By most accounts, Europe’s economic situation is bleak. While fears of a euro break-up are past, price and wage deflation are a growing concern. And as Europe faces a possible third recession since 2008, the renewed downturn is dragging on global markets. Economic stagnation is also feeding nationalism across the continent. In Britain, Prime Minister David Cameron is confronting growing pressure to cap immigration. But German Chancellor Angela Merkel warns that limiting immigrants from other European Union countries would be a “point of no return” that could increase the risk of Britain leaving the Union. Diane and her guests discuss the fallout from Europe’s down economy.


  • Desmond Lachman Resident fellow, American Enterprise Institute.
  • Constanze Stelzenmueller Robert Bosch Senior Fellow, The Brookings Institution.
  • Jacob Kirkegaard Senior fellow, The Peterson Institute.
  • Zanny Minton Beddoes Business affairs editor, "The Economist"; formerly, economist at the International Monetary Fund.


  • 10:06:53

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The European Commission today lowered its growth forecast for the Eurozone and the European Union. The region has experienced two recessions in the past six years and may now be on the verge of a third. At risk, deflation in much of the EU, a rise in nationalism and a drag on world markets.

  • 10:07:21

    MS. DIANE REHMJoining me to talk about Europe's faltering economy, Desmond Lachman of the American Enterprise Institute, Constanze Stelzenmueller of the Brookings Institution and Jacob Kirkegaard of the Peterson Institute for International Economics. Joining us from a studio in London, Zanny Minton Beddoes of The Economist magazine.

  • 10:07:47

    MS. DIANE REHMDo join us with your own thoughts, your ideas, give us a call, 800-433-8850. Send us an email to Follow us on Facebook or send us a tweet. And welcome to all of you.

  • 10:08:07


  • 10:08:08


  • 10:08:08

    MS. CONSTANZE STELZENMUELLERGood morning, thank you.

  • 10:08:10


  • 10:08:10

    REHMGood to have you all with me. Desmond Lachman, give us an overview of Europe's economy. For awhile, it seemed as though things were going better. What's happened?

  • 10:08:28

    LACHMANWell, certainly at the beginning of the year, there was the expectation that Europe would finally begin a meaningful recovery. But sadly, that hasn't occurred. There've been a number of developments that have thrown that off course, one of them being the crisis in Ukraine, Russia, the West imposing sanctions, that has really impacted confidence in German, which is the main locomotive of the European economy.

  • 10:09:04

    LACHMANAnd now that Germany is slowing, the prospect for getting real recovery in the rest of Europe doesn't look good. There are also a lot of geopolitical risks that have come, namely in the Middle East, that's not helping, either. So we've got a situation where the European economy, which hasn't regained the level that it had in 2008, so six years after the recovery began, the Europeans are still below where they were some six years ago.

  • 10:09:42

    REHMSo what is the growth expected rate for the coming year?

  • 10:09:50

    LACHMANWell, the growth is very modest and this is of concern when you've got a country, when you've got an economy block that has had such a prolonged recession. This morning, we had estimates coming out of the European Commission saying that the Eurozone itself was only going to grow something like .8 percent in 2014 and then, only 1 percent in 2015.

  • 10:10:21

    LACHMANAnd this is very serious when we have unemployment in Europe still at around about 11.5 percent and very bad social conditions and the politics really beginning to unravel.

  • 10:10:37

    REHMDesmond Lachman of the American Enterprise Institute. Turning to you, Zanny Minton Beddoes, do you believe that Europe is in danger of yet another recession?

  • 10:10:55

    BEDDOESWell, I think it is pretty close to another recession, but even if it avoids a technical recession, even if output doesn't fall, it has clearly slowed very dramatically and it faces stagnation and the risk of deflation. Prices are already falling in several Eurozone countries and the risk is that it turns into what Japan faced in the early 1990s, which was a prolonged period of stagnation and deflation.

  • 10:11:21

    BEDDOESAnd I think that's something that it's different to an acute crisis. Diane, many times on your show, you've talked about that the Eurozone crisis and the acute nature, people worrying about the Eurozone breaking up. This is a little bit different. It's a chronic kind of a malaise, but it's one that I think Europe is a little too sanguine about and that the view on this side of the Atlantic that, yeah, it's Europe, it's stagnate, sort of so what.

  • 10:11:43

    BEDDOESBut actually, that's a real problem and it's a real problem politically, let alone economically for the people involved. So I think it could well be heading into another recession, but even if it doesn't, the prospects of any serious growth look, to me, incredibly small.

  • 10:11:57

    REHMAnd Jacob Kirkegaard, what about unemployment. How does that stand?

  • 10:12:04

    KIRKEGAARDWell, there's no doubt that at 11.5 percent, which is basically the level that you've seen in Europe, in the Euro area at least, over the last three to four months, this is an ongoing sort of bleeding sore, if you like. And what you're also starting to see is a new development because it used to be earlier in the crises that -- actually the developments in the U.S. and Europe were a little different in the sense that what we had in the U.S. was a lot of people dropping out of the labor force as well.

  • 10:12:34

    KIRKEGAARDThat didn't happen in the beginning in the Euro area. You just had a large increase in unemployment. But what we have seen now as the crisis has been dragging on and on and on, is actually that, you know, in some of the more deeper crisis countries right now, this would be particularly Italy, but also in Spain, in France, you're starting to see that people are dropping out of the labor force, which is, in fact, the worst possible outcome of a prolonged stagnation.

  • 10:13:03

    REHMAnd Constanze, to you. Regional differences, but even the German economy is slowing.

  • 10:13:13

    STELZENMUELLERThis is true. That said, the German economy has had a pretty good run and as you said, a lot of the reasons for what is happening are geopolitical. And I think that's one where a lot of Germans would say we have to stay the course, but at the same time, we have to understand that -- and I think most Germans are conscious of this. Germany has very little influence in the world and very little power without the rest of Europe, without working through Europe.

  • 10:13:42

    STELZENMUELLERSo the weakness of Europe, the north-south divides, are of strategic importance to us and that is something that we must do something about. The chronic unemployment that Jacob just mentioned is a huge issue. The economic, social, and political divides left in the wake of the first five years of the crisis, huge issue, that's something that Germany has to address.

  • 10:14:01

    REHMAnd Desmond, how does this bad news sort of effect the entire global economy?

  • 10:14:11

    LACHMANWell, potentially, it can affect the global economy in a bad way, in a very meaningful way for at least three reasons. The first is that if Europe does move again into recession, it means that the markets for the other countries' exports, United States included, isn't very bright. The second way would be if the euro continues to depreciate. The euro has already weakened from something like 140 to the dollar to 124.

  • 10:14:41

    LACHMANIf it continues to weaken, it makes more difficult for the United States' exporters to compete in third markets, say the Asian markets. They've got a bigger European competitor. But the way that really bothers me the most is that this crisis could again take on a rather virulent form because of the very heavy debt that Europe has. Countries like Italy, a very large country, has as much as $2 trillion dollars in debt.

  • 10:15:15

    LACHMANIt's around about 135 percent of GDP. If Europe does go into recession, if Europe does go into deflation, questions are going to be asked whether a country like Italy can, in fact, repay the debt. If that occurs, we could be moving into quite a different phase like we were in 2012 where Europe really poses a major threat to the global economic recovery.

  • 10:15:41

    REHMAnd Zanny, you mentioned Japan, but what about the European economy in comparison or contrast to others around the world?

  • 10:15:55

    BEDDOESWell, I think there's a view that -- in Europe that what happened to Japan two decades ago may well happen to Europe and that it wouldn't be so bad. You know, the Japanese economy fell into deflation and it was stagnate and it was okay. I think, in Europe, the situation is very different. First of all, it's a big economy. It's 20 percent of the world economy. And as Desmond laid out, a prolonged period of weakness in Europe, let alone a recession, would have an impact on the rest of the world.

  • 10:16:21

    BEDDOESAnd it would have an impact particularly if questions were raised about the sustainability of the euro once again and we descended from a chronic phase of the crisis back to an acute one. And I agree with Desmond that that's not at all implausible. Some of these debt levels are extremely high in Europe's economies. And if you have deflation, the burden of repaying that debt, the burden of servicing that debt rises so it's perfectly possible that that could happen.

  • 10:16:45

    BEDDOESAnd there's another dimension that was totally absent in Japan. Japan is a very homogenous society. It's a society that kind of stoically withstood years of economic failure in some sense. The Euro area is not like that. Already, we see the rise of extremist political parties, certainly populist political parties. The political environment, I don't think, can withstand years and years of stagnation and that's an added dimension that was not there in Japan and that makes me much more concerned.

  • 10:17:16

    BEDDOESAnd, you know, one can argue about whether this is -- how quickly this might become acute again, but being back in Europe now and seeing the political debate, the nature of the debate about Europe, whether it's about immigration, whether it's about the nature of the European Union, the lack of support for it, it worries me to have that already and then face the prospects of years of stagnation and deflation.

  • 10:17:36

    REHMAnd Jacob, these political extremes coming from both the left and the right.

  • 10:17:44

    KIRKEGAARDYeah. I guess I would say that I'm somewhat more sanguine than Zanny and also Desmond on this issue of populist parties in Europe because I think there's no doubt that you have the emergence of a lot of these types of parties, but it's very important to recognize that, as you say, they're not just sort of right wing anti-immigration party.

  • 10:18:03

    KIRKEGAARDThere's actually also very left wing in many of their welfare oriented policies. They basically want to go back to how the welfare state looked like in the 1970s and '80s. And this is important because given that they suck support from both the extreme left and the extreme right, I think it is highly unlikely that they will achieve an actual governing majority. They will be a factor. But even if they get 25 percent of the vote, in a parliamentary system where a grand coalition is possible, it's not gonna make such a big difference.

  • 10:18:35

    REHMJacob Kirkegaard, senior fellow at the Peterson Institute. Short break here. We'll be right back.

  • 10:20:00

    REHMAnd welcome back. We're talking about the threats to the European economy which some believe may be on the verge of a third recession. One of the issues that's come up quite recently, Constanze Stelzenmueller, is immigration and the fact that Britain is in the throes of a discussion on whether to put a cap on immigration. How do you see that affecting not only Germany -- you've had Angela Merkel make comments -- but the rest of the European Union?

  • 10:20:51

    STELZENMUELLEROkay. I think immigration is key to this entire problem for a very simple reason. If you look at European demographics, if we want to have functioning economy in 30 years, we are going to need immigration. We have a strategic interest in immigration. And not just immigration, in other words, not just in people coming to our country but people staying there and becoming well integrated members of the community and possibly even citizens.

  • 10:21:17

    STELZENMUELLERIt was a huge shift in Germany when the Germans decided to shift from a -- you know, let's keep them out and send them back if possible to let's integrate them as much as possible policy a couple of years ago. That's it. We are lucky in a sense. It's an irony of history that Germany lost its last colonies and the Treaty of Versailles after World War I. Nobody remembers that Rwanda and Tanzania were once German colonies.

  • 10:21:42

    STELZENMUELLERSo our immigrants are either political or economic immigrants. And our biggest Muslim community is more or less secular Sunni. And so the immigrant communities that have post-colonial hang-ups that are highly politicized that are -- have -- is a great deal of Islamic extremism, which is not to say we don't have that now, we do. Those you find in Great Britain and France. And some of the French -- the success of the French Front National and UKIP in Britain can be ascribed to this.

  • 10:22:15

    STELZENMUELLERBut it is of course also a failure of France and Britain to actively, aggressively try and integrate these people and tell them, you are French citizens, British citizens, and not just in your passports. You are part of this community. That's a failure and I think that is something that has to be addressed in all of our interests.

  • 10:22:34


  • 10:22:35

    KIRKEGAARDWell, I just want to make the point that I think, you know, talking about immigration in Europe, it's really part of the good story in Europe. It's an issue that creates political problems but that's really because the level of immigration into Britain, into Germany, into many European countries has actually, in the pre-crisis years and continued even after the crisis, to be at record levels.

  • 10:22:56

    KIRKEGAARDI don't think many people, for instance, recognize that the level of legal permanent migration is sort of equivalent of green cards in the United States, into the EU 15 is twice the level of the United States today. And this is a very new development in many of the countries in Western Europe to receive that many immigrants. And therefore, I don't think it's so surprising that in a period of prolonged economic stagnation that there is a part of the electorate that responds against it. But it's fundamentally part of a good economic story.

  • 10:23:26

    KIRKEGAARDAnd it's one of -- a story that separates Europe very distinctly from Japan, which is quite unique in...

  • 10:23:32


  • 10:23:33

    KIRKEGAARD…it's quite unique in one advantage economies of having, you know, very dreadful domestic demographic outlook. But combining that with essentially hermetically closed borders so it doesn't even get migration. Europe is quite different.

  • 10:23:47

    REHMBut Zanny, Prime Minister David Cameron is really facing a great deal of pressure from both sides as to whether to put a cap on immigration. Talk about where that's coming from and why.

  • 10:24:07

    BEDDOESWell, I think he somewhat boxed himself into a corner. It's coming -- the political pressure on him is coming from UKIP, from the UK Independence Party and its growing success. And there's going to be a general election here next year, and clearly David Cameron is worried about losing a lot of votes from the Conservatives to UKIP. And so in an attempt to woo some of those voters, he's talking tough on immigration.

  • 10:24:32

    BEDDOESI think the background to it is -- much as Jacob pointed out, it's partly a function of Britain's economic success. Britain is growing relatively rapidly and is attracting a lot of immigrants, but it's also a function of popular discontent living standards. And one of the striking things about the UK is that the average real wage, so the average living standard in the UK has fallen by 10 percent since 2007. And that is the biggest decline since about the 1850s.

  • 10:25:02

    BEDDOESSo it's a huge decline in the living standards of ordinary Britains. And they're looking for a scapegoat. They're feeling unhappy and immigrants are often an easy scapegoat. That's not the only rationale behind it but it's certainly one of the reasons why people are feeling unhappy. And that feeds into the success of UKIP. And UKIP's success in turn is terrifying the mainstream politicians. And that's kind of how we got to this situation.

  • 10:25:26

    BEDDOESThe problem that David Cameron faces is by saying a lot of these things, for example the cap on immigration to -- or movement amongst -- from people who are members -- who are in countries that are members of the European Union is that is, as Angela Merkel says, a kind of touchstone tenant -- central tenant of the European Union. And so he can't possibly achieve that.

  • 10:25:48

    REHMBut Desmond, with the comments of Angela Merkel, do you truly believe that she is willing to see the UK leave the European Union rather than put a cap on immigration?

  • 10:26:08

    LACHMANWell, I think it would be a much broader kind of discussion and it would depend on the kind of conditions that the UK are demanding to stay in Europe, that if the United Kingdom under pressure from UKIP is rather entrenched in its demands as to how Brussels must change in order to suit UK, then I think Angela Merkel will stick by her pledge and let Britain go.

  • 10:26:37

    LACHMANBut I should just come back to the politics is not just the rise of UKIP in Britain that is of concern to me. It's rather in major countries. You know, if we look, like, France where we get Marine Le Pen's National Front, an extreme right party that wants to get out of Europe, that when they're polling now at something like 25, 26 percent, they're ahead of both major parties, I think that's symptomatic of what's going on across Europe is that the political elites are under huge pressure.

  • 10:27:15

    LACHMANYou're getting the center fragmenting, you're getting the extremes be it in Greece, be it in Spain, be it in Italy. And that's just going to make it very difficult for these countries to stay the course. And my fear is what is striving this is unemployment levels that are sky high.

  • 10:27:34

    LACHMANWe've spoken about 12 percent in Europe as a whole, but if you go to a place like Spain, unemployment there is 26 percent. Youth unemployment is around about 50 percent. Italy youth unemployment is 40 percent. To me, if that is not reduced quickly, the political rot that we've seen in Europe these last three or four years as a result of the economic crisis will continue. And I'm not sure that Europe has a very good track record with social and economic unrest. You know, we've just got to look back to the '30s to take polls.

  • 10:28:13


  • 10:28:14

    STELZENMUELLERYeah, I think Desmond has a key point here. And I do agree. And while this is not the German government's position, I think there are a lot of economists in Germany who agree that we do need growth-oriented policies in order to address these issues. In other words, we need to find some way of providing what economists would call wandering onto dangerous territory here, the provision of public goods, you know, things like unemployment insurance, things like infrastructure projects possibly financed by bonds.

  • 10:28:43

    STELZENMUELLERBut we need to do that without letting governments off the hook of structural reform. Because a France or an Italy that refuses to engage in structural reforms, of the kind that other countries have successfully done, thereby improving the economic outlook, and I don't mean so much the Germans as the Baltic countries or the Pols or other, that is absolutely key for keeping the European project on court.

  • 10:29:07

    STELZENMUELLERBecause if there's one thing that we learned in this economic crisis since 2008, it is that the vulnerability of even a small country in Europe puts the others at grave risk because we're also deeply integrated. And what America has learned from all this is that actually it puts America at risk as well because there's so much trans-Atlantic integration.

  • 10:29:26


  • 10:29:26

    KIRKEGAARDWell, I guess I just -- I want to take issue with the characterization that Desmond made that there's sort of -- that we're sliding towards the 1930s in Europe, because I think it is a completely erroneous historical analogy to draw. Because I think if you look at the actual populace parties that exist in Europe they are, as I said, not just right wing parties. They are essentially welfare chauvinistic parties. What they basically offer is they tell voters, typically low-skilled blue collar voters, look, we will protect you against immigrants, against globalization, against Brussels and the EU, etcetera. But they're not anything like what you saw in the 1930s.

  • 10:30:07

    KIRKEGAARDAnd in the country that has suffered the greatest economic decline, which is Greece, which has essentially gone through something that is worse than the great depression here in the United States. Remember that the SYRIZA Party is actually very strongly in favor of staying in the euro. Sixty to seventy percent of Greeks support the Euro because they recognize that if they leave that the outcome will be far worse than the travails they've already suffered.

  • 10:30:34

    KIRKEGAARDSo this idea that, you know, Europe even in the -- even if we continue to face a period of low growth that might be -- quite likely be quite long, you know, when you've had no one of the European countries likely to face a decline in GDP of 25 percent, which is what we've seen in Greece. So I don't really understand where all this concern comes from and these, you know, farfetched historical analogies.

  • 10:30:59

    REHMAll right. I want to turn for a moment to Zanny and question whether Germany's continuation of demands for austerity, how in fact that may have fueled what's happening throughout Europe.

  • 10:31:22

    BEDDOESWell, Germans have moderated their demands for austerity somewhat compared to a couple of years ago. But they are still, I would say, the main break on what one might call sensible economic policy in the euro area in two senses. I think most economists would agree that the euro area could somehow do with some form of whether it's infrastructure spending or other kind of demand increasing fiscal policy.

  • 10:31:49

    BEDDOESAnd many, not all economists but many would agree that the European Central Bank should be much bolder and it should move much more closely to doing what the Fed did with QE quantitative easing, printing money to buy silver and bonds. It's been buying some kinds of assets but that it should go the whole way and buy silver and bonds. And in both of those areas it's the Germans who are essentially holding the brake on preventing that from happening.

  • 10:32:14

    BEDDOESIn fiscal policy terms, the Germans are determined to balance their own budget next year, even though they've got quite a lot of fiscal room and could usefully do with some infrastructure investment themselves. It's a little known fact that German infrastructure -- public infrastructure is actually in terrible shape and infrastructure spending is very low.

  • 10:32:31

    STELZENMUELLERThat's well known by now.

  • 10:32:32

    BEDDOESWell, I think a lot of people still think that German infrastructure, at least compared to American infrastructure is quite good, but actually it's not. Bridges, that's another question.

  • 10:32:40

    REHMZanny Minton Beddoes. She's business affairs editor for The Economist and you're listening to "The Diane Rehm Show." Constanze, do you agree basically with what Zanny has said?

  • 10:32:58

    STELZENMUELLERWell, I mean, I think, yes. I mean, I think it's overstating or simplifying the German position to say it's all about saving and austerity. I think if you want to be fair to the German position you have to say, if you, the Greeks, the Italian and most importantly the French don't do much needed structural reforms, you are making yourselves and us vulnerable against the next crisis. And you know that your economic dysfunctionality is producing political dysfunctionalities. Or conversely, you know, your corruption problems in Greece is hurting your economy.

  • 10:33:36

    STELZENMUELLERI think that's a very legitimate point to make. And I think that in many -- actually a lot of other European countries are hiding behind Germany when it makes that. So that said...

  • 10:33:45

    REHMBut what about the European Central Bank and what it has or has not done?

  • 10:33:52

    STELZENMUELLERYou know what? On that one I'm going to hand over to Jacob because he knows much more about this than I do.

  • 10:33:55

    REHMAll right.

  • 10:33:57

    KIRKEGAARDNo. I mean, I think that first of all, I agree strongly with Zanny's point that Europe and Germany specifically needs quite a lot of additional investment, some of it private, some of it public. On the issue of the European Central Bank, I actually think they have been quite responsive. I know that there's a lot of people who think that they should have, you know, done a Federal Reserve-style quantitative easing a long time ago. But I think that that really is sort of an apples and oranges comparison because we simply need to recognize that the European Central Bank is not a normal central bank in the sense that it is backed by a single government.

  • 10:34:37

    KIRKEGAARDSo it's from a political and technical point of view and much more complex issue to buy silver and bonds. But what they have done is actually -- what they have begun to do now, which is something that the Fed really never did because it's forbidden to do so, it's beginning to buy private assets. And if you want to create additional credit stimulus in the economy, this is actually, in my opinion, an arguably stronger measure to take. You have to -- it depends on how much you buy but potentially buying private assets straight up is actually a much more effective way to stimulate the economy.

  • 10:35:09


  • 10:35:10

    LACHMANYeah, I just want to make two points. You know, one is the ECB has certainly been too slow and too timid in its reaction. They've got one goal which is to keep inflation at 2 percent. Inflation is running at .4 percent. It's less than a quarter of their target yet the ECB take a long time to get anything going. Another point I'd like to make is that in Germany Mrs. Merkel's rumor for maneuver is now being limited by the rise of the party on her right, the Alternative for Germany Party, which got something like 10 to 12 percent in the poll. These are people who want to be out of Europe. They don't want to keep bailing out the periphery.

  • 10:36:02

    LACHMANIt makes it very difficult for her to move in the same way as UKIP is pulling Cameron to the right. I believe that the AFD will limit what Mrs. Merkel can do. And for the same part in the periphery, the rise of a party like SYRIZA that Jake mentions wants to stay in the euro. They want to stay in the euro provided they don't have to do all the things that is required from the euro. They want to tear up the memorandum, not do the fiscal adjustment, not do the structure reform. So I think the political forces in Europe are really making it difficult to get Europe moving.

  • 10:36:42

    STELZENMUELLERI'd like to jump here. On the AFD poll that Desmond must mentioned was the European elections which are usually protest votes. That's where they got 10 to 12.

  • 10:36:50

    LACHMANYeah, but it's the state election.

  • 10:36:52

    STELZENMUELLERBut it also has got more in the state election, this is true. But again in the state election you have to look at the local context. I think I won't waste your time with that here, but the point is the AFD I do take seriously. But I think that as of now they have -- there's been so much visible destructive influencing among the leadership. So many extremist positions that frankly their reputation in Germany, the more visible they've become the more it's going down. I think you don't want to overstate them.

  • 10:37:19

    REHMAll right. We've got to take a short break here. When we come back it's time to open the phones. I'd like to hear your thoughts, your ideas. Stay with us.

  • 10:39:57

    REHMAnd welcome back. Time to open the phones, your comments, questions. First, to Ed, in Battle Creek, Mich. Hi, you're on the air.

  • 10:40:09

    EDYes. Hello. I was just wondering if the problem may be the globalization, the problems and chaos and unpredictability and instability of the global financial trade system, because we've just come through, in the United States, the -- this huge, enormous crash, which was close to a depression -- not quite a depression. And we have similar problems. I mean, we have slow growth -- really anemic, I would say.

  • 10:40:47

    EDAnd we have the problem of the outsourcing of jobs to China, you know, just huge outsourcing of all manufacturing jobs. So we don't have those jobs. And then we also have the -- one your panelists mentioned problem of inequality. We have an increasing massive -- what do you call it -- disparity between the billionaires and the millionaires and then the regular wage earners who can't -- there's no demand. They can't buy houses. They can't buy cars, you know.

  • 10:41:21


  • 10:41:22

    EDThey're struggling.

  • 10:41:23

    REHMAll right. Desmond?

  • 10:41:25

    LACHMANThe caller is certainly correct in saying that Europe lives in a globalized world and global conditions are really very important. What happened at the United States in 2008, our global financial crisis, really did push Europe into its own crisis. But having said that, if one looks at what's occurred over the last three, four years, we've had a federal reserve that has been printing money at an extraordinary rate that has been making interest rates low across the globe, making it easy for Europeans to finance themselves.

  • 10:41:59

    LACHMANThey've lived in a rather benign global environment. The issue is what happens going forward once the Fed begins raising interest rates or once we get these global tensions in the Middle East that can impact Europe negatively. But the pluses from being in a global system are so much bigger than the negatives of the occasional shock.

  • 10:42:23


  • 10:42:24

    KIRKEGAARDNo. I mean, I absolutely agree with Desmond, that the positives of being in a globalized world for Europe and the United States are much greater than in a sort of closed economy setting. But I think when you look at the issues that are facing Europe, yes, they're suffering from some of the issues that Desmond mentioned that are global. But really most of the chronic problems that are creating the stagnation that we're -- or potential stagnation that we're seeing right now, are really homegrown.

  • 10:42:55

    KIRKEGAARDI mean they have to do with things like excessively regulated labor markets, the high cost of firing and hiring, therefore, workers, the excessive regulation of many types of businesses. The fact that businesses can't open when they want to. And fundamentally -- if you want to talk about it -- this is what structural reform is all about.

  • 10:43:18

    REHMThat's one view, Zanny. Would you agree with that?

  • 10:43:22

    BEDDOESI would agree with that, but I would add to it. I think Jacob said -- put it very well when he said that a lot of Europe's problems are homegrown. And the lack of structural reforms that he -- it's a very ugly phrase that we all have to use -- but the lack of these reforms is part of it. But I would also say that economic policy choice is a part of it. And some of the things we were talking about earlier, the German's demand for austerity, with hindsight I think clearly overdone.

  • 10:43:50

    BEDDOESI would say the European Central Bank should have taken much more of a leaf from the Federal Reserves' Book and been much bolder than it has been. And so I think there are policy choices, there are conditions that are particular to Europe, you know, it does -- it is the only region that shares a single currency. As a result it has advantages, but also stresses that come from that that are different to others.

  • 10:44:10

    BEDDOESBut I think the caller's absolutely right, that there are certain concerns and certain failures of the economy which are common across the rich world -- slow growth in the wake of the financial crisis, rising inequality. These are trends we see everywhere. And he's absolutely right to point them out. I think they're not a function of globalization, but they are common to -- across the rich world.

  • 10:44:32


  • 10:44:33

    STELZENMUELLERWell, let me add to this as well. I think what Ed, from Michigan, is pointing to is the importance of having not just functioning states and functioning representative democratic institutions, but also a decent society. In other words, you can liberalize the labor markets, but you must make sure that the poorest are taken care of and that they don't fall off the map. And I think that from this derives our credibility as Western nations, and not just at home, but in the world as well.

  • 10:45:04

    REHMWhat is the difference in what Ireland is doing? Why is Ireland so successful right now, Jacob?

  • 10:45:15

    KIRKEGAARDWell, first of all, Ireland is very successful right now because they had a very deep fall. I mean they went through a very, very deep recession. So they're kind of bouncing back from that. But the other advantage that Ireland has is that they do not have, you know, an overhang of this -- these issues of structural reform. They actually have a very flexible and very open economy. And therefore, they have been able to recover from the crisis.

  • 10:45:43

    REHMFlexible how?

  • 10:45:45

    KIRKEGAARDWell, this is -- in Ireland, for instance, it's very easy to start a new business. It's very easy to come as a foreign investor. It's very easy to hire workers. And it -- because it's also very easy to fire them. So you have a much more flexible economy. And you have a very well educated population, as well.

  • 10:46:03

    REHMAll right. Let's go to Mike, in St. Louis, Mo. Hi, there. You're on the air.

  • 10:46:11

    MIKEHi, Diane. This is a fascinating subject and one I've been sort of following since the early '80s when I discovered economics after that big recession. And what I've found over the years is that I believe we've been in a period of deflation since the 1980s. And the Federal Reserve and other governments have basically been filling the -- what is left over to keep the economy afloat. But inflation hasn't been a problem since probably the early '80s, in real terms.

  • 10:46:45

    MIKEIt's been deflation and we're still not out of it. And the natural order of economics is the only thing that's going to get out of it. Government policies just tend to extend the malaise. And the middle class right now in this country is suffering from that malaise, that Europe is actually showing, I think, really more deflation right now because they have always been a little more conservative from a cultural standpoint. But the world is going to have to deal with deflation and it's going to have to deal with it just on an organic natural way and keep the politicians out of it.

  • 10:47:20

    REHMAll right. Desmond?

  • 10:47:22

    LACHMANI would agree with the caller that deflation is a key problem, but it's a particular problem in Europe, given the very high level of debts. If we look at Europe, it's not just a question that the public sector is highly indebted. We've got many countries where the private sector is very highly indebted. And we know from the '30s that if we see prices falling and we see a stagnate economy, it's very difficult for people to dig their way out of that debt.

  • 10:47:54

    LACHMANAnd there's the danger that you'd fall into what economists would call a deflationary trap. Which really just feeds on itself, it slows the recovery, makes the deflation worse, makes the debt problem worse and one doesn't dig out of it. And that's really the reason why there is urgency that the ECB does something to make sure that we don't fall into this trap. We're very close to it. And it looks like, to me at least, that time is running out.

  • 10:48:24

    REHMWhat do you want to see them do right now?

  • 10:48:27

    LACHMANWell, I would think that what Zanny was mentioning is that the ECB really needs to be a lot more aggressive. They need to take leaf out of the Feds' book. They need to be buying assets, increasing the size of their balance sheet. That is really the last chance that they've got to keep the show together because the economics, if it is not got right, it's really going to drive the politics. And we're going to be in a downward spiral.

  • 10:48:55


  • 10:48:56

    KIRKEGAARDWell, I mean I think -- I mean I agree that deflation in high-debt economies is a major issue. But when we start to think about that it also matters who owns the debt to the extent that you owe it as a country to yourself. It's actually much more of a redistributional issue. And when you think about, you know, who gets hurt by deflation -- obviously people that have lower wages. But if you, for instance, have a fixed income, if, you know, if you receive a fixed pension, if you have deflation it's actually good for you.

  • 10:49:26

    KIRKEGAARDAnd one other thing, because you can buy more for the same amount of money. And one of things that characterizes Japan's experience is that -- which obviously had deflation for a very long time -- is a huge redistribution from young to old people. Because old people tend to be on fixed -- should be government pensions in Japan.

  • 10:49:47

    KIRKEGAARDAnd therefore, I actually think that that is, one, it's a political problem. But the real problem with deflation is that I think it signals more broadly in an economy that there is a lack of growth dynamic. There is a lack of investments. There is a lack of demand. There is a lack of innovation in this economy. So it's much more than just really a price level. It signals stagnation at a much broader societal level.

  • 10:50:12

    REHMAll right. To David, in Cincinnati, Ohio. You're on the air.

  • 10:50:18

    DAVIDThank you for taking my call.

  • 10:50:20


  • 10:50:20

    DAVIDI have a two-part question. One of which was partially answered before, but my question is what is meant by structural reform? And then the second question is earlier one of your guests said that essentially if Europe is down, the U.S. really doesn't benefit by that. So my question would be is -- what can the U.S., and by extension the rest of the world, do in order to help the E.U. get out of its situation?

  • 10:50:51


  • 10:50:52

    STELZENMUELLERWell, I think by structural reforms, really is meant making one's economy more competitive, breaking the stranglehold of the unions on labor regulation, flexiblizing labor markets, and so on. I'll leave the details to the economists. But the -- the economists, plural, and to the economist. On the Europe/U.S. question, I think the -- as I said earlier -- the first years of the crisis, I think, revealed to Washington for the first time just how vulnerable the U.S. is to economic shocks in Europe, and frankly, the other way around.

  • 10:51:37

    STELZENMUELLERAnd I think -- to the point that the chairman of the joint chiefs, General Dempsey was saying that he was sorry that he had flubbed economics at West Point. And that clearly the military were going to have to take a long, hard look at how economics impacted -- which I hate to use as a verb -- on their own activities and on the safety of the world. I think that's a very key point.

  • 10:51:58

    STELZENMUELLERI think we're only -- we're still in the process of trying to figure out how to address that politically and institutionally. Do I think we need an economic NATO? No. Do I think we need longer, more sustained, more technical conversations between policy makers? Yes.

  • 10:52:12


  • 10:52:13

    KIRKEGAARDWell, I just want to, you know, a structural reform is, as Zanny mentioned, a terrible term that could mean anything to anyone. Typically, when politicians use it what it means is that it's something that you do that only has an effect after the next election. In which case you don't have to be held accountable for it. But I think it's very important that while it is true that in -- right now in Europe many of the things that is sort of meant by the term structural reforms means, as Constanze said, liberalizing, making labor markets and other types of business conditions more flexible.

  • 10:52:46

    KIRKEGAARDThat isn't the only thing that structural reform can mean. I mean, you know, structural reform in an economy can also be widening the access to education, widening the access to health care, like we have seen recently in the United States. A structural reform can be something that actually serves to reduce income inequality. So it can cut both ways in many ways.

  • 10:53:07

    REHMJacob Kirkegaard of the Peterson Institute. And you're listening to "The Diane Rehm Show." Here we have an email from Berlin. Michael says, "Economically, Germany cleaned its house, gained in efficiency and kept unemployment low. But what we didn't consider is that a shared currency works like communicating tubes. If things go too well in one place, it necessarily goes bad in another. And now South Europe is not able to buy our goods anymore." Zanny?

  • 10:53:58

    BEDDOESIt's an interesting analogy. I'm not quite sure I accept that it has to be that if things go well in one place they have to go less well in another. The point of the single currency is that you share obviously the currency, and a result monetary policy. And I think what the writer of that email had in mind is that if you have monetary policy set for the whole euro zone, it is likely at any particular point in time, to mean that interest rates are a little bit too high for the country that's not doing very well and a little bit too low for the country that's booming.

  • 10:54:27

    BEDDOESAnd the problem with the euro area is that during the boom years before the financial crisis, that mechanism essentially got out of control. And there were huge flows, huge capital flows from Germany -- which at that time was actually not spending very much at home -- to the periphery economies, to the Spains, to the Greeces, pouring into those places, causing bubbles and causing their economies to overheat and causing their costs to rise.

  • 10:54:52

    BEDDOESThe difficulty, I think, is that -- and what we've learned painfully is that if you're going to have to have a single currency you have to have all kinds of other bits of economic institution building to go along with it. And that those weren't put into place with the euro. It was kind of a halfway house. And what the Europeans are now painfully and painfully slowly doing is building the rest of the architecture around that -- the Banking Union, all things like that.

  • 10:55:14

    BEDDOESOnce you have all of that in place, in theory, a single currency area ought to be able to work. And some people -- I suspect Desmond may disagree with me. Some people are more skeptical about whether it even can work, but I think in principle it can. But it essentially means making the euro area a little bit more like the U.S. It doesn't have to become as federal as the U.S. is, but it has to move a little bit more in that direction.

  • 10:55:33

    BEDDOESAnd it's that painful process that the Europeans are in the midst of. And just to bring that back to a thread of the discussion we had earlier -- and I agree with Jacob, that these political -- these parallels with the 1930s are easily over-exaggerated. It's not -- we're not going to see a replay of the 1930s. But the politics in Europe matters because these parties, whether left or right, have in common that they give voice to a dissatisfaction of the status quo and dissatisfaction with the European project.

  • 10:56:01

    BEDDOESAnd they're a kind of fragmentation force. And that's what worries me. What worries me is that just as you need to continue the European project, build all the rest of the stuff that the euro area needs to work, you have political momentum moving in the opposite direction.

  • 10:56:17

    REHMFinal question, do you believe, Jacob, that Europe is going to fall into a third recession?

  • 10:56:27

    KIRKEGAARDNo. I believe that Europe is likely to very narrowly escape it, but the issue then will be that actually we're going to be in a situation of prolonged stagnation. And we…

  • 10:56:38

    REHMAnd Desmond?

  • 10:56:40

    LACHMANI'm afraid I think that we are going to go into a third recession. And worse yet, I think that we're about to enter the next phase of the European crisis.

  • 10:56:52


  • 10:56:53

    STELZENMUELLERI think that Europe has a great deal of massive political problems to worry about, external -- in particular, the conflict with Russia -- that could unify it. That could also lead it to seek further integration.

  • 10:57:05

    REHMAnd Zanny, final one quick point from you? Will Europe fall into recession?

  • 10:57:14

    BEDDOESIt may fall into two quarters of declining growth, which is the technical definition of recession, but even if it doesn't I'm afraid I don't see very much except for stagnation ahead.

  • 10:57:23

    REHMAll right. Zanny Minton Beddoes, Jacob Kirkegaard, Constanze Stelzenmueller and Desmond Lachman, thank you all so much.

  • 10:57:35


  • 10:57:35

    KIRKEGAARDThank you.

  • 10:57:36

    LACHMANThank you.

  • 10:57:36

    REHMAnd thanks for listening. I'm Diane Rehm.

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