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After a marathon 17-hour negotiation, Eurozone leaders emerged early this morning with a unanimous agreement to resolve the Greek debt crisis. The terms of the deal have not yet been announced but they are said to include the creation of a fund that would provide 50 billion euros (more than $55 billion in U.S. currency) to recapitalize Greek banks and help pay down the country’s debt. In exchange for European financial support, the Greek government agreed to a series of tough austerity reforms, which must be approved by its parliament this week. Diane and guests discuss a new agreement to rescue Greece and what it could mean for the Eurozone and Greek citizens.
- David Wessel Director, Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution; author of "Red Ink: Inside the High-Stakes Politics of the Federal Budget."
- Jacob Kirkegaard Senior fellow, The Peterson Institute for International Economics
- Meg Lundsager Public policy fellow, The Wilson Center; former U.S. Executive Director at the International Monetary Fund
- Richard Wolff Professor emeritus of economics, University of Massachusetts, Amherst
- Eleanor Beardsley Correspondent, NPR News
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. After negotiating through the night, Eurozone leaders, this morning, reached a unanimous agreement to resolve the Greek debt crisis. The deal paves the way for a third bailout of Greece in five years. Joining me in the studio to talk about what's in the agreement and chances for passage in Greek and European parliaments, David Wessel of the Brookings Institution, Meg Lundsager of the Wilson Center and Jacob Kirkegaard of the Peterson Institute for International Economics.
MS. DIANE REHMJoining us by phone from Amherst, Massachusetts, Richard Wolff of the University of Massachusetts. And you are, as always, welcome to join us. Give us your calls, you comments, 800-433-8850. Send an email to email@example.com. Follow us on Facebook or Twitter. And welcome to all of you.
MR. DAVID WESSELGood morning.
MR. RICHARD WOLFFGood morning.
MR. JACOB KIRKEGAARDGreat to be here.
MS. MEG LUNDSAGERThank you.
REHMThank you. David Wessel, how much do we know about what's in this deal?
WESSELWell, we know quite a bit. The virtue of the Europeans is they put out lots of statements and they talk a lot and there's a lot of them to talk. Basically, at the last minute, the Europeans and the Greeks agreed to a framework of a deal and the deal requires Greece to enact certain reforms very quickly, pension reform and tax reform in the matter of days and then there'll be a sequence of negotiations to come up with a new, as you put it, third bailout that will probably be close to $100 billion U.S. partly to solve the problems that existed in Greece a month ago and partly to repair the damage that's been done in the last couple of weeks.
WESSELThere's some really interesting features to the deal. The Greeks have to put $50 billion worth -- or 50 billion euros worth of state assets in a kind of trust fund and those are supposed to be sold off to help recapitalize the banks and pay off some of the loans. And so I think there's a deep sigh of relief all around the world that in the end, the Germans didn't kick the Greeks out of the euro, although they sure came close.
REHMMeg Lundsager, as former U.S. executive director of the International Monetary Fund, what is your reaction to the agreement?
LUNDSAGERWell, I was very happy to see that they could agree. It's very ambitious. David just went through some of the elements and it's a very tight timeframe for the Greeks to persuade -- for Prime Minister Tsipras to persuade his parliament to approve all these. Basically, the Greeks are compressing into a few days here and then the next few months, many of the measures they should have been taking over the years to make their economy more competitive.
LUNDSAGERSo it is good news. It's very challenging and it'll take a lot of cooperation with the European partners to provide the support, including the European Central Bank. The IMF will be part of the equation, too, they've -- in this agreement. The Europeans have insisted that the Greeks ask for a program beyond when the current one expires next year so the IMF will be involved for some time to come.
REHMAnd isn't IMF oversight, wasn't that part of the sticking part of the agreement?
LUNDSAGERWell, the sticking part was that the IMF is insisting that the Greek debt be subject to some sort of treatment to reduce the burden on the Greek economy. And before the referendum was called, I understood the IMF was being somewhat flexible in terms of being sympathetic to the German position of perhaps they'll stretch out the maturities of the debt and have a longer grace period.
LUNDSAGERBut they say clearly in this statement, there will be no reduction in the nominal face value of the debt. That's a clear statement in what came out early this morning.
REHMAnd Jacob Kirkegaard, it would seem that the referendum held on July 5 did not soften in any way the Eurozone position.
KIRKEGAARDNo. I mean, I don't think there's any doubt that this deal represents exactly that, namely that the referendum to call the referendum was a disaster for Greece because it's very clear that the value, the political value, of the referendum outside Greece was zero. In fact, it was less than zero because what happened was that the interpretation of the resounding no outside of Greece was that other euro area governments said, well, okay. If these people are willing to leave, then we're willing to let them go.
KIRKEGAARDSo for the first time, the was a previously absolutely unheard willingness to openly discuss the issue of the Grexit and that is clearly, in my opinion, would be a disastrous outcome for Greece so it very much weakened the Greek negotiating position and ultimately forced the capitulation or whatever you want to call it that happened over the weekend.
REHMAnd what role did France play?
KIRKEGAARDWell, I think the French had been instrumental here. They ultimately ended up not calling the shots over the weekend, but they certainly, in my opinion, played a pivotal role in getting Alexis Tsipras to ultimately agree earlier last week to the positions of the creditors before the referendum, but then, as we have seen over the weekend, clearly, as David also said, the Germans want it more. They were not satisfied with just going back to the position ex-ante. They wanted a new and tougher deal.
KIRKEGAARDAnd because they were willing, in my opinion, for the first time to put Grexit, explicit Grexit on the table. They got that, but we should make no mistakes. This is a different euro now. When you negotiate with the explicit threat of exit on the table for a country that is misbehaving or whatever you want to call it, then making, at the same time, the claim that this is a irreversible currency is a lot harder to make.
REHMAnd to you, Richard Wolff, what's your reaction? Is the deal a good one for the Greek people in the long run?
WOLFFNo. My opinion is that it is a disaster for the Greek people, but I'm not so clear that we are done. We've now been through several months of negotiations several times. We have been told this is the make or break it time over the weekend or this week or by this date and the weekends have come and gone, the dates likewise and we continue. My guess is we will continue beyond this, depending on how these various parliamentary things go.
WOLFFMost of what I read in the newspapers is grand-standing by political leadership, mostly in Europe, that needs to appeal to its own people. I would like to say that as a professor of economics all my life, every court in virtually every country of the world is constantly dealing with situations when a loan can't be repaid. There's nothing unusual or unique about it. And 90 percent of the time, if not more, the decision is made that both the borrower and the lender clearly have made some mistakes because the lender is supposed to be careful not to loan to people who can't pay back and borrowers, likewise, are supposed to be careful not to undertake something they can't complete.
WOLFFAnd so you work out a deal that makes both sides pay, in a sense, for their mistakes. What is remarkable, in my mind, is that the Germans, with the complicity of most of the rest of Europe, seems to have forgotten the lesson that I just summarized and want to put all the blame and all the burden and all the fault-finding on one side, savaging a small poor part of Europe in the interests of what is a relatively small amount of money in the larger frame of Europe. And I think it bodes very poorly for the project of a unified Europe to watch this kind of behavior of one part toward another.
REHMDavid Wessel, Paul Krugman wrote over the weekend that this -- what is being demanded of Greece is madness.
WESSELWell, it's a lot easier to be, and I've done this, a newspaper columnist and tell government officials that what they're doing is wrong than to be in the situation and have to concede something. I think what happened here, ultimately, was that the Greeks realized that they wanted to hold onto the euro and that the Germans were willing to throw them out. And as a result, Tsipras had to capitulate to the German demands.
WESSELSo the question then is, is what Germany is demanding unreasonable? And one of the interesting features of the new deal is it's a little less heavy on the austerity in the near term and a little more heavy on the kind of what they call structural reforms, things like more competition among pharmacies and ferry services and stuff like that, things that might actually help Greece in the long run.
WESSELSo to that extent, I think that it's not necessarily -- it's understandable. I think...
REHMBut what about the pensions?
WESSELWell, look, the problem is that Greek pensions are more generous than those of other countries in Europe. And other countries in Europe have a hard time convincing their taxpayers that they should lend money to Greece so Greeks can retire early on higher pensions. So to the extent -- I mean, some poor -- look, either way, the Greek people are going to be through hell. They've been through one layer of hell and they're going through a second layer of hell whether they got thrown out of the Eurozone or not.
LUNDSAGERYes. If they had left the Eurozone, they'd likely have a rapidly depreciating currency, a new drachma. They'd probably have very high inflation. That would totally destroy the value of their savings and they'd still owe all this euro-denominated debt. They'd be, I think, much worse off, but it's really hard to persuade people and there's quite a daunting agenda in front of them. And everybody's going to have to bear part of the burden so tax collections have to improve. There has to be much better enforcement.
LUNDSAGERI mean, it has to be a sense of fairness, too, within Greece.
REHMMeg Lundsager, she is the former U.S. executive director at the International Monetary Fund, currently with the Wilson Center. When we come back, we'll speak with Eleanor Beardsley of NPR from Athens, Greece. Stay with us.
REHMAnd joining now from Athens, Greece, Eleanor Beardsley. She's a correspondent for NPR News. Welcome, Eleanor. Good to have you with us.
MS. ELEANOR BEARDSLEYDiane, it's great to be with you.
REHMTell me how Greeks are reacting to the news of the deal reached in Brussels early this morning.
BEARDSLEYRight. Well, I've been out on the blazingly hot street of Athens pretty much since they reached that deal. And, you know, people are following very closely. They were on tenterhooks all weekend. So, you know, there's a sense of resignation and, you know, reality. Some people are angry. But I think that people just realized here that they had run out of options. And it's true that -- this weekend there was the memorandum that Germany considered a, you know, five-year Grexit possible. I think the realization that they really could come out of the euro currency shocked many people. And they're just -- they realize there's no more options right now.
BEARDSLEYThe banks have been closed for two weeks. One woman told me, you know, she said, a Grexit might have been the best thing but nobody prepared us for it. No previous government prepared for that.
BEARDSLEYSo we can't do that now. We have to do what Europe's asking.
REHMSo tell me about the chances that the deal is going to be approved by the Greek Parliament.
BEARDSLEYWell, from what I'm hearing, it's going to be approved. There will probably be protests out in front of the Parliament by the far left. There will be huge, probably, debates. But, again, people feel that their options have run out. You know, I've been talking to people -- and even Tsipras wasn't popular -- but people said, no previous governments did anything and right now we're not ready to change horses. He's taken us through these obviously extremely difficult negotiations for three days in Brussels and all night last night. People realize, you know, they're not going to change governments, to do what? They feel like they've got to stick with this now. There, yeah...
REHMYou said that the banks have been closed for the last several weeks. When do we expect them to reopen?
BEARDSLEYWell, there's talk that they may reopen by the end of the week. But I've been speaking to small-business people -- even, take the travel agencies, they have been shut out of the international airline ticket circuit. You can't even buy a flight on, for example, American Airlines or whatever, any European carrier except Aegean, because the guy said, "They're not taking our credit cards. They're not taking our credit. They're not sure if we're going to pay." So right now businesses are being held up, stopped, all -- things are just coming to a standstill. It's car -- you know, going into pharmacies, some of their medicines aren't coming through.
BEARDSLEYEveryone said at the end of last week, "If the banks don't open next week, it's really going to be dire." And they haven't opened yet. People are still lining up for cash. They can't get very much. And the banks said they only can assure the cash withdrawals through tonight. So I'm not even sure what's going to happen tomorrow.
REHMNow, there's been a lot of opposition to the plan on social media, one person declaring that it was actually a coup d'état.
BEARDSLEYExactly. That's very interesting, Diane. So I went up today to the Acropolis to check that out. And, you know, I got a guide and I talked to her. And she said that all the guides are talking about that. And people are angry. You know, one taxi driver said to me, "You know, you lend a guy money and then you say, 'Oh, you have a beautiful house and a beautiful wife.' And then you make that guy lose his job. And then you come in and say, 'Oh, I'll buy your house from you.' And it's much cheaper." And so there is a feeling of, you know, before we know the details of this plan, it's 50 billion euros of state assets that are supposed to be privatized. And there was talk of them -- the whole program being run out of Luxembourg overnight.
BEARDSLEYI mean, can you imagine? That would have been a complete loss of sovereignty for the Greeks. But now I think it will be based in Athens. But people are thinking, my gosh, are they going to sell the Acropolis? The details aren't known yet, but there is some anger about that. But this woman said, "No, you cannot take a -- you cannot take the mind and soul of a country." So my tour guide was convinced it could not happen.
REHMSo, Eleanor, how much support does Tsipras have? Are there going to have to be new elections?
BEARDSLEYYou know, Diane, I am certainly no political expert in Greek, you know, politics, as my colleague, Joanna Kakissis certainly is. But from the people I've been talking to today, they just feel like they've come to the end. They're -- another Greek government is not going to do better or different. You know, it took three days for Europe to give this deal. And I don't think that -- there's no better deal they can get at this point. And this one man just told me, he said, "No, no. Tsipras is staying. We're not going to change governments now." There's been so much, you know, insecurity and chaos. People just need to know where they're going now.
BEARDSLEYThey don't know exactly where that is but I think the unknown has been really frightening for people, perhaps leaving the Eurozone. Now they know they're staying in the Eurozone. And from the people I've been talking to, they said, "We're ready to do what it takes, though it's going to be very hard."
REHMDoes that mean losing portions of their retirement benefits?
BEARDSLEYI think it does. There's, you know, people who have retired early. They have raised the retirement age. They were supplementing some people's pensions. I think that is going to be phased out, you know, by 2019. You know, I went to a homeless center today, where homeless can go and take showers. And she said, you know, and they got 85 percent private funding. And they were very worried because they said, "You know, businesses will slow down. We've been suffering for five years. It is definitely going to get worse. And we're worried that our funding will dry up." Already, they're saying, medicines are donated to them. They said people aren't donating as much.
BEARDSLEYSo, yeah, there's a great worry about the impoverishment of this country. It is going to get worse before it gets better. But some people say, "It's got to get better." They say "The Greeks do need to change some things and we're going to do it." So, I'm hearing both sides, you know, optimism, pessimism. But everyone sort of thinks that Greece doesn't have any other choice at this point.
REHMDavid Wessel has a question for you.
WESSELSo, Eleanor, do you think that there's a chance that the structural reforms -- more competition, privatization, changing the way the labor markets work and so forth -- do you think those will actually be put in place? I think part of the problem in Europe has been, nobody outside of Greece trusts the Greeks to pursue these painful changes.
BEARDSLEYExactly. Well, that is why the negotiations took so long. Apparently, on Friday night, France was onboard, everyone was onboard, said this looks good. And I don't know if it's the Germans who threw a wrench in the gears. But they said, "We need proof." There is a lack of trust. And so they have mandated that these structural reforms actually have legislation behind them. So I think the next two days is going to be very crucial here.
BEARDSLEYThey're -- Tsipras is coming back to Athens and they're going to pass laws that actually support these reforms so there will be, you know, no getting out of them. And I think we're going to see some upheaval in the next couple days. We'll see how people really feel. But I guess if they have the laws behind them and all of the other European nations are also voting on the package based on what they see in Greece. And I think the Greeks know that if they don't back up the reforms with laws, Germany's not going to support them. So again, we come back to, they've hit a wall. They don't really have a choice.
WESSELSounds like blackmail.
BEARDSLEYYeah, well, good way to look at it.
REHMMeg Lundsager has a question.
LUNDSAGERYes. In terms of going beyond -- first of all, getting the approval this week, what's your sense of how capable the Greek government is to actually implement these measures? Because when I read through the statement early this morning, looking at -- I mean, it's a lot to implement, not just to approve in the Parliament. And what's your sense of their capacity to do that?
BEARDSLEYYeah. A lot of Greeks, when you talk about this government -- I guess it depends if, you know, you like Tsipras or not -- they think he's immature. It's just a party that has no governing experience. So I think that's a legitimate question. I don't know how well they're going to be able to do it. A lot of people don't think this government -- you know, he's so young -- you look at him next to these European leaders, he's like a young kid up there negotiating the fate of his country. I'm always struck by that. So I don't know. It could be -- it could be difficult. And I think only the days and weeks will tell if it's really going to happen.
KIRKEGAARDWell I just -- one question. I mean you mentioned that there are rumors that the banks will not -- I mean, there's no more cash in the banks physically at the end of the day. If you look at that and say that, well, the earliest possible that the ECB could increase emergency liquidity assistance to the banks would probably be Wednesday, by which, by the time the Greek Parliament has to pass all this, that shows -- that would suggest the next 48 hours will not be very pleasant.
BEARDSLEYExactly. That is exactly true. But it's so hard to realize that when you go out on the street here. Because the place is crawling with tourists and you've got the tavernas and people are out. And, yes, the Greeks are in a slight panic. But if you didn't know what was going on, you wouldn't know it. It's like vacation paradise. And so, yeah, I'm actually very interested to see how this is going to play out. If the ATMs run dry, I don't know what's going to happen. A lot of tourists are bringing cash, so...
BEARDSLEY...hopefully we can hang on.
REHMAnd, Richard Wolff, a question from you.
WOLFFJust a couple of economics dimensions that might be helpful. In 1953, Germany -- which was suffering from enormous external debts, like Greece -- went to the creditors -- the United States, France and Britain -- and requested that their debts be cancelled, just like Greece and made that argument that if Germany -- Western Germany -- was to be a bulwark against the USSR, as the U.S., France and Britain wished, then they would have to be given relief from their debt in order to get their economy going and play that role. Throughout the -- much of the year, 1953, in London, Germany pressed this point on a recalcitrant Britain, France and the United States. At the end of the year an agreement was reached, called the London Agreement.
WOLFFAnd here's what it did for Germany. Half of its total debt -- and it was a big debt -- was erased. And the other half of its debt was stretched out over 30 years, effectively meaning that Germany no longer had a significant debt services. Furthermore, Germany was not required as part of this deal to go through an austerity, to change its labor laws, to structurally reform anything. The Germans got what they now refuse to give the Greeks.
WOLFFIt is a stunning kind of reversal of the roles and suggests political interpretations that really ought to be part of this conversation, as indeed they are...
WOLFF...Greece and beyond.
REHMAll right. Richard Wolff, I'm going to let Eleanor Beardsley go. Eleanor, thank you so much for joining us and we'll keep in touch.
BEARDSLEYGreat, Diane. Super to be with you.
REHMAnd I know, Jacob Kirkegaard, you'd like to respond.
KIRKEGAARDNo, but I mean, this repeated return to the 1953 London Debt Conference is somewhat of a selective reading of history because it exactly highlights that, one, debt relief is possible but it only happens in a, shall we say, geopolitical context. Because it is exactly right, as Richard points out, that Germany requested this partly in order to be able to fund -- put more funds into its national defense and be a good potential NATO member, et cetera. But the reality is for Greece that the geopolitical context isn't there. And then the other part is that we should also remember that West Germany is 50 -- was half the size of pre-War Germany. So there is other reasons for why this happened.
REHMAll right. I want to go back to a point you made earlier, Jacob. That is, that we could be seeing a vision of a new euro.
KIRKEGAARDYeah, I mean, I think it's very clear to me that what happened over the weekend was actually far more important than Greece. It wasn't really, in some ways, about Greece at all. Because it was -- it seems to me that what is at stake here is the long-term vision of what kind of common currency are we talking about? And I guess if I'm sort of simplifying a little bit, there is a sort of traditional northern or Germanic view of the euro, essentially a rules-based club, where you're a member and you stick to the rules. And if you don't stick to the rules -- well, we now know, as of this weekend, that you might actually find yourself on the outside, which is a very unpleasant experience.
REHMAnd you're listening to "The Diane Rehm Show." Meg, you wanted to add to that.
LUNDSAGERYeah. When this European crisis first erupted and got really bad in 2010, for a while there I was afraid we'd end up with a neuro and a seuro, where it would break in two, with the stronger countries in the North and the weaker countries in the South. And you'll remember all the press in terms of the Mediterranean around -- and the periphery, including Ireland. The remarkable thing is the unity of the Eurozone was so important. And we saw what Portugal, what Ireland did in their programs. And we saw what the Baltic countries did because they wanted to move into the Eurozone. That was remarkable, too. So that political overlay is really, really important.
LUNDSAGERAnd I think that if there's any sign that that's fracturing -- and this looks pretty close -- that's going to be a real blow to the economic unity as well.
KIRKEGAARDWell, I mean, I guess I would just say that, I mean, in sort of contrast to the German view that I just highlighted, I think part of the -- the main reason that the French were so involved last week was really that they have traditionally had -- again simplifying somewhat -- a much more political view of the euro area. It's really a political project that has value in among itself and therefore, you know they are willing to concede more shall we say respect for each member state's political red lines and probably also agree to a larger level of solidarity to maintain the euro as a whole. So these are two very fundamental long-term visions. And I think, as of this weekend, clearly the German view is in the ascendancy.
REHMSo you heard Eleanor Beardsley say that the banks are still closed, maybe will open at the middle of the week, David Wessel, but they need cash. And that cash has got to come from an agreement that has to be made quickly.
WESSELRight. So the -- providing cash to the Greek banks is really up to the European Central Bank. And the European Central Bank has quite a bit of flexibility as long as they can say with a straight face that Greece is moving towards a deal. So as long as -- the next couple of days will be tough but if the Greek Parliament passes this, I suspect the European Central Bank will continue to provide liquidity. Then there's a bigger problem, which is a lot of the banks are probably bust because it's kind of hard to be repaying your loans if the economy is going through a great depression. So there will have to be some recapitalization of the banks and this is a real test for Europe, whether they can pull this off.
WESSELThey've been trying -- talking about being able to recapitalize banks and separate the strength of the banks from the strength or weakness of the government's finances but it's really a work in progress. I think that what happened here was, it must have been terrifying to the Greeks to have the banks shut, not be able to get money out -- you can't buy gasoline because the gas station can't buy gas -- and that that really led them to capitulate to the German demands.
REHMAnd really to come out with an almost tougher deal than had previously been offered, Meg.
LUNDSAGERNo. You're absolutely right, Diane. And I have to say, I was impressed last week when Tsipras submitted his letter to the European -- his European colleagues, that it lifted, word for word, many of the things that were in the -- what he turned down the week before. So I have to say it was a little puzzling and, of course, a huge cost to the economy because we've seen how the problem with the banks is only getting worse day by day and the whole economy grinding to a halt because people can't pay each other. So it's been a costly delay.
LUNDSAGERAnd I think, in part, you know, the Europeans feel that's been Greece's fault. So Greece has to do, what at the IMF we would call, a number of these prior actions to prove -- you know, do this ahead of time before we'll give you any money -- to prove that you're really committed.
REHMCould Tsipras lose his leadership?
LUNDSAGERI think he could, absolutely, that he could lose his party leadership.
REHMMeg Lundsager, and she is with The Wilson Center, former U.S. Executive Director at the International Monetary Fund. Short break here, your calls when we come back. Stay with us.
REHMAnd welcome back. Time to open the phones. First to Athens, Ohio. Hi there, Mike. You're on the air.
MIKEHi Diane. Thank you very much for taking my call. I don't know if any of your panelists mentioned this, but I heard on the news, just before your show came on, that one of the sticking points on this agreement is the value added tax is to be raised from 13 percent to 23 percent, which is, boy, that's a real problem. We don't have that in the states. It's a special tax that goes to a fund to offset the effects of manufacturing and mining and stuff. But that would apply to virtually everything that's sold.
REHMAll right. I think there may be some disagreement here.
WESSELSo, they are asking the Greeks to raise their value added tax.
WESSELTo 23 percent.
WESSELIt's that kind of national sales tax, right? I don't think it really has much to do with manufacturing and mining, but the point is, Greece, unlike the United States, the Greeks don't pay their income tax. So, the creditors are demanding that Greece come up with some way to collect the taxes that the government actually agrees to impose. And the value added tax is seen as a more efficient way to do that, because people actually have to pay it.
REHMDo you see the Greeks reacting any differently if this deal is approved, paying their income taxes? Meg.
LUNDSAGERWell, I would certainly hope so, that, you know, this has put enough fear into them that if they want their country to survive, as a, let's say a respectable partner in Europe, and hold their head up high, they've all got to be part of the solution. So, I'm hoping compliance improves. But there are a lot of structural adjustment measures in here, which are improving the enforcement, improving the attacks at administration. So you actually go after people. You know, make, the best thing to do is to make a very public display of some tax dodgers and throw them in jail.
LUNDSAGERImpose huge fines and, you know, scare everybody else to comply.
REHMDo you think the Greek government is willing to do that?
LUNDSAGERI think that they're going to have to do that.
REHMDo you agree?
KIRKEGAARDNo, I mean, I agree. I mean, if you, there's no doubt that the country has a significant power, amount of capacity building in front of it. It needs to basically establish, probably for the first time ever, a fully functioning, tax collection system for a modern economy. Because otherwise, you cannot fund, on a sustainable basis, the kinds of services that the Greek government would like to offer its citizens, just like any other modern economy government would like to do.
REHMAll right. To Houston, Texas. Ryan, you're on the air.
RYANHi Diane. Thanks for taking my call.
RYANI love getting on the show.
RYANI was calling because, personally, it sounds like a lot of good points have been made, but honestly, I feel like, in the long term, at the end of the day, really, the bank owners just need a reality check. Because the Greek bank owners, they're not gonna really get hurt by this. The Greek workers and the Greek families are. The Greek government officials, probably not gonna be severely hurt by this. Some may lose office, but other than that, not really. The big winners here are the European bank owners.
RYANThe European Union officials, and the Greek bank owners. The ownership class of these banks need a total reality check on the struggles of everyday people, and that servicing their debts is not the top priority of a nation.
WOLFFYeah, I agree with that last caller. Frankly, I find it strange to keep talking in these abstractions about the Greek debt. The Greek debt, when the crisis of 2008 hit, was a debt mostly to private banks. The maneuver done by Sarkozy and Merkel was to convert that debt into a debt to European institutions. They got the European Central Bank, the commission, the IMF, to make loans to Greece. Not to help develop the economy, which they now claim is their concern, but rather to pay back those private banks because otherwise those private banks might have needed another bailout after the first one they got.
WOLFFAnd that would be, politically, too embarrassing to Sarkozy and Merkel. The other point that I would make, which is also in line with what your caller asked, is that there's a very serious question that when you raise a value added tax by that enormous percentage, plus cut wages, plus cut pensions, you're not setting the stage for economic growth. You're setting the stage for a further decline and there's loads of economic, historical evidence, which I teach in my courses, as do most other responsible professors.
WOLFFTo indicate that it is far, far, far from likely that this host of measures will do anything different than the last five years of comparable cutbacks have done to damage, not enhance, the Greek situation.
REHMAll right. Meg.
WOLFFThat's why they need, that's why they need the relief of the debt and internal development support and not this kind of savagery.
LUNDSAGERWell, I think you've hit on one of the key points that the Europeans, the IMF have been focused on. Which is to make the economy competitive. So, I admit, in the short run, it may be a bit difficult, the ideas to improve insolvency laws so that companies that really aren't making any money and have no prospects can shut down and let the workers go. But also importantly, so new companies can start up. Now, of course, you need to have some sense that there'll be demand out there for your product. So, it will be a bit tough.
LUNDSAGERAnd what I was hoping all along that there would be, when I was at the IMF, there would be enough liberalization of some of these restrictions, domestic restrictions, that you could actually get some foreign investment into Greece and have a positive signal. Well, unfortunately, that didn't happen, not for the want of, I think, the IMF and others trying, but it was always very difficult each time.
WOLFFAnd so why should that work now when you make even more stringent cuts?
LUNDSAGERI think it will be really challenging, and that's why I think the rest of the Europeans are in for a long period of needing to support Greece.
WOLFFTo say the least.
KIRKEGAARDNo, I just want to come back to the point that the caller made about the transfer of private debt to the public sector. It is certainly the case that there were a lot of private debt in 2010 that was not restructured, but rather transferred to the public sector. But I think we need to be clear, that in 2010, that was done because of fears of systemic contagion in the European, throughout the European economy, basically the fear that there was going to be a run on all the Euro area banks.
KIRKEGAARDSo, the idea that if only you had restructured Greek debt back in 2010, everything would be fine, I basically don't think that is true, in my opinion, because the correct decision that was taken, because I do also believe. And it's also described in the agreement over the weekend, of what will happen, is that the value, the net present value of the Greek debt is going to be reduced very considerably, further than it already has been. So that the Greek government is going to end up paying much, much less than market interest rates for its current debt loads for generations to come.
WESSELI think part of the problem here is it looks like the Germans were determined to punish the Greek government for calling this referendum. So that instead of a program that, where every element is designed to improve the prospects for Greeks to grow in the future, there's all these things stuck in, like they have to put the assets in this 50 billion Euro trust fund, because we don't trust the Greek government. And that clouds the whole conversation.
WESSELAnd given, as Jacob said, that the Euro has largely been a political, as well as an economic project, it's making people uncomfortable because you can't say, with a straight face, that everything the Germans insisted on was designed to do what was best for the Greek people.
REHMAll right. And let's go to Durham, North Carolina. Oscar, you're on the air.
OSCARYes, good morning. Thank you for taking my call, Diane.
OSCARI have a problem feeling sympathy for the Greeks and the Greek people. The fact is that people across the entire economic spectrum in Greece have avoided paying taxes for decades, and unfortunately, their laissez faire (word?) has caught up to them. You know, there's -- I can't go up to my bank and say, well, you know, my family has decided that you guys are too harsh on us, and we're not going to pay our mortgage. The bank will come and take our house. Simple as that. You know, so it's hard for me to understand.
OSCARYou know, even people's pensions and all that, how were these pensions funded? They were funded by taxes. What taxes? They weren't collected. So, you know, I understand totally where the northern European countries are coming from. All of the south Europe, you know, they have this le se faire attitude of just live life, and that's...
REHMAll right. Richard Wolff, how do you respond?
WOLFFWell, you know, I'm going to put aside what I would have liked to say to the gentleman who just called. This depiction of part of Europe as lazy, non-tax paying moochers reminds me of nothing so much as Mr. Romney's ill-considered comments last year, dividing the American people into the two sorts. Those who work hard and those who mooch off the taxes on those who work hard. The Germans are playing exactly the same game in Europe, easier for them politically, because they speak to, only the German leaders do, to their people, whom they celebrate as the hard workers.
WOLFFAnd then they denounce the rest of Europe, particularly the southern part, as the moochers. It has no more validity there than it does here.
REHMRichard, may I ask, let me ask you a question, Richard. Do we have any idea what percentage of the Greek taxpaying population does pay its taxes?
WOLFFThat disguise the debts of the Greek government in order to make big fees and interest payments. There is a notion here of all of the Greeks having come to some decision to rip off the system. It may be comforting to those in the North of Europe, to tell themselves these fairy tales.
WOLFFBut they do not deal with the reality of what a complex economy is and they never have.
REHMOkay. Richard, I don't think you heard my last question. Do we have any idea of what percentage of the wage earning taxpaying population of Greece actually pays taxes?
WOLFFWell, they already have a value added tax and you can't buy anything in Greece without paying that.
REHMNo, I'm not talking about the value added tax. I'm talking about straight income taxes. Do we have any idea of the percentage of the population that actually pays those taxes?
WOLFFThere are a variety of estimates, ranging from what is fairly normal across Europe to arguments that it's considerably less than that. I think you'd be hard put to single out Greece as a non-payer of taxes. I want to, you know, again, remind you, in the United States, we have two trillion of assets of corporations held outside the country in order to avoid paying taxes, et cetera.
REHMI understand. All right, David.
WESSELSo, I'd like to respond to, I'd like to respond to the caller. I think he made a good point. I think there are two things to say here. One is we talk about the Greek people as if it's a homogenous group. And there are a lot of rich Greeks who have managed to get their money out, who have probably been the worst of the tax abusers. And it's unfortunate that the new government has been even preaching about doing something about the oligarchs, has been surprisingly soft on them.
WESSELAnd the second thing is, undoubtedly, Greece has made mistakes. But as a simple matter of humanitarianism, you don't want, just as we didn't want everybody who got hurt during our Great Recession, or the Great Depression 50 years ago to have to like suffer, to not have food and not have medicine. So, we're at the stage where the Greek, we're asking Greek people to suffer. It's not a question of only collecting taxes. It's a question of food and gasoline and medicine. And to that extent, I think the caller's a little bit hard hearted.
LUNDSAGERYeah, no, I do agree with David. There needs to be some support for the Greek people in need. And this has been my concern in Europe is that they're always too fixated on what one country owes another. As opposed to a system in the United States where we take care of those in need, wherever they are. So, you don't think of New York being a net payer into the federal tax system or Arkansas being a net taker overall. It's just they're a part of it, and we help people who need it. Europe is so far from that, and I think they're slipping even further after this, after this crisis.
LUNDSAGERSo, I think it'll be even more and more difficult for them to move towards a fiscal union that, ultimately, they need.
REHMAnd you're listening to The Diane Rehm Show. Jacob, you wanted to add to that.
KIRKEGAARDNo, I mean, I think, again, there's no doubt in my mind that there is systematic, legalized non-payment of taxes. I mean, the fact that you have sizeable parts of the Greek economy, those that are thriving in fact, say shipping, et cetera. That is constitutionally tax exempt. Is a long standing problem that, as David said, to my surprise, the Syriza government seems to have had no interest in really dealing with, in the last six months, rather than fight what has obviously turned out to be a futile attempt to get debt relief from its creditors.
REHMMeg, how do you see this playing out? Can Greece recover from this catastrophic financial disaster?
LUNDSAGERI fear it will be a very long, slow recovery, even if Greece adheres to all these conditions, I think it's clear it'll take a long time to restore enough confidence that employers will hire, that new businesses will start, that foreign investment will come in. So, I think it will take a long period of European support. And this is what I worry. That it will be hard for the Europeans to maintain that support if they don't see a big turnaround in Greece. So, a lot of hand holding needs to go on here, but I'm not sure the Europeans are quite of a mindset to do that.
KIRKEGAARDWell, I mean, I'm actually quite optimistic. I think this deal, if it is, you know, comprehensively implemented rapidly by the Greek authorities, is a foundation for a new beginning in Greece. I acknowledge that the value added tax that we've discussed will be deflationary in the short run, but at the same time, this deal represents the possibility for a platform for growth in my opinion. Because what Greece needs is political and regulatory stability going forward. Then it can grow. Because with this deal, in the not too distant future, it can very well have access to QE from the European Central Bank.
KIRKEGAARDMuch easier financing conditions, which, in my opinion, is actually more important than what the fiscal stance for the economy is in the short run.
WOLFFWell, I'm, from here, it's a disaster because it's so harsh on the Greeks, and it is so poor when it comes to recognizing the historical reality behind all of this, and the likelihood that these repressive measures are ever going to help Greece. I agree with one of the earlier comments, that this isn't about Greece. This is about an attempt to reshape Europe, led by the Germans, into a poor verses rich kind of constellation that is awful to watch, that is reminiscent of bad periods of European history over the last century, that are more obvious than anyone needs to point to.
WOLFFAnd so for me, this is very, very bad. And I'm looking for the Greeks to find a way to change what appears to have been done.
REHMAll right. And David Wessel, has Greece really, finally avoided an exit from the Eurozone?
WESSELI don't think you can say anything is final. I mean, as Rick pointed out earlier, we go deadlines and crises, and there's plenty of opportunity for things to slip. I think the most, one of the discouraging things I've noticed is there are signs that young, educated Greeks are leaving. And that really will hurt Greece in the long run. If they lose their young, ambitious educated young people to other countries, because they're just so disgusted with the situation, or desperate, Greece will have a hard time recovering.
REHMDavid Wessel, Meg Lundsager, Jacob Kirkegaard, and Richard Wolff. You also heard from NPR's Eleanor Beardsley. Thank you all so much.
REHMAnd thanks all for listening. I'm Diane Rehm.
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