Greek leaders are scrambling to meet conditions for a desperately needed bail out of approximately $11 billion to avert bankruptcy. A second infusion of rescue funds will also be required. So far European leaders have failed to agree amongst themselves on terms for this second bailout. Resolving the financial crisis in Europe requires enormous political compromise, but without a resolution, the euro could cease to exist as we know it with untold repercussions for both the European Union and the global economy. Join us for a discussion of the ongoing debt crisis in Europe.
- Antonio De Lecea minister for economic and financial affairs, Delegation of the European Union to the United States
- Markus Ziener U.S. correspondent for Handelsblatt, a leading German-language business newspaper.
- Zanny Minton Beddoes economics editor, The Economist; formerly, economist at the International Monetary Fund.
- Sudeep Reddy economics reporter, The Wall Street Journal.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The clock is ticking for European politicians. With the future of the euro in the balance, they need to come up with a plan to shore up the shaky finances of some European governments and banks. So far, there is no deal.
MS. DIANE REHMJoining me to talk about Europe's political paralysis: Zanny Minton Beddoes of The Economist, Sudeep Reddy from The Wall Street Journal, Markus Ziener of Handelsblatt, German daily, and Antonio de Lecea from the Delegation of the European Union to the United States. Throughout the hour I'll look forward to hearing from you. Join us by phone, by email, on Facebook or Twitter. Good morning and welcome to all of you.
MS. ZANNY MINTON BEDDOESGood morning, Diane.
MR. SUDEEP REDDYGood morning, Diane.
MR. MARKUS ZIENERGood morning, Diane.
REHMZanny, if I could start with you. The European politicians, certainly not unlike what seems to be happening here, seem to be behind the curve on this one. Give us an idea where we are right now.
BEDDOESI think behind the curve is an understatement if anything. And throughout this crisis, which is now, what, almost two years old, too little has been done too late to solve it. And as a result, what began as a fiscal crisis in Greece, a country where 3 percent of the eurozone's GDP, has now transformed into a crisis that threatens the whole eurozone. But I think there are two specific areas where action needs to be taken and decisions need to be made.
BEDDOESThe first one is on Greece itself. And the sort of narrow question of the moment is, will the European Union's politicians decide to give more rescue loans to Greece to enable it to avoid a kind of chaotic default on its debts within the next few weeks? By the middle of October, Greece is basically going to run out of money, and there's going to be a chaotic default unless there is more money coming, more rescue funds.
BEDDOESAnd, so far, the Europeans have been playing hard ball, particularly the Germans. They have wanted more signs of more measures from the Greeks before they do it. So that's the immediate thing. And, just very briefly, the broader problem, however, is that it's no longer just about Greece. It's a crisis that has metastasized much further than that.
BEDDOESAnd the particular new wrinkle, if you will, since we last spoke about this, is that big economies in the heart of Europe, particularly economies like Italy, have been hit with, essentially, a crisis of confidence, where investors worry about whether they, too, may be forced to default. And as a result, there's a loss of confidence in their bonds. People are not willing to buy them.
BEDDOESAnd the big question for the Europeans, the broader question is, what are they going to do to deal with that? Are they going to provide resources? Is the European Central Bank going to get involved more? How are they going to do that broader solving?
REHMSudeep Reddy, what kinds of changes has Greece made up to now?
REDDYGreece has made a lot of promises so far. They have promised to...
REDDY...raise taxes on citizens, particularly the wealthy. They have promised and actually taken some job cuts and benefit cuts. They just haven't done enough, and that's the problem. We keep getting to this point where there's another review every few months and find that Greece has done some things, but just hasn't taken the decisive action, the complete action that either it promised or it suggested to the European leaders and leaders from the rest of the world that it would do.
REDDYAnd that's why there is this crisis of faith now that Greece will actually be able to come through because, so far, everything has fallen short. And they do really seem to be a step behind in Europe in trying to at least enforce the commitments that Greece has made.
REHMBut, Markus, Reddy, as Zanny has said, other European countries, other banks are very much in trouble as well.
ZIENERYeah, that's right, and -- but, I think, you have to take a case-by-case approach. I'm not convinced that actually the whole eurozone is in jeopardy. If you look at what's happening in Ireland, what's happening in Portugal or in Spain, Ireland is improving, Spain is improving, and Portugal has adopted or is going to adopt pretty severe austerity program.
ZIENERSo I'm not so sure that -- whether we are going to see -- or whether we are in the middle, actually, of a very big euro crisis. I think it's a crisis of some euro countries, and so I'm -- I think we have to buy time. And that's what the European leadership is actually about to doing. They want to buy time, but not only for Greece.
ZIENERThey want to buy time for these countries I just mentioned to be able to weather a storm that might be ignited by a Greece default. So that's what time -- buying time is about right now.
REHMSo you're saying that the problem is with some euro countries, but not with all of Europe.
ZIENERYes. I mean, I have to -- I'm sure we have to admit that the mechanism is not in place, actually, to deal with situations like in Greece. The European leadership was too slow in adopting this kind of mechanism. They are just starting to doing that. We are going to have a bailout fund in October. We might be having a European stability mechanism in 2013, so we're pretty slow. Europeans are pretty slow, actually, in getting ready for this test.
REHMWhy do you think they're so slow?
ZIENERBecause they haven't envisioned this. I just think that they glossed over a couple of things. I mean, that's also true for the German government when they were permitting the Greeks to join the eurozone. I think it was already obvious way back then that Greece has quite some problems, but they just turned a blind eye to that.
REHMAnd to you, Antonio de Lecea, what are E.U. leaders pushing for now?
MR. ANTONIO DE LECEAIf I may, I would like to slightly disagree with some of the statements so far, I mean, that Europe needs a plan to shore up financing in some E.U. members. Well, the plan is there, and the plan has been identified. The decisions have been agreed. The point is to implement, so that's a main point.
MR. ANTONIO DE LECEAAnd the -- and why they have not been implemented because, I mean, they -- we are in democratic countries, and maybe the expectations are too high of too quick decisions. I mean, we'd rather have the populations with us than being faced with problems right after, taking the decisions and then show that those decisions cannot be implemented.
MR. ANTONIO DE LECEASo the benchmark by which -- I mean, often in the media, we hear that we are too slow or too fast. And the timing of the media and the financial market is not necessarily the same as we see in democratic countries.
REHMBut are you saying that the media is portraying this situation as being far worse than it really is?
LECEAThe situation is serious, and it is serious partly because the financial markets also expect quicker reaction. And, in the meantime, well, they don't -- no longer provide the funding, which aggravates the problem, so it's -- and they don't -- because they, in some way, don't trust or mistrust the capacity to deliver, so...
REHMBut isn't time of the essence at this point as this whole situation seems to be spiraling into worse and worse situation?
LECEAIndeed, time is of the essence, and delivery is of the essence. And for that, all parties need, indeed, to act. And Greece must, I mean, clearly show that they are ready to do whatever it takes, which is painful, but is what they had already -- they already needed to do long ago. And now they can do it with the help of the E.U. and the entire community.
REHMWould you agree with Sudeep Reddy that Greece has already taken some steps?
REHMBut you're saying not enough?
BEDDOESIt seems to me that the fact that financial markets don't believe in what's going on is prima facie evidence that the strategy is not working. And I don't think you can fall back and say, well, the media don't understand and the financial markets don't understand. If financial markets don't understand, then the strategy is not working. But, secondly, I think there are two important misconceptions in the European response.
BEDDOESThe first is -- and I think this is a very much a German-driven thing. The view is that the cause of this crisis was profligate, particularly Mediterranean governments, and the rest -- the right response is austerity, short-term budget cutting. That is absolutely true in the case of Greece. I would submit that it is not necessarily the main or, indeed, the major cause of the problem in a country like Italy or in Spain or, indeed, in Ireland.
BEDDOESIreland and Spain were running budget surpluses before the financial crash. Their sovereigns are in trouble because they had a big property bust and a banking crisis. So the kind of very simplistic notion that this all about government spending and too much profligacy is wrong. Secondly, I think, the more you push on austerity in the short term, the worse your economy is, and the harder it makes it to reach your targets.
BEDDOESAnd that's exactly what's happened in the Greece. The economy is in a depression. It's not surprising that it's unable to cut its deficit in the way that people expected. And, thirdly and finally, I think that that analysis really misses one important aspect, which is that many investors, many financial markets think that we are now in a very different world to the one that they thought the whole euro project was based on.
BEDDOESFor 10 years, even though,, officially the euro was no bailout of individual countries, financial markets and the whole financial regulatory structure implied that all government debt ought to be treated reasonably equally. And, suddenly, thanks, in part, to the way that the Europeans have handled this crisis, there's a lot of uncertainty about whether countries will be allowed to default, big countries like Italy, third biggest bond market in the world.
BEDDOESIf you think that Italy might default and you used to think there was no chance of it, you're not going to want to invest in Italy. And that's a kind of fundamental big question of confidence that the Europeans need to address.
REDDYWhen people look at this problem, they see Greece. They see protests on the street in Greece and often forget the linkages throughout financial markets around the world. And that's really the problem that we're facing now. If this were just a Greece problem, obviously, it wouldn't be getting this much attention.
REDDYAnd the issue is how much financial markets actually believe the policymakers. Policymakers, over the last three or four years, have lost a lot of their credibility. They took important actions in the 2008 and '09 financial crisis. And it may have actually saved the world. But now, they're straining to present to investors that they can actually accomplish something more now.
REDDYThey're low on ammunition. Their tools just aren't as good as they were before. And that's the really big problem now.
REHMSudeep Reddy, he is economics reporter for The Wall Street Journal. 800-433-8850, that's the number to call if you'd like to join us. Send us an email to drshow.org.
REHMWelcome back as we talk about the European debt crisis, its effects not only on Greece, but on the entire eurozone, potentially. Here in the studio: Sudeep Reddy, economics reporter at The Wall Street Journal, Markus Ziener, U.S. correspondent for the German daily Handelsblatt, Antonio De Lecea. He's minister for economic and financial affairs from the Delegation of the European Union to the U.S.
REHMZanny Minton Beddoes, she's economics editor at The Economist. I look forward to hearing your questions, your comments, 800-433-8850. Send us your email to firstname.lastname@example.org. Markus Ziener, it would seem that Germany is certainly playing a huge role in this entire discussion.
ZIENERAbsolutely. If we're talking about the bailout fund, for instance, it's -- Germany is in -- well, it's actually shouldering half of the fund, so -- in case Greece goes badly, so the Germans will be -- will have to pay quite a bit.
REHMAnd the German people are not too happy about that.
ZIENERYes. And I wanted to come back to that because, sure, the media might distort a little bit, the overall image that could be seen last night when we had the elections in Berlin, local elections. And the interesting part was that the one party that was openly more or less campaigning against Greece, they lost severely. And they didn't make it -- made it into the parliament, into the local parliament of Berlin.
ZIENERAnd that's basically good news because it shows that you can't really benefit too much from such a -- from such a policy, from such a campaign. The bad news is the party I'm talking about is the junior coalition partner of Angela Merkel's grand coalition. So, in a way, that's good and bad at the same time. So I -- it might be such that the German public very much understands what Greece is about and that they must be helped.
REHMEurope is demanding that Greece really cut back. And some people are wondering whether that kind of austerity is simply going to take Greece further down. Antonio.
LECEAThis is only partly true. What Europe demands is indeed that Greece reins in its deficit, which is unsustainable, in any case. But what Europe also wants is that Greece unleashes the growth potential that is now really locked by a number of regulations, by distortions to competition, by a bloated public sector. So this is as important as reining in public finance. This is the -- I mean, the biggest or one of the main part and parcel of the package.
LECEASo what Greece is requested is indeed to cut the deficit, but also to implement all those reforms that will unleash the growth that will make Greece grow and therefore be able to -- I mean, to pay the debt, but also to grow and create income.
ZIENERYeah, I wanted to just to clarify that. It's not as simplistic as one might think, that Germans only saying, well, we need austerity program, and then things will go fine. I mean, that's not the case. But Greece has already 350 billion of debt. I mean, the question is whether it's a good idea to pile up more debt, and they will have to deal with that. So that's one thing. I think it's not only about cutting -- tightening the belt. That's -- it's more than that.
BEDDOESI think it's an irony that the one country which, according to most observers, will not be able to pay its debt, which is Greece, which is really a pretty -- most dispassionate people looking at this think Greece is insolvent and that there is no way they can possibly pay their debt burden. Yet, for Greece, the Europeans insist on pretending that it will be able to, if it does enough austerity.
BEDDOESAnd then there are other countries -- I'm using Italy as an example, but many of the other ones -- where probably they are more illiquid than insolvent, but the Europeans are refusing to kind of stand clearly behind them. So I think part of the problem -- this whole crisis has got so much more complicated -- is that in neither case are the Europeans prepared to say clearly, you know, what side of the fence the country is on.
BEDDOESAnd I think in Greece's case, it's very, very hard to see that Greece will be able to pay its current debt burden. And so it will either require open-ended transfers from the rest of the European Union, or there will need to be a hard restructuring of Greece's debt that involves a much -- involves cutting the debt burden. Now, that doesn't mean a kind of chaotic default. You could do it in an organized way.
BEDDOESBut the Europeans have been pretending that there's some middle way that Greece, if it only does enough budget tightening and growth-enhancing reforms, which are very important -- but if they did those, it would be able to pay its debt burden. And I just don't believe it possibly can, and I think this would be helped by some clarity there.
REDDYZanny is exactly right here because there are really two extremes of what you can do here. One is to deal decisively with Greece and with the weaker members, whether it involves a restructuring of their debt or some other decisive action, perhaps even figuring out a way to throw them out. Or, at the other end, you can actually create a stronger fiscal union in Europe.
REDDYThe eurozone was set up with a common central bank, but no common government to deal with budgets. And this is actually an opportunity to move in that direction. The problem, of course, is that they're dealing with 17 governments. And we know, in the United States, how difficult it is to deal with one.
REDDYBut to get 17 together in the room simultaneously to all move on the same track, especially when they all have incredibly different histories and political and economic environments, that is a really tough task. And that's why so many investors really don't believe this is going to end well because it's just, politically, a -- an incredibly messy problem to deal with.
REHMSo does all this come down to the question of European integration, whether the euro was somehow mis-sold or oversold? How do you see it?
REDDYWell, that's certainly the big question. The grand project here was to force Europe to come together and to create stronger ties. And now you're seeing these divisions, and you're seeing the resentment between countries. So I actually think the political -- the top political leadership in most of these countries, particularly in Germany and France, they understand that they need to come together and form, over the longer run, a stronger union.
REDDYThe problem is getting a lot of the political authorities, particularly at the lower levels, to see that this is the issue because the leadership, whether it's the heads of state or central bankers or finance ministers, they can see how this will unravel. And they know what the long-run game is. But they have to deal with the day-to-day politics of it as well.
REHMMarkus, do many in Germany regard the whole euro as a bad idea in the first place?
ZIENERNot at all. Not anymore, at least. I mean, at the beginning, sure, there was the feeling that the German market was the better deal. But then it turned out that the euro is a pretty hard currency. So I think there are no regrets, and I think they're seeing all the advantages you have from a European -- from a united European currency. You can -- you have to know exchange rate risk. You can freely trade within the European Union. It's much easier.
ZIENERBut there is a political component to all that, and that seems, to me, it's becoming a little short here. If you look at the history, at European integration after World War II, I mean, we -- step by step, this integration was getting much closer and tighter. And the former German Chancellor Helmut Kohl once said that it's a question of war and peace, when he was talking about the euro.
ZIENERIt might be a little overblown, but, in the end, there's some truth to that.
REHMWe have an email from Bart in Naples, Fla. He says, "U.S. Secretary Treasury -- of the Treasury Geithner is giving the eurozone money from the U.S. Treasury to keep them open for business in the guise of short-term loans backed solely by euros. If the euro goes because of this crisis and confidence flees, the American taxpayer could be on the hook for it. The U.S. government is conducting another bailout." Sudeep.
REDDYWell, the U.S. government certainly is involved, but largely through the IMF, the International Monetary Fund, which is a partner in the rescues of several of these countries and is acting as an enforcer in Greece and Portugal and Ireland. And that's actually -- the U.S. has about a sixth of the IMF in terms of the power there. And that's a useful way, given the constraints both economically and politically here at home, for the U.S. to be involved in that.
REDDYThe Treasury secretary realized this, having lived through not only the '08 financial crisis, but he was a senior Treasury official in the 1990s and dealt with the crises in Mexico and Russia and South Korea. And he knows how these things, these crises develop and knows that you need to bring firepower. But U.S. credibility is clearly strained here in sending a message to the Europeans.
REDDYWe not only created the financial crisis and exported it abroad, but also, after the events of the summer in this ridiculous debt crisis at home, policymakers around the world are not looking to the U.S. for political guidance and wisdom here because they can see that we're just as troubled here as a lot of other places.
REHMSo when the Treasury secretary went to Europe and presented his ideas, I gather there was not the warmest reception, Antonio.
LECEAThat's not truly correct. The -- Secretary Geithner was invited because there is -- I mean, the various economies are now very much intertwined, and this is the acknowledgement that one cannot solve the problem in one part of the world, only because financial stability can be a problem everywhere.
REHMYou're being very diplomatic.
LECEAAnd -- I mean, it goes both ways. I mean, it happened -- or it could have happened with the U.S. debt or if the U.S. defaulted. We would have suffered from it and vice versa. So -- and the acknowledgment of that is that he was invited. So -- then Secretary Geithner exposed his views. I mean, he was very much and very carefully and attentively listened to.
LECEAI mean, we benefit from his experience. And, of course, we will factor that into our own decision making and our ideas.
ZIENERWas it really necessary for the secretary to be at the meeting in Wroclaw in Poland? I don't think so. Actually, he was invited by Poland, okay, so he couldn't reject that. But he was -- he -- a week earlier, he was in Marseille attending the G7 meeting, and I think he already said what he wanted to say.
ZIENERAnd was it very wise of the secretary to talk about Lehman Brothers not having quite, some say, a second Lehman Brothers, and if you compare that to Greece openly on television? I don't know whether that was helpful. I think we've learned that markets are very sensitive, and he should be careful what to say.
BEDDOESI think there are several things going on here. First of all, I think it's absolutely true that U.S. credibility, internationally, is somewhat compromised by the absurd political shenanigans that went on here during the summer.
REHMYou're talking about raising the debt ceiling.
BEDDOESThe debate about raising the debt ceiling. The very real risk, it appeared, that the U.S. was going to default really did lead around the world to enormous raising of eyebrows. What on earth is going on in this country, you know? Who on earth runs this country despite this chaos? And I think, as a result, you know, it's much harder for U.S. policymakers to go and say with credibility, this is a very serious crisis. I'm not talking about the eurozone.
BEDDOESThis is a -- for the U.S. to say this is a very serious crisis, you need to act big time. So I absolutely accept that. Nonetheless, I think that it was -- you know, Secretary Geithner had to go because he was invited by the Poles. You couldn't possibly -- it would be hard to turn down an invitation. And I think it was a -- having gone, it was perfectly sensible and reasonable for the U.S. to lay out the stakes involved.
BEDDOESAnd I think there is a sense in Europe of not really recognizing the short-term stakes. And people scoff at this Lehman-moment comparison. But it is true that financial markets -- the consequence of a mishandling of the European crisis could be extremely grave for the Europeans and for the world economy as a whole. And it's already in pretty weak shape.
REHMZanny Minton Beddoes. And you're listening to "The Diane Rehm Show." We're going to open the phones now, 800-433-8850. Let's go to Cary, N.C. Good morning, John. You're on the air.
JOHNHi. Yes. Really interesting topic. I have maybe -- I'm not an economist. I've got this simplistic idea that the problem is that all these countries have their currencies linked together. They used to float. And I was wondering if something as simple as sort of creating, you know, reinstating sort of their old currencies and have those individual currencies float against the euro -- how about a new lira and a new mark and a new franc and have those things float against the euro?
JOHNAnd then these --, you know, some of the -- one of the problems, it seems to me, is that there's no way that they can devalue the currency 'cause it'll mess everything up. But, I think, in this way, these individual countries could have kind of their own exchange rate.
REHMAll right, sir. Thanks for your call. Sudeep.
REDDYWell, the old formula, the old playbook was to devalue a currency. And it would boost exports, draw in tourism, do all sorts of things that would allow a country to recover through that massive devaluation. To do that now would be one extreme of what you could do in solving this problem. But that would essentially be the breakup of the eurozone.
REDDYIf you're going to move away from a single-share currency and move back to individual currencies, it is an approach. Nobody is really prepared to discuss it right now because it would be ugly. And you have to figure out how to deal with the banking systems in different countries that all have debt from each other on their books. And they all have these -- the existing currency.
REDDYBut once you get beyond that stage, you then deal with the issue of the crisis and financial markets that would occur just by raising the idea. And then you're just creating the problem that you're trying to avoid in the first place.
REHMMarkus, how do you see it?
ZIENERYeah, Sudeep's right. I mean, in the past, many of the European countries were able to devalue their way out of trouble. And that's not a possibility anymore. And it seems to me that European leaders, only now, they understood that being in the currency union means that you have to stick to what you had agreed upon.
ZIENERSo, in a way, you don't have that tool anymore, which makes it difficult for countries like Greece and others to adhere to what they agreed on. So that -- yeah...
REHMAll right. Let's go to Arthur in Cambridge, Mass. Good morning. You're on the air.
ARTHURThank you very much. I've been listening to a very interesting discussion of economic strategies and the future of the euro and of the European Union. But far below all of this, or off to the side, is -- are the Greek people, who seem to be suffering a great deal, and they're being asked to suffer a great deal more. And what are they going to have to give up? And what is the future for them? Unemployment is bad. It's getting worse.
ARTHURI understand that the Greek government is being asked to set aside or lay off hundreds of thousands of workers.
REHMAll right, sir. Let's get a response. Zanny.
BEDDOESWell, I have a lot of sympathy with the caller's view. I think it is quite clear that the Greek government -- the Greek economy is in an absolute depths of a recession that shows no sign of ending any time soon. The truth, however, is that the Greek government was spending much, much more than that it was raising for a very long time. And that couldn't go on.
BEDDOESSo what is needed is a combination of some tightening and, particularly, a cutting of the government, but then, I think, as Markus said earlier, a lot of reforms designed to overhaul the economy and make it grow faster.
REHMShort break. Right back.
REHMAnd welcome back. We'll go right to the phones, 800-433-8850. To Miguel in Baltimore, Md. Good morning. You're on the air.
REHMYes. Go right ahead, sir.
MIGUELOkay, I think -- I just wanted to say thank you, Diane, for this wonderful show. And I just wanted to give a different perspective of the problem. I'm a (unintelligible). I just turned 30 years old yesterday. I live here in the States. And I'm a little bit tired of the media focusing on Southern European countries as the main problem of the issue.
MIGUELI want to remember that Germany forced the entrance of Greece in the euro while European parliament and European Central Bank said several times that they were having double accountability and that was a really bad idea. But Germany and France, in their moment, broke a law that was forcing the European countries on the euro to maintain a 3 percent of maximum deficit, yearly deficit, just because of their own convenience.
MIGUELAnd that Germans are not actually the ones that are paying more (unintelligible) on this crisis. The British, French, people from Luxembourg are paying more. And, just to finish, I just want to say that the (unintelligible) and from what they call the Ryanair Generation, I cannot imagine Europe (word?) again. I cannot imagine Europe splitting and leaving the euro.
REHMAll right. Sir, thanks for calling. And to you, Markus Ziener.
ZIENERWell, it's true. The caller's right that, as I said earlier, that many of the facts that have been available at that time -- 2000, 2002 -- regarding Greece and other countries have been not looked into that deeply as they should have. There was statistical data available, or at least we knew -- or the European leaders knew that the facts and the data that was available was not correct. So, I think, that was the kind of original sin, to not be thorough enough here.
ZIENERBut, I mean, can you imagine having a eurozone without Greece when they were applying -- in particular, Greece, the oldest democracy? I think that was very difficult, really, to reject. And it's a question of sovereignty. I mean, you have to go to these countries, and you have to look into the data. And, I think, 10 years ago, it was pretty difficult, actually, to get access to that and to do that.
REDDYWell, the caller is making this point about the unification of Europe, the Ryanair Generation. And that's why I actually think Europe is probably going to go in a direction toward greater unity in the end, rather than toward a breakup. Both of them are very difficult. But the unity is, at least, what they've had some experience with over the past decade, and they've been moving toward that, and even for the strongest countries in Europe.
REDDYGermany has seen great benefits from the euro. And they know that they want to stand behind it. And if you were to have a breakup of the eurozone, it could actually hurt, pretty seriously, the German economy, too.
REHMBut, Markus, the question becomes, exactly what will Germany support?
ZIENERGermany will support the existence of the euro. And I think they very well know the dire consequences of a euro slipping away, or even Greece having a default. We've already seen what's happened to French banks, that they've been downgraded, citations and all. They have a lot of exposure to Greece. Just -- let's imagine for a second what's going to happen if we have a default and disorderly default.
REDDYPeople in Greece will withdraw their money from the banks. Banks will collapse. Banks have to kind of -- rescued by state governments. It will have repercussions to European banks.
REHMBut the question remains, how far will Germany go to support not only Greece, but the euro itself?
REDDYWell, that's the million-dollar question. I really can't answer that. But I think we'll just pretend that things will go along for some more time.
REHMAnd to you, Antonio.
LECEAYes. I mean, the euro breakout is in the interest of no one, certainly not in the interest of Germany. So, at the same time, it is true that some countries, and particularly those in the southern periphery, have lived above their means for quite a few years. They thought that the euro was, in some way, a substitute for good policies, and it's not. I mean, the euro by itself will not substitute bad policies.
LECEAAnd in order to avoid that, there is the need for more surveillance and better integration. And, indeed -- I mean, euro -- other countries have agreed last weekend to go further in fiscal integrations, so to increase surveillance, to give more teeth to the mechanisms, to -- I mean, to guide their policies and to discipline those policies.
REHMBut what about our caller's concern that there's already high unemployment in Greece, there's already strict financial control, and yet it's not enough, Zanny?
BEDDOESWell, I think that the last caller made a very good point when he pointed out that, a decade ago, it was the Germans and the French that were breaking the rules because it suited them politically. So I think how...
REHMHow did they break the rules?
BEDDOESThere was the stability pact, which had said that your deficit should be limited to 3 percent of GDP. And the Germans actually had a higher deficit, and so got the rules kind of suspended for a while, in effect, to get away with that. So this sort of sin of breaking the rules is not only something that is done in Southern Europe.
BEDDOESThat said -- and I said this earlier -- I just don't think it's helpful to categorize this whole debate in terms of mistakes made by one side alone. There were mistakes made in Southern Europe.
BEDDOESBut there were also mistakes that we're now seeing in the design of the euro in the sense that the financial regulatory structure, the incentives for banks, for governments, built up in a way that that the euro was set up were there to encourage banks to issue a lot of short-term debt, to encourage governments to issue a lot of bonds, and to make it appear that the riskiness of each bond was pretty similar.
BEDDOESAnd you can say that countries were very profligate. Well, they were very profligate because they could raise a lot of money very cheaply, and the rules encouraged them to do so. So we're now, 10 years on, seeing a kind of institutional flaw in the euro, if you will, and that needs to be addressed. And I'm very encouraged by Markus' assessment of the German population.
BEDDOESIf he's right -- and I think he is -- that Germany is absolutely committed to the euro, and people -- the Ryanair Generation, if you will, is committed to the euro. And I agree with that. I find it hard to see the euro breaking apart. But if that's a really clear political commitment, then, for goodness sake, let's lay out the components of what we need to do to get that. And that's what the -- what Europeans are not doing.
REHMAll right. To Brooklyn, Mich. Good morning, Sally.
SALLYHi. I have -- I've heard of all these problems in the world. And I just think, why doesn't the whole world start out with a zero debt? Why doesn't everybody wipe away the debt and we all start from zero? What would happen next?
REHMWhat would happen, Sudeep?
REDDYWell, I certainly don't think the Chinese are going to like that with $3 trillion in foreign reserves. And countries that have actually lived within their means or handled their finances carefully are looking upon the rest now with some amusement, I think, and concern because they have done the right things. And there are a number of countries that have done the right things.
REDDYYou have an entire group of countries -- Brazil, China, India -- that are rising up and see very strong bright futures ahead of them, when people on the U.S. and Europe and Japan are worried about whether tomorrow will be better than today. The -- I think the problem in a lot of this, that's kind of perplexing, is how much difficulty politicians have in explaining to the public and communicating to the public the core issues here.
REDDYWe certainly saw this in the U.S., and that's why this debt ceiling battle was so divisive. But the governments, somehow, need to be able to communicate more quickly to their citizens what the risks are if they don't take action because, right now, the financial markets are going to act first before they have a chance to take action.
REHMBut if, in fact, the politicians themselves are totally divided, it's pretty difficult to explain to a public exactly what the solution should be. Here's an email which says, "Isn't Greece's problem the same as the U.S., the refusal of the rich to pay their fair share of the tax burden?" Zanny, how do you see it?
BEDDOESI think there are quite a lot of parallels between Greece and the U.S., but I think -- and I think that -- I'm not sure about refusal to pay their fair share of taxes. I think the problem in Greece was enormous tax avoidance. The rich, in large part, just didn't pay what they were supposed to pay. You can have a debate about whether the U.S. -- the rich people ought to be paying a higher share of the taxes. That's a separate debate.
BEDDOESBut in the -- in Greece, it was very much -- tax avoidance was a large part of the problem and a huge amount of government spending. But I think, more broadly -- and this goes somewhat to the last caller's comment -- you know, one person's debt is another person's asset. And so a lot this debate is about the distribution of losses and the distribution of pain.
BEDDOESAnd I think it's that -- at that kind of very general level, that's a question that we're going to be having in all rich countries over the next few years. But the reason that I find this whole European debate so frustrating is that I think it is being pigeonholed into a very narrow kind of definition of what the problem is. It's all Greece. It's all profligacy. And I just don't think that's true.
LECEAI beg to disagree. I mean, indeed, one problem is Greece. But I agree that there were loopholes in our institutional setting, and there were some incentives for some of what we have seen. But, again, don't blame only politicians. Also, markets misperceived completely the risk that was underlying in lending to Greece or to other countries.
LECEASo, all of a sudden, markets woke up and realized that the risk was much higher. And that lead to a -- to a freezing or to the difficulties in financing. So, indeed, I mean, what we need to do now is to restore confidence, restore confidence so that the -- all Europeans can apply solidarity and can help Greece, I mean, come out of the crisis.
LECEAWe need the markets to restore confidence in politicians being up to their job and making -- and bringing the -- and filling the loopholes in this institutional setting. And this certainly implies more coordination, more integration and a stronger Europe.
ZIENERYeah, maybe when we're talking about what to do, maybe European leaders should be more honest to the public and tell them, well, we have a problem with Greece, and that Greece is 3 percent of the eurozone GDP. I mean, aren't we able, actually, to carry them along for some more time, I don't know, 10 years, 15 years? I have no idea.
ZIENERI mean, in Germany, we have this burden sharing between rich lender states and poor ones, and they all pay into one fund. And then they get -- the money gets distributed among them. So maybe there's a way of dealing with them with this kind of thing, but that you have to tell the public, okay? But Greece is a -- you can handle that problem.
BEDDOESYou know, I completely agree that building and maintaining confidence is absolutely essential right now. And I submit that there are two reasons why there is no confidence. The first is that Europe has a problem that other countries don't, which is the governance problem. Here, it's bad enough getting confidence with one treasury.
BEDDOESImagine when you've got 17 countries, and you've got 17 finance ministers, all who feel like saying whatever they want to say, all of whom, frankly, have very loose lips and blather constantly. I don't think that helps at all. The process is very, very, very damaging in Europe. But, secondly and more fundamentally, I don't think that there is yet a collective diagnosis that is broadly laid out and made clear with a clear set of policy prescriptions.
BEDDOESAnd I go back to a point I made earlier, I think the central problem is pretending that Greece is solvent when it's not. If you wanted my kind of four-point plan for the Europe -- for the euro, I would acknowledge that Greece is insolvent, and I would restructure its debt. I would then say other countries are illiquid but not insolvent, and we will stand behind them.
BEDDOESI would recapitalize Europe's bank so that they could withstand a Greek default. And I would shift the focus on -- from straight austerity to a much bigger pro-growth agenda.
REHMAnd you're listening to "The Diane Rehm Show." Markus, what do you think of that four-point plan?
ZIENERWell, it's not 10 points. It's four points. Yeah, well...
REHMIt's four points.
ZIENERYeah, I think that it sounds pretty good, but I disagree on -- if it comes to that the Europeans don't know what to do. I mean, they have to figure that out. I mean, you -- just think about -- the euro is 10 years old. I mean, it's pretty young. And so we're in that process of evolving. And maybe this is really the chance to get this economic government everyone is talking about, that you have to have this government in place that everyone has to adhere to, so, in a way, it could be a huge change.
REHMSo you're sort of talking about joining politically as well as economically.
REHMHow realistic is that possibility?
ZIENERI mean the crisis is severe, and I think governments have understood how much they can be affected if things turn out the way they -- as they do right now. So, I think, as long this pressure is up, you should use that window of opportunity to get something done.
REHMTo create that kind of political unity.
REDDYWell, Diane, the strategy so far has really been a lot of kicking the can down the road.
REDDYAnd people realize that. They've tried to buy a little time. They just haven't used the time very well to come up with decisive action. Most of the steps Europeans have taken have been actually good, but they would have been -- they're good solutions for what happened three months ago or six months ago.
REDDYAnd that's the problem with trying to get political authorities together to deal with such a large problem, is you can't get them on the same page early enough to send a message to markets. It's possible -- and you can certainly say that markets have created some of these problems. But if investors give you enough rope to hang yourself, it doesn't mean you should go and do that. And that's what happened in the U.S. with the mortgage crisis.
REDDYThat's what's happened in some of these European countries with the debt crisis. And they now have to face the facts and the reality on that.
REHMAll right. So, Zanny, suppose tomorrow, by some miraculous flip of a switch, you had created political unity within that whole area of Europe. What do you think would happen?
BEDDOESDo you mean political unity in terms of acknowledging what the problem is?
BEDDOESOr broad political union?
BEDDOESWell, you see, I don't think that total political union is a necessary part of this. I think that you will -- better if I call it my four-point plan. That requires more economic integration. It doesn't require full political union. I don't think you have to have full fiscal union for the eurozone to work. I just think you need to have a closer economic integration than you've got right now and a new set of rules.
BEDDOESBut it doesn't, in my mind, require full political union, but...
REHMMarkus, last word.
ZIENERYou have to have some kind of law enforcement. You have to implement things, and you have to have a system to sanction the countries who don't adhere to that principle.
REHMMarkus Ziener, he's U.S. correspondent for Handelsblatt, a German daily. Antonio De Lecea, he is minister for economic and financial affairs from the Delegation of the European Union to the U.S., Sudeep Reddy of The Wall Street Journal, Zanny Minton Beddoes of The Economist, thank you all.
REHMAnd thanks for listening, all. I'm Diane Rehm.
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