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Greece’s creditors are studying the latest proposal by Athens to resolve its years-long debt problems. The plan includes some pension cuts and new taxes. Some officials suggested the 11th-hour plan offered the first real hope in months that Greece could avert a full-blown financial crisis. The main overseers of Greece’s bailout – including the IMF and European Central Bank – found the proposal to be broad and comprehensive. But Greece is far from satisfying all the key players. Eurozone finance ministers will meet again ahead of Thursday’s EU summit with heads of government. We discuss the latest on the Greek debt showdown and what it means for the eurozone.
- Scheherazade Rehman Professor of International Business and International Affairs at George Washington University and director of the university's European Union Center.
- Nicholas Karambelas Legal counsel for the American Hellenic Institute; founding partner of Sfikas and Karambelas in Washington, representing clients in matters relating to Greece and Cyprus.
- Tom Nuttall Brussels correspondent and Charlemagne columnist for The Economist.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. European leaders this week are grappling with how to break a stalemate with Greece over its debt problems. An 11th hour Greek proposal offers the first hope many have seen in months. Still, Greece must secure financing before June 30 when it owes a debt payment to the IMF. Much more work needs to be done ahead of an EU summit this Thursday.
MS. DIANE REHMJoining me to talk about the Greek debt crisis and the outlook for the Eurozone, Nicholas Karambelas of the American Hellenic Institute, and Scheherazade Rehman of the George Washington University. And from a studio in Brussels, Tom Nuttall of "The Economist." Do joins us, send us an email to firstname.lastname@example.org. Give us a call to 800-433-8850. You can join us on Facebook or Twitter. And it's good to have you all with us.
MR. NICHOLAS KARAMBELASGlad to be here.
MS. SCHEHERAZADE REHMANThank you.
MR. TOM NUTTALLHi there.
REHMTom Nuttall, if I could start with you. Fill us in on what's been going on between Greece and its creditors and the EU officials over the past few days.
NUTTALLOkay. So late on Sunday, the Greek government sent the latest in a very long series of reform proposals to the institutions that monitor Greece's bailout. Now, the institutions who have been complaining for months that the Greeks weren't serious about reform now consider that they have a very serious basis for negotiations, that this list that the Greeks sent was detailed, costed, specific and that it gives them something to work with so that ahead of the finance minister's meeting here tomorrow, they may be able to strike some sort of deal.
NUTTALLSo there is now a fair degree more optimism than there was a couple of days ago.
REHMCan you give us some of the main items that are in this new proposal?
NUTTALLYeah. I mean, it hasn't been formally published, but there have been leaks. I think the two most important issues, which have been the sticking points between Greece and its creditors recently are pensions. And here, the Greeks aren't making all of the cuts that all of the creditors, and particularly the IMF, would like to see, but they are seeking, for example, greater contributions from employers to pensions, which should relieve the burden on the state.
NUTTALLThe other sticking point has been VAT, value added taxes. Now, again, the Greeks aren't doing exactly what some of the creditors had wanted and, in particular, they're not going to apply the highest rate of VAT to energy costs, which is 23 percent, but they are making adjustments elsewhere that should relieve some of the burden on the state. And there's various other fiddles that they're making around the edges, but these have been the two very tricky points in the last few weeks and there has now been significant movements from the Greeks.
REHMTom Nuttall of "The Economist." He is reporting for us from Brussels. And to you, Scheherazade, what we know of the proposal, does it seem to go far enough?
REHMANNo. And that's the simple truth of it. You know, we've got 48 hours of optimism, at this point. D-Day is now Thursday. What they have proposed is really no real spending cuts, very little in the package on that. What has been leaked so far are new taxes on business and the wealthy and some VAT issues and that comprises almost 90 percent of the package, from what we know. And, again, this is all hearsay and leaked information.
REHMANHaving said that, I find it very difficult that the Troika, especially the IMF, will accept an offer from a government that's notorious in failing to collect taxes. The entire package is based on higher taxes and so I don't see this coming to a good end unless there are real spending cuts, which I believe the IMF is going to push for.
REHMScheherazade Rehman, she is professor at George Washington University. And to you, Nicholas Karambelas, what about the people of Greece? What is their response?
KARAMBELASWell, I think you see -- the big issue you see is a middle class of very well-educated people and having assets who have no cash coming in and not having the ability because they don't have a job or their business have gone under. So you have a -- it isn't just poor people. You have a substantial middle class that simply doesn't have the cash to operate on a day to day basis. Then, the other issue is, of course, the general unemployment, which is close to 50 percent with young people.
KARAMBELASSecondly, we mentioned the pensions. Remember that Greece has the oldest or at least one of the oldest populations in the EU so that you're paying -- the pension money is spread around a lot wider because they have fewer younger people. And plus, remember that many Greek families are living off of the pension so it isn't just one pensioner getting a pension. It's a whole family sometimes living off of 800 euros a month on an average.
REHMAnd as far as you know thus far, part of the deal would be to cut back on those pensions.
KARAMBELASThat's what we hear, yes.
REHMNicholas Karambelas, he is legal counsel for the American Hellenic Institute. If you'd like to join us, give us a call, 800-433-8850. I find myself wondering, Tom, when the Eurozone leaders met last night, what was their mood? Is it now more hopeful?
NUTTALLI mean, yes. It absolutely is. It was a bit of rollercoaster of a day. And the story's very complicated because various different institutions approached this issue in different ways. So, for example, the European Commission, which is part of the European Union, is generally perceived, I think rightly, to be more friendly, more accommodating towards the Greeks. The IMF is often a lot more hard-line.
NUTTALLThe Commission was notably warmer towards this Greek proposal yesterday than the IMF was. But the leaders, when they arrived yesterday, their finance ministers met earlier in the day and some of them, including Wolfgang Schaeuble, the notoriously tough German finance minister, sounded very skeptical. But the tone or the mood had lifted somewhat by the evening when the ministers -- sorry, when the heads of government convened to meet.
NUTTALLAnd although in their press conferences and their statements, it was all sort of couched in, you know, there's lots of work remaining to be done. This is only sort of a preliminary basis for discussions. Compared to some of the rhetoric we've heard, in fact, from both sides over the last couple of weeks, which has got extremely heated. This was a definite lifting of the mood.
REHMDefinite lifting of the mood, Scheherazade, but from your perspective, not warranted?
REHMANI think there's a lot more work ahead, you know. You're talking about a young government, a fringe government coming in. And this, you know, typical now of many Eurozone countries where fringe governments are becoming part of the ruling coalition or indeed leading country where they are young on the international platform for negotiations. This government actually believed that they could negotiate with the IMF, with the EU and the ECB to say no more austerity and please continue the bailout.
REHMANThat was their silver bullet and that was their platform, a promise they could not keep at all. And we understood that. Having said that, the growing pains over the last five months are slow. They've got less than 48 hours to become a mature government, to show leadership and to step up.
REHMBut Nick, you see this as a euro crisis and not a Greek crisis.
KARAMBELASWell, I see it -- obviously Greece is part of that same crisis, but there are, and always have been, certain contradictions in the Eurozone in the way it was structured to begin with. You'll see that the Eurozone is about, I don't know, 12 or 13 lines in annex to the Treaty of Lisbon. So it's been a continual process. And, for example, it was originally seen as every country being part of the Eurozone eventually and there's 19 and I don't think there are any more entering, not under these circumstances.
KARAMBELASSo Greece is, in a lot of ways, is a symptom rather than a cause of the euro crisis.
REHMANYeah. You know, I would differ a little bit from that. I think in 2010, this was a Eurozone crisis. They were fault lines in the structure, in the makeup of the single currency, in the way everything was set up, including a central bank, which is not a real central bank. All of that has been shored up now and the markets have changed their minds. They now see this as a Greek issue and not a Eurozone issue, therefore making it harder for the Greeks to say, if you don't help us out, the entire Eurozone is in trouble. I don't believe that's true today.
KARAMBELASI think there have been these changes that have gone on, but I think what keeps these negotiations going is no one really knows what will happen if these talks just fall apart. And I think, at this point, it's turned into politics rather than economics and policy and so everyone wants to avoid getting the blame, but also getting the credit if everything works out.
REHMNicholas Karambelas, he's legal counsel for the American Hellenic Institute. Short break here. Your calls, your comments when we come back. Stay with us.
REHMAnd welcome back as we talk about the Greek debt crisis, its negotiations with the Eurozone and with the IMF. Here's our first email from Maryland. Tom Nuttall, I'm going to direct this to you. "When Greece is discussed, the talk is all about how irresponsible the country was. But what about those who made what were essentially the international equivalent of liar loans to Greece? Why is there such a divine right of lenders to be fully repaid, when it inflicts such suffering on so many innocent Greeks and causes economic devastation that makes repayment impossible?" Tom Nuttall.
NUTTALLYeah. I mean that's the reasonable point. I think, two comments to make on that. The first is that when Greece first got into trouble back in 2010, I think a lot of people now accept that there was a mistake in Europe's strategy. There should have been a degree of debt write-off from the outset and there wasn't. The European policymakers feared financial contagion. They wanted to make their banks whole. Now I think a lot of people consider that that was a mistake. Two years later, there was a big debt write-off of private-sector holders of Greek debts -- one of the biggest haircuts in history.
NUTTALLThe problem now is that that means that all the debt -- well, about 80 percent of the debt is in so-called official hands. It's not owned by private bondholders. And that turns this into an extremely political issue. The debt is now a sort of a political instrument and its maturities can be extended, its interest rates can go up and down as political needs dictate. So although it's not true to say that all of the pain has been borne by the Greeks, because there was that big write-off a few years ago, I think you can make a reasonable case that there was a mistake here. It would have made more sense for all sides for there to have been a much earlier write-off of that debt and we probably wouldn't find ourselves in this situation now.
REHMANI think he's right. I think that definitely the Europeans fumbled the ball and crisis-managed it in 2010. We know that. But there was also something else behind this. There's abject market failure here for eight years. So capital markets were lending to Greece at very, very low interest rates, almost similar to Germany, without recognizing the risk. So there was abject market failure within the system, which then led the Greeks to have excess borrowing at very low rates for a very long time. And with their budgetary system, it was not a good coupling.
KARAMBELASI think both Scheherazade and Tom are right. And I think their positions are confirmed by three IMF reports, which basically say exactly that, that this was a mistake from the beginning. Which kind of puts, in my mind, the IMF into a little odd position here, saying, you know, "Yeah, we made a mistake. But give us our money." You know?
REHMWhat about the development in the last few days of the Greek government going to Russia?
KARAMBELASI think that's -- that's on a couple of levels. The leftist parties in Greece have always looked to, first, the Soviet Union, and then to Russia and even the right-wing parties, because of the common religion. So it's not that unusual to see a Greek leader going to Russia. The -- and I think what's really behind it was the pipeline negotiations. You can interpret it as Mr. Tsipras going there and kind of stuffing it in the nose of the Europeans. I don't think it was that.
REHMBut also, didn't it have something to do with sanctions against Russia? Tom Nuttall.
NUTTALLWell, I mean, this is what people were worried about when this government -- this Syriza-led government took office in January. Because the European Union, as you know, has a number of economic sanctions that it imposed on Russia over its actions in Eastern Ukraine. And those sanctions need unanimity from all 28 member states in order to be maintained. So there were some fears that the Greek government might use the debt issue to take the sanctions hostage, as it were. You know, give us a better deal on debt, otherwise we won't vote for the sanctions. Actually, that has turned out to be the dog that hasn't barked.
NUTTALLYou talk to anyone involved here in Brussels in the discussions over sanctions and they'll say that the Greeks have not caused any trouble, have not tried to break ranks over this. Now, I suppose it is a possibility that if there were to be an accident that led to Greece leaving the Euro and things got very heated -- the relationship between Greece and the EU fell apart, that calculus could change, if Greece sought money from the Russians. But there's been very little evidence that that's a card that they want to play, thus far.
REHMNow, Tom, you talked earlier about Wolfgang Schaeuble pushing to impose capital controls on the Greek economy. What about Angela Merkel? Where is she in this whole discussion?
NUTTALLWell, what does Angela Merkel think, is one of the great mysteries of European politics -- not only about Greece but about pretty much everything. Great minds have been -- have devoted hours to chewing over this problem and very few answers have been found. She is broadly considered to be slightly more favorable towards the Greeks than Mr. Schaeuble, who was quite keen or certainly ready to see Greece leave the Euro the last time we had a crisis, a few years ago. She wasn't. She has a more visionary sense of what the European Union is. She's also said to have concerns about geo -- geopolitical concerns about what would happen in the event of a Greek departure from the Euro in a traditionally unstable part of Europe.
NUTTALLSo, while she is certainly not prepared to see the rulebook torn up in order to keep the Greeks inside the Euro, she is probably prepared, when it comes down to it, to be slightly more accommodating than her finance minister.
REHMSo isn't that what Athens is banking on, Angela Merkel leading the Germans to say we have to be more lenient here?
KARAMBELASAbsolutely. They're -- that's really where the -- I think it was Lagarde -- Ms. Lagarde who said, you know, we got to get the adults in the room. And I think Ms. Merkel is one of those, having the vision, as Tom says, and looking at the longer term and being -- is seeing the EU as a -- in a confirmed, positive way.
REHMScheherazade, what about the U.S.? Is it helping in any way to shore up Greece's debt troubles?
REHMANI think the message from the U.S. has been relatively clear through the IMF that we would prefer not to see a Greek exit. And I don't think that will happen. Please do whatever you can to make sure we can resolve this and resolve it quickly. I think the U.S. has been very supportive in trying to reach a deal. Now, beyond that, its, you know, its interests are lying on the security issues, especially with Russia. And we don't want more chaos, economically or otherwise, in the Eurozone and the EU in particular.
REHMTom, you wanted to jump in?
NUTTALLYeah. I mean, it's been quite interesting watching the evolution of the U.S. position, as far as we can divine it. I mean, I remember it was either just before or after the Greek election in late January that President Obama made a statement widely considered to be pushing Europe to take a more lenient stance. He said, if you have a country that has experienced a depression like Greece's, where they've had a -- they've lost a quarter of output, unemployment is at 25 percent, at some point the people are going to break -- or words to that effect.
NUTTALLNow we haven't -- as this government has proceeded in what many people consider to be an amateurish, incompetent way over the last few months, we've -- the statements from the U.S. have grown more nuanced. They certainly, as Scheherazade said, they certainly want to see a happy resolution to this crisis. They wouldn't want to see Greece fall out of the Euro because no one knows what the political or the financial consequences of that would be. But I think they have been broadly prepared to sit back and let the Europeans and the IMF sort this one out.
REHMSo what about the European Central Bank, Scheherazade? To what extent has it been shoring up Greece's banking system?
REHMANI think one of the most understated human beings on the planet is Mario Draghi, the head of the European Central Bank. So much rests on his shoulders. He will truly determine the future of the Eurozone. He is, at this moment, providing $1 billion a day in liquidity assistance for the Greek banks. This will go on till Thursday. This is the only central bank governor in the world who can not only control monetary policy, but has a say in terms of fiscal issues, i.e., do the austerity measures or there will be no more assistance.
REHMDo you believe that the ECB would stop giving liquidity?
REHMANThat's a tough one. I believe they'll definitely get it till Thursday. But that is a card that they can play if push comes to shove.
REHMWhat do you think, Nick?
KARAMBELASWell, I think it's a card they can threaten to play. I think, again, overlying all of this issue is uncertainty. And most of this -- most of what's going on here has no precedent. And I think Mr. Draghi -- and I think he has said that -- that, you know, we really don't know what would happen if we do that. And, no, I think it's very difficult with the uncertainty.
REHMAll right. I'm going to the open the phones. 800-433-8850. Let's see if I can get this mouse there, to Gary in Flint, Mich. You're on the air.
GARYYes. Thank you for having me. I'd like to ask the question about the elephant in the room, the root cause of all this -- why no one speaks about it, the fact that Wall Street and the big international banks raped and pillaged before 2008 and caused a lot of this like they have in Iceland and all across the whole world. And no one will go follow the money and find out where, you know, who actually benefited from all this. There's a whole lot of money that went somewhere. And it's not just a case of poor economics in Greece. You know, these poor people over that have unreal -- unbelievable unemployment. There's poverty and everything.
GARYAnd this is all being pushed down their throat and going to make their life worse. But, yet, the money has gone somewhere. And the people -- the people, it didn't go to the mid-class or the lower class in the United States. It didn't go to them in Greece. It didn't go to them in Iceland. It didn't go to them in Europe. It didn't go to them in Ireland.
KARAMBELASI think there's a valid point there. But the problem is, right now -- well, first of all, there's no forum in which to go after these -- the Wall Street people who did this at the international level. And secondly, at this point, I think we need to deal with what's right in front of us. And I think we'll leave the other to historians.
REHMANYou know, I think something important has been brought up here, which has been playing out itself in many, many ways, and that is the income-disparity issue that is running across not only the European Union, but also in this country. And every time we hit a crisis, that flares up and is more apparent and becomes bigger.
REHMBut what about the Wall Street bankers?
REHMANThere is absolutely no -- no grace there. They caused the crisis in 2008, there's no question. And they're back to doing business as usual. Very little banking reforms have been done. The big banks have simply become bigger. And so, too big to fail has multiplied.
REHMSo what is the possibility that -- if Greece should get bailed out and there is a deal here -- if no reforms have taken place, what's the chance this could happen again?
REHMANWell, you know, it could happen again. The reforms have to be taken. Let's -- you know, let's be honest. The Greeks are probably their own worst enemy right now, in terms of the way they have been negotiating. There is room to wriggle here a little bit. It wasn't their fault for the 2008 crisis. But now, we have to see what's in front of us and play that game.
REHMAnd you're listening to "The Diane Rehm Show." Tom Nuttall.
NUTTALLYeah, I mean, I'm glad you raised this. Because one thing I think people ought to know is that even if we do strike some sort of deal this week that opens up some financing for Greece and enables it to make its immediate repayments to, first, the IMF and then some big one that it's got coming to the ECB in the next couple of months, you know, that's the optimistic story. Believe it or not, despite the fact that this saga has been going on for five months, all we're talking about here is a short-term deal to finish the last bailout that the previous government was unable to conclude itself. It doesn't answer any questions about the medium- or long-term sustainability of the Greek public finances.
NUTTALLAnd you can bet your bottom dollar that once whatever deal is secured this week -- if there is one that's secured -- expires, we're going to be back here again and again and again. Partly because the Eurozone has proved utterly incapable of coming up with a thoughtful political response to the challenge that a party like Syriza presents when it's elected. And partly because this Greek government has shown no commitment at all to serious growth-inducing reforms that the country so desperately needs: tackling the corruption, tackling the clientelism. And this proposal that they sent yesterday morning, it's a bad proposal. It's recessionary. It's the kind of austerity that this -- that the Syriza campaigned against when it was in office.
NUTTALLBut the whole point now is that we're all sort of conspiring in affection, so that we can get the numbers to add up, so that parliaments across the EU can be satisfied and we can have some sort of disbursement of the bailout money. It's not a very pretty picture.
REHMBut what you're saying is that, even if the bailout money does cover the short term, this could happen again a year down the road, Tom?
NUTTALLYeah. And, yes. In fact, I've replaced the word "could" with "will." So I mean, there's a little bit of bailout money left. And there's sort of various other pots hanging around that can get Greece through the next few months. But until the economy starts to grow properly, Greece will have to borrow. And it's locked out of private markets, partly as a result of this government's antics. So it will need to secure more financing from its official creditors. And what we're talking about here -- although people don't like to use the phrase -- is a third bailout. And that will probably be coming down the line, if we can ever get the second one worked out. So I would say, yes, we will be coming back to this place. And I think it's probably going to be a lot sooner than a year.
KARAMBELASI think, we use the term "growth." And I think we need to define it. For Greece, it means two things: It's exports, in terms of bringing in hard currency and, secondly, direct investment. And I think Tom is absolutely correct, that these tax measures that have been introduced in the last couple of days -- or have been proposed in the last couple of days, will totally discourage both of those.
REHMANI believe they're both right. In six months, we're going to be right back where we are.
REHMANAnd, I believe, in a year, you'll have snap elections again.
REHMAll right. We'll take a short break here. More of your calls, your comments, when we come back.
REHMAnd welcome back. I'll go right back to the phones, to your questions as we talk about Greece, the hope for bailout, but what could happen even with that in place. To San Antonio, Texas, hi, Tony.
TONYWell, thank you very much for taking my call, Diane.
TONYMy question is, why doesn't the Eurozone prepare itself for the exit of Greece, help it along, make it an organized exit? Greece needs to fix its financial problems on its own before it's ready to rejoin the euro, and it'll be a good test for the euro.
REHMANYeah, the problem with that is if the -- if Greece leaves the Eurozone, they will be left with a piece of paper called the new drachma, which will have almost no value in the markets. It is locked out of the capital markets at this particular juncture. So you are talking about decades of very real pain. Its only hope is to really stay in the Eurozone.
REHMDo you agree?
KARAMBELASYes, I do, and also as we just discussed, the growth, the key to avoiding this in the future, is exports and direct investments, and that would just totally fly in the face of exports and investment.
REHMANOne billion dollars is being moved out of Greek banks by its depositors every day. And this happened all last week. It happened on Monday. And if this continues, that's why the European Central Bank is so important, because it's providing that liquidity into the banks, but they can't do it forever. The Greeks have to believe in their own economy, or money will be siphoned out.
REHMBut tell us about Greece's ruling party and how a party that barely existed a few years ago is now the government, the Syriza party?
KARAMBELASYeah, I think it comes about as a -- it is, of course, a coalition and a very loose coalition. It's not a top-down vertical party in any sense of the word. It is being held together basically because it's experienced, through Mr. Tsipras, it's experienced election success. And that's what holds it together, but there's already a very vocal minority called the left platform in the party that basically rejects any of these measures that Mr. Tsipras has proposed.
KARAMBELASSo it is a very undisciplined party in that sense.
REHMANI think this phenomena is not just in Greece. Economic deprivation pushes out traditional, centrist parties in elections. And centrist parties, center-left, center-right, have served Europe very well, and we are seeing the outcome of having a fringe government actually running a country. We are talking about other countries, like France for example, and we never thought this was possible even a year ago. Marine Le Pen is now being pegged to being part of a -- possibly winning the presidential election in 2017, and the National Front is a fringe party.
REHMTom, do you want to comment?
NUTTALLYeah, there is extraordinary political fragmentation taking place across Europe right now in almost every country, particularly in Western Europe. Marine Le Pen is a huge challenge. I would be very surprised if she were actually to become president in 2017, in a French presidential election, but there's a very large chance that she could emulate the feat of her father and make it through to the second round, as he did in 2002, and that itself would be a big shock.
NUTTALLThe -- I think what we're seeing is that a lot of establishment parties have really no idea how to react to what they're seeing around them. In some countries, a challenge comes from the populist right in different forms, and that often takes a form of anti-immigration parties, parties opposed to the EU, to the euro. And other parties such as Greece, also in Spain and in Ireland, these are countries that have had particularly acute economic difficulties in recent years, the challenge comes from the anti-austerity left, the parties that are ostensibly pro-European, but they're very opposed to the -- some of the actions that the European Union has taken in recent years.
NUTTALLAnd the fact that you're seeing this in so many countries, in many countries that have traditionally been very close to the European core, tell us a bit story about what's happening in European politics over recent years, and I don't think that we've really seen any mainstream parties show that they know how to respond to it.
REHMSo what happens, Scheherazade, if the Greek government and the prime minister sign a deal?
REHMANYeah, you know, it's one of those situations where you're damned if you do, and you're damned if you don't. If they sign the deal, they will split their own party, and the future of the PM is at stake, and I do believe that you will have, like I mentioned earlier, probably snap elections within the year.
REHMWell, but tell me what could happen with a snap election.
REHMANAt this point, anything.
REHMWhat do you mean?
REHMANI mean that we could have any other fringe government in there, promising a silver bullet to fix the problems of this year, which are not fixable in the short run. This is a long-term economic plan that has to be put into place by a mature government that understands how to manage the creditors.
REHMDo you see any reflections of what's happening in Europe to what's happening here in this country?
REHMANWell, there is a very big risk in the Western world, and that is governance failure, and we are watching that in Europe, but it's happened here, as well. We are absolutely stuck. We have very little movement on the budget. We have austerity measure that we have to take, infrastructure investments. None of that has moved here.
REHMDo you agree, Nick?
KARAMBELASYes, and I think also if there are snap elections, which I think is likely, as well, there are -- there are basically two ways it would go. Optimistically, it might be a broad front of parties that get together and show some national unity in terms of dealing with this problem. On the other hand, it may just be a completely fragmented political parties across the board, none of whom can show any kind of basis for a negotiation.
REHMAll right, to Koi (PH) in Lafayette, Louisiana. You're on the air.
KOIHi. Basically in thinking about this issue that's happening in Greece and reflecting, as some of the panelists have, on how America is heading for a cliff in relation to our national debt, it seems to me adding $3.3 billion a day to our national debt is not a healthy -- it won't be a healthy outcome. So just to the panelists, I mean, what do you think is the solution here? It seems to me that government, as well as banks and finance companies, are responsible for causing this problem, but it doesn't seem like there are too many voices out there sounding the alarm for this cliff that we're heading off of.
NUTTALLWell, I mean, I can't really speak to the American situation, although one comparison you might make is to look at the performance of the American economy versus the Eurozone economy, since 2008, which obviously was a cataclysmic time for both parts of the Western world. The American economy has roared ahead of the Eurozone economy. Unemployment is a fraction of what it is across the Eurozone. Now within the Eurozone, obviously there is wide variation. Unemployment is very low in countries like Germany and The Netherlands. But in some countries, and not only Greece, you have unbelievable figures.
NUTTALLYou have Spain, which has -- unemployment's been over 20 percent of the workforce for several years. Now you have Italy, which has basically not grown its economy for over 10 years. And so I think some questions might need to be asked about why it is that the Eurozone, or part of the Eurozone, have proved so unable to find ways to grow their economies, to create jobs for people, particularly for young people, to break down two-tier labor markets, whereas the United States, or parts of the United States, don't seem to have experienced the same difficulties.
REHMHow would you respond to that, Scheherazade?
REHMANWell, it's all relative, and the markets have this undying optimism on the American economy. To make this point, during the worst years of our crisis, in 2009, more money actually poured into this country than before the crisis. So really it is relative to Europe. The markets see us as a growth engine and see us much more flexible in the face of adversity than the Europeans, hence we are in a better position.
REHMAll right, so let's look at worst-case scenarios. Suppose the Greek government has to exit from the Eurozone, cannot pay its debts, and switches back to the drachma. You're squinching your face, Scheherazade.
REHMANThat is just an awful scenario.
REHMANBecause the Greeks are locked out, effectively, of the global capital markets. No one's going to lend to them at anything reasonable. They will simply get themselves into more and more debt. The only option would be to print this new money 24 hours a day, seven days a week, 52 weeks a year, and we'll be back to square one. They need to stay in the Eurozone, but there are decades of pain ahead at this point.
NUTTALLYeah, I'm sorry to say I agree. I think you can make a strong case to say that Greece should've never been allowed into the euro back in I think it was 2001, but that's a very different proposition from saying it ought to leave now. If they were to leave, and if they were to return to the drachma, then you would have to re-denominate all of the private-sector debts. You'd have bankruptcies left, right and center. You'd have hyper-inflation, well, you'd have very high inflation anyway, you'd have probably a political crisis in a country that is prone to and has a history of instability and coups, sometimes violent ones.
NUTTALLSo this notion that it would be worth taking the short-term pain in order to regain the competitiveness that their country really needs so it can start, you know, exporting its way out of its troubles I think is very misguided. And just one other quick point, which we haven't mentioned yet, if Greece were to leave the euro, the effect on the rest of the Eurozone is difficult to predict.
NUTTALLNow, as Scheherazade said earlier, there certainly is a sense amongst Eurozone policymakers that they're much better insulated from the consequences of what we call here a Grexit from the euro than a few years ago, and that's probably justified, but it's hard to know. This has never happened before. And at the very least, what you would do is to reverse the previous assumption that membership of the single currency cannot be revoked. It would now look like something that is reversible, and the consequences of a move like that on other potential weak links such as Portugal and Spain are very difficult to predict and could be very painful.
REHMSo you're saying there could be a domino effect.
NUTTALLWell, I mean, I wouldn't expect, if Greece did leave the euro, I wouldn't expect the dominos to start tumbling. I don't think it would be Portugal next and then Spain. But I think what you would see, for example, is a long-term, non-trivial rise in their borrowing cost, which would have an effect on their governments' ability to provide basic social services over the years, which is why I don't think anybody wants to see this happen.
KARAMBELASWell, as I said before, there's no legal mechanism for a country to -- an EU member state to leave the Eurozone or to be kicked out of the Eurozone. So the only way it could happen would be a very disruptive way, as both Scheherazade and Tom have said. And I could see, if that did happen, it would only because the ECB stopped sending euros to Greece, and then Greece would have to develop a parallel currency.
REHMAnd you're listening to the Diane Rehm Show. All right, and to Paul in Dallas, Texas, you're on the air.
PAULGood morning, and enjoy your show, thank you very much.
PAULI'd like a member of the panel to elaborate on how it is that -- how it came about that the, as you stated earlier, that the Wall Street banks caused the problems that are now -- you're now discussing in Greece.
REHMANWell, we all know that securitization of the housing mortgages, which were junk, basically, and spread into the financial system, caused the crisis. We know that. We know the root causes. But having said that, some of the behaviors and the legalities of things that should have been shored up in this country have not been done. The Dodd-Frank Act is not complete. You know, we can't even get our hands around the Volker Rule, about shorting your own instruments.
REHMBut how did that affect Greece, Tom?
NUTTALLWell, I mean, you have to do a bit of work to draw the connection. I mean, it's not a coincidence that the Eurozone crisis erupted in 2010, less than two years after the collapse of Lehman Brothers. But, I mean, let's not forget that Greece was always living on borrowed time. It was running up -- the trigger for its crisis was the revelation that a government that had recently been voted out of office had been lying about the budget deficit that Greece had run up, and it turned out it was running vast deficits. It was living way beyond its means.
NUTTALLIt had growth that was completely unsustainable. If you look at other countries that fell into trouble, like Ireland and Spain, they -- huge housing bubbles developed there as a result of credit that poured in from Germany and other countries. You had very dodgy relationships between politicians, housing developments, housing developers and banks. So, I mean, lots of these problems were home-grown. Their trigger may have come from what happened in 2007, 2008, but it's not a coincident that the countries that ended up with bailouts had been, in various different ways, engaged in all sorts of questionable activities in the run-up to their respective crises.
REHMAnd we have two emails here, really related. The first says, hold on, how is it not partially the fault of the Greeks? Retirement at 50, short work weeks. Has everyone forgotten about that and just taken the easy route to blame it on the banks? And another from KillDevilHills in North Carolina, isn't there still a major problem with tax compliance in the Greek economy, and isn't tax compliance, or the lack thereof, one of the major original contributing factors to Greece's woes? Nicholas?
KARAMBELASWell, I don't think the issue is totally tax avoidance or tax evasion. What Greece really needs is tax reform of its system. There are many instances in which the Greek taxpayer has to pay taxes on revenues that it never -- it doesn't receive, on income that it doesn't get. For example, there's a tax that Tsipras was going to eliminate called the ENFIA tax, and that's just possession of real estate. And in order to make up the value of real estate, they consider what an empty piece of property would've paid the owner in rent, and they get taxed on that.
REHMWell, we shall see what happens in the next couple of days. Thank you all so much. Nicholas Karambelas of the American Hellenic Institute, Scheherazade Rehman of the George Washington University, and Tom Nuttall, Brussels correspondent for The Economist. Thank you all so much.
REHMAnd thanks for listening, all. I'm Diane Rehm.
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