I'm trying to understand how that is austere at 60-years-old retirement.

REHMAll right. Justin Vaisse.

VAISSEIt's actually not what he promised. What Francois Hollande said is that he would roll back that reform, yes, from 62 to 60, but only for a tiny minority of the population.

REHMWho?

VAISSEThose who have started working at 18 of age...

REHMI see.

VAISSE...and have worked continuously until they reach 60, which is about...

REHMSo it was not a blanket statement?

VAISSENot at all. And if you look more closely at the different measures, such as this one or the hiring of new teachers, which actually is no net hiring of new civil servants at all, you -- looking closely, you see that the economic program of Francois Hollande is quite compatible with the long-term fiscal consolidation of getting to zero deficit in 2017.

REHMI would like to understand, in reality, how much compromise you believe there might actually be. Markus Ziener, is Germany likely to let up on some of its austerity targets?

ZIENERIf you -- if the consequences for not letting up would be to see social unrest in certain member countries of the eurozone...

REHMSuch as Greece?

ZIENER...such as Greece or other countries, of course, Germany would let up. And I think they're already letting up. I mean, there is already talk about using the EIB, the European Investment Bank, to launch programs that kind of stimulate the economy, and there are other things also in play. So because I think, I mean, everyone knows if this is going down in social unrest, the whole pact will falter.

REHMWill that be enough, Mark Weisbrot?

WEISBROTNo, I don't think it will. Again, you have a recession. You have mass unemployment in Europe.

REHMBut you've also got all these countries who've already agreed to this pact that Germany has managed to put together realistically. Do you believe that that's going to fall apart completely?

WEISBROTOh, it certainly won't be honored. I mean, if you're talking about -- they're basically talking about balancing budgets. And it's almost like a balanced-budget amendment in the United States, you know, which has been proposed and rejected many times because, you know, even most economists or conservatives don't agree that that's a good idea. And so I think -- yeah, it won't -- that won't be -- I don't expect the French budget to be balanced in five years, which is what Hollande, I think, pledged.

WEISBROTAnd so, no. I think that they're going to have to back off and that you will possibly get exits from the euro. I mean, I think that's one of the things they're afraid of, is that Greece will exit. And if they do kind of what Argentina did, they will be very successful. And then other countries, like Spain, which has over 50 percent youth unemployment, will think, why are we sitting here suffering like this indefinitely with no light at the end of the tunnel and taking these measures that are making our economy worse when we don't have to?

REHMAll right. Stella.

DAWSONThe path out of this we've not talked about is fiscal union. The fundamental reason why the eurozone is having problems is they created a currency union without fiscal union. Slowly, they're going to start moving further and further towards federalizing their debt, federalizing how they fund the government. It's going to be a slow and painful path. But in actual fact, we're beginning to see some steps toward that already.

DAWSONThere's an EU bailout fund, which issues common bonds. If they put some more money into the European Investment Bank to promote growth for infrastructure projects, it may be through issuing some more common EU project bonds. Gradually, I think that's the route out of it. If there's the political commitment to stick with the euro, ultimately, they'll lead to fiscal union.

REHMAll right. To Farmington Hills, Mich. Good morning, Robert. Go right ahead.

ROBERTAngela Merkel's prescription for Europe is necessary. But economic structure reforms, which must be done by individual countries, will make that sufficient.

REHMAnd that's your statement. And, Mark Weisbrot, do you want to respond?

WEISBROTWell, you know, this is what people keeps saying -- and the IMF says this, too, even though I don't think they really believe it -- that, you know, if you make labor markets more flexible, you make it easier to fire people. You know, in Greece, they lowered the minimum wage by 25 percent. And, you know, they're cutting pensions. That these kinds of so-called structural reforms are some -- are going to increase the productivity of the economy, we haven't seen that. I've never seen it anywhere. I don't really believe it.

REHMAnd you're listening to "The Diane Rehm Show." So far, what's happening in the eurozone has not really hurt or affected terribly the U.S. How do you see that happening in the future, Stella?

DAWSONI'd slightly disagree that it has not affected the U.S. at this point. I think it has through the political uncertainty that it's created. There's been a flight away from risk. And lot of monies come into the United States has helped cushion some of it. But political uncertainty globally can shave quite a bit off of GDP growth. And by some estimates, we've already had about a half a percentage point knocked off of GDP growth, when we're only growing at 2.2 percent right now.

DAWSONThat could continue if we had a real crisis, which is not unlikely at the end of June where Greece cannot fund itself. If there were to be a breakdown of discussions between Merkel and Hollande, which I would not expect -- they're making the right noises -- that will create a market upheaval, and that's going to spill over into the U.S., loss of business confidence and loss of consumer confidence. It will hit growth again. It hasn't been as severe as previously. I think a lot of it has been priced into the markets.

REHMMark Ziener.

ZIENERI think the euro crisis is a little bit talked up here in the United States in terms of what the effects are on the domestic economy and, I think, for domestic reasons. We have a presidential election year. I think it's a good thing here to have a scapegoat if things don't go that well. So, in a way, I think it's overdone. And, secondly, this crisis is really different. This is not -- we cannot solve this crisis with pumping money into the market. We really have to flank that with labor market and other reforms.

REHMInteresting, Justin Vaisse, that President Obama has already extended the invitation to President Hollande.

VAISSEYeah. President Obama, you know, all but supported Nicolas Sarkozy, especially in the last weeks of the campaign. But a paradox is that precisely because Francois Hollande wants to rebalance the deal with Germany towards more growth, he is probably more palatable, I would say, to the Obama administration.

VAISSEBecause precisely one of the big fears is a new accident, such as the one Stella was mentioning earlier in June or in July in the eurozone, in Europe, that would condition or that would impact negatively growth here and, of course, would endanger the chances of re-election of President Obama. And so that's one of the connections between Obama and Hollande.

VAISSEAnd we've see in the recent years Obama pretty much throwing his weight behind Nicolas Sarkozy in order to push Angela Merkel towards more, I would say, accommodating policy, whether on the ECB or helping countries. And so what we see is the continuation of that where he hopes that Europe will strike a better balance so as to avoid any financial accident, which would, once again, endanger his chances for November.

REHMMark Weisbrot.

WEISBROTNo, I agree with that. I mean, you know, the administration's assistant secretary of state for international affairs has gone to Europe 17 times in the last two years. (unintelligible) and Tim Geithner has gone there. And they've got a strong message: please don't create a huge mess before my election. And so I think that's influencing. I think that...

REHMBut, surely, it's not just electoral politics.

WEISBROTWell, I don't won't speculate on peoples' motivations. That's something I can't really prove. But I do think they definitely have a stake in it. Let's put it that way. And, you know, they're going to -- I think that's part of why you see Christine Lagarde making these accommodating statements. The U.S. is a major player in the IMF as well.

REHMMark Weisbrot of the Center for Economic and Policy Research, Justin Vaisse of The Brookings Institution, Stella Dawson, economics editor for Reuters and Markus Ziener, U.S. correspondent for Handelsblatt, thank you all so much.

WEISBROTThank you.

ZIENERThank you.

VAISSEThank you.

REHMAnd thanks for listening. I'm Diane Rehm.

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Monique Nazareth, Nikki Jecks, Susan Nabors and Lisa Dunn, and the engineer is Tobey Schreiner. Natalie Yuravlivker answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. 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.