Working well past midnight European leaders agreed to the broad outlines of a plan to deal with the European financial crisis. Private investors will be forced to take losses of up to 50 percent on Greek bonds, and bailout funds will be quadrupled. Investors are, so far, supportive. German Chancellor Angela Merkel said the crisis presents an opportunity to correct flaws made when Europe’s economic and monetary union was originally built. Most agree implementing last night’s plan remains a formidable challenge. Join us for an update on the European debt crisis and its implications for the U.S. and world economy.

Guests

  • Mark Weisbrot co-director of the Center for Economic and Policy Research.
  • Robert Kimmitt senior international counsel, WilmerHale, former deputy secretary, U.S. Department of Treasury, and U.S. Ambassador to Germany, 1991-1993.
  • Sudeep Reddy economics reporter, The Wall Street Journal.

Transcript

  • 10:06:54

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. European leaders worked well into the early hours of the morning to come up with a plan for weathering its looming debt crisis. Investors cheered the broad outlines announced late last night, but many issues related to implementation of the plan must still be resolved. Joining me to talk about what's been accomplished, why it might matter a great deal to us, Robert Kimmitt. He's former U.S. ambassador to Germany and former deputy Treasury secretary.

  • 10:07:39

    MS. DIANE REHMAlso here in the studio, Mark Weisbrot of the Center for Economic and Policy Research, and Sudeep Reddy, he's economics reporter for The Wall Street Journal. Do join us, questions, comments, 800-433-8850. Send us your email to drshow@wamu.org. Join us on Facebook or Twitter. Good morning, gentlemen. Thanks for joining us.

  • 10:08:13

    MR. MARK WEISBROTGood morning.

  • 10:08:13

    MR. SUDEEP REDDYGood morning, Diane.

  • 10:08:15

    REHMSudeep Reddy, if I could start with you, give us a summary of what we know about the plan they came up with early this morning.

  • 10:08:25

    REDDYWhat European leaders did was come up with a new grand plan to replace the grand plan they had three months ago, which replaces the plan that they had a few months before that. So it's, in some ways, a new start to dealing with the core problems of Europe. They came up with a new deal on Greece to cut, essentially, the value of Greek bonds and have banks take a hit on that front.

  • 10:08:47

    REDDYThey came up with a broad agreement on bank recapitalization because one of the problems is not just Greece but banks throughout Europe holding bonds from Greece and other European nations that are under threat. And that's something that's going to have to take shape in the coming months, perhaps as long as eight months. And then the third plank of this is to figure out a way to expand the value of their bailout fund to maximize the efficiency of it, they say, and that's really just using leverage, borrowing against it to create something on the order of a trillion euros of borrowing.

  • 10:09:25

    REDDYThe -- all of this sounds great. There were a lot of high fives in Brussels when they came up with a plan like this. The problem is we don't know a lot of the details on the Greece issue. We don't know particularly whether everyone's going to sign on. The big banking association signed on to this, but there could be a revolt by some others. And it's really not even clear whether the haircuts, the cuts in the debt that they're taking, 50 percent, is even enough, given the scale of Greece's problems.

  • 10:09:55

    REDDYAnd then on the bank recapitalization, there's something on the order of 100 billion euros in the plan to deal with the banking problem, but it's not clear whether that's enough or whether they're going to be doing it quickly enough given the timeline established. And then we just don't have, really, any substantial details on the leverage plan.

  • 10:10:14

    REHMYou know, considering the fuzziness of all of this, Amb. Kimmitt, why are the stock markets surging in response to what seems like a basic -- or a basis for a plan, but no details?

  • 10:10:36

    AMB. ROBERT KIMMITTWell, I think that this is a significant step to address a short-term issue, and that is the sovereign debt crisis that was looming over Europe. And I think the markets had expected the leaders to come up with a plan with just the elements that Sudeep laid out. And, basically, the leaders delivered what the market was expecting. But I would emphasize, again, this is a short-term step.

  • 10:11:03

    AMB. ROBERT KIMMITTThere are still medium-term steps that are needed to promote growth in the euro zone, and then, long term, they have to find ways for better coordination and management of fiscal policy in Europe, just as they have on the monetary side. But again, I think the short answer is the markets had an expectation of a three-part plan, and, in the end, the leaders did deliver it.

  • 10:11:26

    REHMAnd, Mark Weisbrot, who are the Greek bondholders who are going to take the hit on this?

  • 10:11:34

    WEISBROTWell, these are mostly European banks. But I want to emphasize that this really doesn't resolve even the Greek debt problem. You know, we don't have all the numbers yet, but what they're reporting is that the Greek debt would be reduced to 120 percent of GDP by 2020. So what is the debt burden they're going to have from now till then is not sustainable. And this is really the problem. They -- it's not so much a debt problem. It's a policy failure problem.

  • 10:12:07

    WEISBROTThey made Greece into this mess. Greece's debt when they first negotiated their first bailout in May of 2010 was 115 percent of GDP. Now, it's 165 percent. They're shrinking the economy. You can't shrink your way out of a debt problem. And, now, you know, if you look at this crisis and why it's been so acute in the last few months, is because the European authorities -- and by that, I mean the European Commission, the European Central Bank and the IMF -- have threatened and begun to do to Italy exactly what they did to Greece.

  • 10:12:45

    WEISBROTThe IMF has already had to lower its debt -- its growth projections for Italy in the last six months because of this forced austerity. So you get into this situation that Greece has been in now for two years where they cut spending and raise taxes in order to try and meet a deficit target that's imposed on them. The economy shrinks, so their revenue falls. They can't make the target, so they start to cut more. And it's the threat of that happening to Italy with $2.6 trillion of debt that has caused this crisis, and they have not resolved that.

  • 10:13:22

    REHMSudeep.

  • 10:13:22

    REDDYWell, Diane, to get at your original question, why are markets soaring, I think part of the issue is that so many markets around the world had been starting to brace for the possibility for another 2008, another global financial catastrophe. And that is probably what would have happened if there were no resolution at all out of this summit. Investors around the world would start to bake in the worst-case scenario and pull back entirely.

  • 10:13:49

    REDDYAnd expectations had been brought so low by leaders going into this summit that anything, even something on Greece, was seen as a positive. There, at least, is a new plan to have a plan. It gives Europe a chance to fight another day in this currency battle, but it's just not enough to deal with this decisively.

  • 10:14:08

    REHMSo you would agree with Amb. Kimmitt that, while the short-term issues may have been addressed, not resolved, you've still got the mid term, the long term?

  • 10:14:20

    REDDYAnd Amb. Kimmitt and Mark both made great points on this notion that, over the long term, medium and long term, Europe has to figure out a way to come up with stronger growth. It's a problem that all advanced economies are facing. We're dealing with this exact issue right now. The problem in Europe is that they have even less room to maneuver than the United States does when it comes to fiscal policy, and they're cutting back. They're pretty much already in a recession in Europe, and it's very hard to fight your way out of that in -- when you're in constraints like this.

  • 10:14:49

    REHMBut aren't many economists arguing that this is exactly the wrong way to go about this, Mark Weisbrot?

  • 10:14:58

    WEISBROTYes. This is a self-inflicted, as I emphasized, crisis caused by bad policy. We have something similar in the United States. It's just not as severe. And here, I think, we would differ. I don't think it's really constraints. I mean, even the European Central Bank, if you compare them to our central bank, they raised interest rates twice in the last year, so -- whereas our central bank lowered them to zero -- near -- or near zero in December 2008 and have kept them there ever since. So they are pursuing much more conservative policies there than in the United States.

  • 10:15:37

    WEISBROTWe would be worse off if we tried to pursue those policies. And I want to emphasize also that, you know, it's understandable that, here in the United States, we're most worried about the contagion effects of this crisis. But, you know, left out of this discussion is the people. The euro zone with 21 percent unemployment in Spain, 16 percent in Greece, 14 percent in Ireland, millions of people, their lives have already been severely disrupted and damaged.

  • 10:16:09

    WEISBROTAnd this is a result of this kind of policy failure where the authorities are not looking to see how they can restore full employment and growth, but concerned only -- or overwhelmingly about the creditors.

  • 10:16:25

    REHMAmb. Kimmitt.

  • 10:16:27

    KIMMITTWell, I think both in the United States and in Europe, governments are confronting, I think, the central issue of our time, and that is the role, the size and the cost of government in an era of globalization and, in the case of Europe, rapidly declining demographics. I think sometimes the closer you are to the central issue, the messier the process, and, therefore, it's not a surprise to me that Europe make its decisions at 4 a.m. in the morning on sovereign debt.

  • 10:16:55

    KIMMITTWe make hours just before midnight on debt limit because these are tough votes, tough political processes. But I think we're grappling with the right issue that is to lay a stronger foundation for the growth and opportunity policies that need to come both in Europe and in the United States. But again, I think, in Europe, this is a step in the right direction, but it is not yet a comprehensive strategic plan for the growth and opportunity that Europe needs to prosper.

  • 10:17:25

    REHMWhat about, as Mark Weisbrot brings up once again, the people who are going to suffer even more as a result of this plan going forward?

  • 10:17:42

    KIMMITTWell, I think those who will suffer, those who have been dependent on government support -- there won't be as much government support. There are going to be adjustment to pension plans in Italy, for example. There will be other steps that are taken. And yes, that will cause pain in the near term.

  • 10:17:58

    KIMMITTBy the way, both in Europe and the United States, the hope is, however, that by matching commitments and resources, governments in Europe and in the United States will lay a stronger foundation for the kind of growth opportunities that are needed in the future. But will there be pain in the near term? Absolutely. That's going to have a decelerating effect -- already has -- on growth in Europe, and they will go through a painful period. But had they not taken action, I think that pain was only going to be more in the future.

  • 10:18:32

    REHMIt's going to be interesting to see what the public reaction is in Greece and Italy after all of these is announced. Amb. Robert Kimmitt, senior international counsel at WilmerHale, former deputy secretary, U.S. Department of Treasury.

  • 10:20:04

    REHMAnd we're back, talking about the decisions announced by E.U. leaders regarding the European debt crisis early this morning. We will take your calls, 800-433-8850. Send us you email to drshow@wamu.org. Here's an email titled, "Doesn't this just kick the can down the road? Could your guests speculate on whether they think Greece will end up defaulting on their debt and perhaps -- and leaving the euro? What would -- what effect would this have on the remaining euro zone members like Italy?" Mark?

  • 10:20:55

    WEISBROTWell, there is a good possibility. As I said, the haircut they're talking about, even 50 percent, is not -- you got to remember, it's not just the size of the debt. It's the interest rate, Diane. Japan has a debt of 220 percent of GDP but doesn't have a debt problem. And, by the way, we don't have a real debt problem in the United States either. Our interest payments on the debt -- right now, our net interest, which is what matter, is about 1.4 percent of our GDP, which is about as low as it's been in the post-World War II period.

  • 10:21:27

    WEISBROTSo that's what matters, is a real burden, and burden -- Greece's burden is high. It's over 6.5 percent and rising. And so there's a real possibility of default, and I don't necessarily think it would be worse. In fact, it might be better than the solution that the European authorities are imposing on them now.

  • 10:21:44

    REHMInteresting. Jeff's email goes on to say, "It would appear as though an austerity plan is the wrong medicine for the crisis, similar to putting an anorexic on a diet." Sudeep?

  • 10:22:03

    REDDYTo the underlying point, this does kick the can down the road. This was partly the purpose of the exercise, was to kick the can down the road, to buy more time because the problem isn't really just Greece and the Greek economy, even though there are a number of issues that need to be dealt with there. It's, how do you build a firewall to the rest of Europe and the bigger countries like Italy and Spain that are under pressure?

  • 10:22:22

    REDDYAnd the approach so far has been largely focused on austerity, which is why, in the long-run, this doesn't work. To deal with problems like this, whether it's in Europe or the United States, you need a combination of long-term and short-term factors. The long term is dealing with the very long debt trajectory. There are things that are built into the economy you know aren't going to last, whether social programs or tax rates. You need to deal with them and make some decision on that.

  • 10:22:49

    REDDYAnd the short-term provide support for the economy through stimulus, through tax breaks, whatever will get the economy at least on the right path. And the problem is it's kind of flipped right now, and the entire focus is on short-term austerity without really thinking about the long-term growth path.

  • 10:23:05

    REHMAnd, Amb. Kimmitt, Jeff goes on to say, "If the Greeks did leave the euro, wouldn't they be able to use their own currency to get on better financial footing?"

  • 10:23:21

    KIMMITTWell, of course, that was the debate that the Europeans had in Maastricht in early 1992, and they decided that Europe would prosper better with a common currency. And they developed a common currency, came up with a common monetary policy implemented by the European Central Bank. The problem is they didn't live up to the fiscal promises that they made at that time, and those consequences are before them right now. Certainly, if a country has its own currency, there are a lot of steps that it can take to deal with the situation inside its own economy.

  • 10:23:54

    KIMMITTBut I think Greece would be so wounded at that point, it would have real trouble accessing the debt capital markets. My own feeling -- and Mark made a good point, Diane -- this is as much political as it is financial. I think Germany and France have made the political decision to keep the euro afloat in the euro zone together and are willing, particularly in the case of the Germans, to pay disproportionately for that goal to be realized.

  • 10:24:23

    KIMMITTAnd my belief is that they feel that if Greek -- Greece were to default, if Greece were to leave the euro zone, that would be the first step toward disestablishment of the European experiment that has benefited Germany and France. I think Germany, certainly, is in its longest period of peace in its history, 66 years. It has a country bordered by nine nations. It has a very strong economy, and business feels strongly that it has benefited from the euro. So I think the Germans have made the political decision to put the resources up to keep the zone together.

  • 10:25:03

    REHMHere's a posting on Facebook from Kaye, who says, "After reading "Boomerang," wherein the author describes how Greece cooked its books to get into the E.U., I just don't understand why they aren't being expelled. The Greek economy cannot be tinkered with. It needs a complete overhaul, starting with tax collectors who have not been bribed and a populace willing to pay." Mark.

  • 10:25:38

    WEISBROTWell, they definitely need to do something about tax collection. But, you know, we need to -- we have a lot of problems to resolve here as well. And you can't wait for that to restore growth. You can't have, you know, a decade or more for a country to recover or get anywhere close to full employment. And, you know, I don't think it would be -- I guess I disagree here, too. I don't think it would be necessarily a tragedy if Greece left the euro and -- you know, or the European Union would fall apart.

  • 10:26:11

    WEISBROTThe euro zone is a separate thing from the European Union, you know? The U.K. is in the European Union, for example, but they don't have the euro. And so, you know, look -- I think a good example is what happened to Argentina back in 2001. At the end of 2001, they were very much like Greece. They had pursued these failed policies for three-and-a-half years. They had a huge unsustainable debt burden. They defaulted on their debt. They let their currency fall.

  • 10:26:40

    WEISBROTAnd, you know, Cristina Kirchner was just elected this weekend by a landslide margin 'cause they've had nine years of over 90 percent growth. They recovered after one quarter of the default. And they were worse off than Greece would be if they left the euro.

  • 10:27:00

    REHMWhat's the difference between Argentina and Greece, Sudeep?

  • 10:27:05

    REDDYWell, Greece, of course, is already in a currency union and pulling out of it while -- it might make sense, theoretically. There are all sorts of practical problems that we don't even think about because you don't even get past theoretical. How do you print a new currency in secret so that you don't spark a panic for people around the country and in the rest of the euro zone? How do you distribute it? How do you issue bonds?

  • 10:27:26

    REDDYA lot this would require the euro zone to, in some ways, support Greece out of the currency bloc as well, and so that could be expensive. At the moment, it's probably cheaper to figure out a way to keep Greece in and reform Greece so that you can keep the entire 17 nation bloc together instead of having it fall apart. Because once Greece goes, everyone knows that investors will focus on Italy or Spain or try to find some way to force out Ireland or Portugal.

  • 10:27:54

    REHMWho is literally on the hook for the up to $1 trillion in bailout funds?

  • 10:28:04

    REDDYThis is an amount of money that is actually split among the governments. The -- it's a 440 billion euro pool of commitments provided by the governments. The bulk of that, of course, is from Germany, and they're the biggest player in the euro zone. The next is France, and they're all -- they've all come up with some amount of money. Even tiny Slovakia and Slovenia went through some very difficult politics to get their tiny share passed.

  • 10:28:32

    REDDYSo it is a shared commitment here to come up with that amount of money. The problem is it's not clear whether a trillion euros is enough to provide the firewall to fight off investors. It's -- it's certainly a lot of money, but the Italian bond market is the third largest in the world. And there are a lot of problems that could happen next.

  • 10:28:51

    REHMAmb. Kimmitt, for a lot of time, we've heard people say, too little, too late. What do you think?

  • 10:29:03

    KIMMITTI think this time, the Europeans are ahead of the problem in the short term if they come out with details and can execute politically. But, again, I think the markets very quickly will say this has stemmed the short-term concern. But what about the mid- and long-term issues that both Mark and Sudeep have mentioned? And, therefore, I think Europe needs to keep its eye on the long term.

  • 10:29:35

    KIMMITTThey need to come up with what the Germans would call gazump concept, a strategic concept for euro at a time that the continent is going to go through tremendous transformation, to be able both to live up to the commitments they made in Brussels this morning, but move beyond that to creating growth and opportunity for a continent transformed.

  • 10:29:56

    REHMBut, again, back to the people and to Mark's point that these European leaders seem far more willing to save the euro than they are to save the people.

  • 10:30:13

    KIMMITTWell, it's interesting. Let's talk about people in Europe. Certainly, we've seen a lot of people on the streets in Greece, Italy and elsewhere. Interestingly, people who haven't been in the streets are the Germans. The Germans, who already went through a revision of their pension program -- their pension age is now 67, which is what a number of others are moving toward. The Germans have been paying disproportionately for the European Union.

  • 10:30:37

    KIMMITTThey're going to be paying more on a going forward basis. And, therefore, I think, yes, there is going to be pain and pressure in all the countries, both the core countries and the periphery. But I think the political leaders have basically made the decision that it would only get worse if they don't take these steps in the near term. But I would agree that austerity for the sake of austerity doesn't produce that long-term result that they need to see, and that is growth that will create opportunity for that 21 percent who are unemployed.

  • 10:31:11

    REHMMark.

  • 10:31:12

    WEISBROTYes. Well, the Germans -- I agree. The Germans have not been in the streets because they've got 6 percent unemployment because they instituted a work-sharing program, which was deliberately designed and successfully brought down unemployment, even during the recession that they had. And that was a very successful program. I wish we could expand it here in the United States, where employers are subsidized, among others, by the government in order to keep people on at reduced hours rather than laying them off.

  • 10:31:44

    WEISBROTWhat is Europe doing to Italy? What are they doing to Spain? They -- you know, the latest agreement, they're pushing Italy to adopt as to make it easier to lay people off. They're making it worse. They're going in the wrong direction in the peripheral euro zone countries. So, yeah, the euro is fine for Germany. But if you're stuck in there, you're in any of the weaker economies and policy is going in the wrong direction, and you're being squeezed more and more, and there's no light at the end of the tunnel, I agree with Sudeep.

  • 10:32:13

    WEISBROTIt would be great if the Europeans would get it together to help Greece grow its way out of its recession instead of shrinking it 5 percent a year, which is what they're doing right now. But they're not offering that.

  • 10:32:25

    REHMSudeep.

  • 10:32:26

    REDDYOne of the reasons the Germans have been taking a hard line is because they realized they've been more disciplined in taking all these actions. And they've done a lot of smart things over the course of the recession, like Mark mentioned, in trying to keep their activity going in the business sector, keeping unemployment relatively low. And there's a feeling that the rest of the euro zone, particularly in the periphery, hasn't done the same.

  • 10:32:48

    REDDYAnd they're not -- they shouldn't get away with it this time. And that's what's driving this culturally. You still have this different view. And until you can come to an agreement in that sense, that you're going to have to get the southern periphery to do more on their own, you're going to have the Germans continuing to move along in these short steps, these minimal actions, without actually doing something much bigger.

  • 10:33:08

    REHMSudeep Reddy, reporter with The Wall Street Journal. You're listening to "The Diane Rehm Show." And we're going to open the phones now, 800-433-8850. Let's go first to San Antonio, Texas. Good morning, Bennett. You're on the air.

  • 10:33:33

    BENNETT(unintelligible) Thursday morning...

  • 10:33:34

    REHMBennett, are you there? All right. Let's go to Sterling, Va. Good morning, Gary.

  • 10:33:43

    GARYThank you. I've been curious because, for years, the Greek Orthodox Church and the Roman Catholic Church have been living tax-free. And they have, you know, sold some very large properties during the housing boom and the real estate boom. Why aren't they chipping in more to alleviate this problem?

  • 10:34:11

    REHMMark Weisbrot.

  • 10:34:13

    WEISBROTWell, that is a problem, again, of tax collection, which I do think is a serious problem in -- in both Greece and Italy, and it's something they have to resolve. But I want to emphasize again that that's not something you can do right now when the countries are either in a recession or on the edge of recession, in the case of Italy. And the first priority right now has to be restoring growth and employment.

  • 10:34:42

    REHMHere's an email from Ricardo. "Do we know which investors are betting against a successful resolution to the European debt crisis? Is it, again, the Goldman Sachs of the world?" Any response?

  • 10:35:04

    WEISBROTTheir positions aren't public. I mean, you can see quotes from people in the newspapers talking about -- in fact, the crisis in December was very much exacerbated by traders just trying to push the yield on Italian bonds up over the 6 percent range towards 7 percent, even, so that, obviously, that would bring about a collapse that they would benefit from. And so you have that. But nobody is -- I mean, the big hedge funds don't disclose their positions. And so we can't really say, you know, who's on what side of these bets.

  • 10:35:38

    REHMSudeep.

  • 10:35:39

    REDDYAnd people who are betting against this can't really know, at this point, whether the politics are going to come together in a way that hurts their bet. You can bet economically that Europe is going to be in a struggling position for the next five or six years, and you -- that's probably a pretty good bet. You could probably make a similar bet on the U.S. for the next few years.

  • 10:35:57

    REDDYBut to actually make the decision now that Europe is going to fall apart would be presumptuous because, on a day like today, you're seeing all those bets reversed across the market, where there's at least something in the short term to keep it together. And all of this is about execution from Europe. They can come up with a short-term plan, but it's all about the steps two, three, four and five. And, so far, they haven't really accomplished those other steps.

  • 10:36:22

    REDDYThey keep coming up with step one and changing it without necessarily going through and completing the rest of the action. That's really been the story for the last two years, and now is the test of whether they're -- they've learned a lesson and will change that.

  • 10:36:34

    REHMAmb. Kimmitt.

  • 10:36:35

    KIMMITTI agree with what both Mark and Steve said and respond to that question. I would also note that we have two marketplaces at work here: the political marketplace and the financial marketplace. The political marketplace, it seems to me, is becoming less efficient, less timely and more expensive by making decisions at the edge. At a time that markets are becoming more efficient, they're making decisions at the first moment rather than the last moment, and, therefore...

  • 10:37:05

    REHMNot always the right decisions, however.

  • 10:37:07

    KIMMITTNot always the right decisions, no. Exactly. But my point is that I think that as the political marketplace tries to understand the financial marketplace and vice versa, I think there is a real gulf of understanding between those two -- misunderstanding.

  • 10:37:22

    REHMFormer ambassador to Germany, Robert Kimmitt, he was also the deputy secretary at the U.S. Department of Treasury. We'll take a short break here. When we come back, more of your questions, your comments. I look forward to hearing from you.

  • 10:40:03

    REHMAnd as we talk about the debt crisis in Europe, a great many people are wondering how does it -- how might it affect us. We have a caller in St. Louis. Good morning, Rick.

  • 10:40:21

    RICKHi, Diane. Great show. I'm curious about what you just mentioned. You know, when -- my friends and I, when we discuss this, you know, I always kind of say, well, you know, so what if everything blows up? I mean, what's the worst-case scenario? I mean, you know, I didn't live through the Depression, so I'm guessing maybe that's the worst-case scenario. But I was wondering if your guests could kind of paint a picture of how, you know, what -- if this really went even more wrong than it already is, what kind of a world are we looking at?

  • 10:40:54

    REHMSudeep.

  • 10:40:55

    REDDYWell, there are two ways this actually affects us. One would not be as bad as you might imagine. That's the economics of it. If Europe goes down and has a severe recession alone and the rest of the world isn't directly going down at the same time, then there are trade channels. The U.S. would take some hit with exports. All of this is important, but the bigger effect is clearly in financial markets.

  • 10:41:19

    REDDYAnd the risk, if you were to see this cascade around the world, would be a default in one country, such as Greece, leading to a default in Italy, in Spain. And not only do you have bond investors pulling back, but we've created an entire system of financial engineering over the last couple of decades. Credit default swaps, CDS contracts are -- they were one of the concerns in the 2008 financial crisis. And if you were to look at it now, you have the risk of all of these contracts getting triggered for bond investors.

  • 10:41:53

    REDDYAnd once you have these insurance contracts having to be paid out, you will have investors basically fleeing around the world, pulling back. Steep, steep drops in stock markets around the world, and that is what leads to the much more severe economic effects rather than the direct ones from just a slower growth in Europe.

  • 10:42:10

    REHMAnd Amb. Kimmitt, what about the effects on U.S. trade policy?

  • 10:42:16

    KIMMITTWell, I might differ just a bit with Sudeep in that, given the fact that 25 percent of our exports go to Europe, the Europe-U.S. share of the global economy is 43 percent by GDP. I think just at a time that we're trying to find a way to grow in the United States, relatively good third quarter number this morning at 2.5 percent, clearly, the president has said that he sees exports as an important part of a job creation strategy going forward.

  • 10:42:50

    KIMMITTAnd while all of us are looking to the brick countries -- Brazil, Russia, India, China -- other emerging markets as our future, the transatlantic trade and investment regime is really our present. And, therefore, if we did see a collapse in Europe in addition to the collapse in maybe global financial markets, I think, also, it would seriously affect U.S. trade and investment, especially exports to Europe.

  • 10:43:16

    REHMAll right. Let's talk once again about the people. How would people here in the U.S. be affected? You all are talking about big numbers. What about small business owners? What about government workers? What about people on the street?

  • 10:43:36

    WEISBROTWell, it's serious here. I mean, that's why you have already people in the streets here, the Occupy Wall Street movement in all the major cities in the United States. I mean, we have 9.1 percent unemployment, and we don't see -- I mean, at the rate of growth -- job growth we have now, it would take decades to get back to normal levels of employment. So this is very serious here. And I don't want to underestimate the impact that a severe crisis or a meltdown in Europe would have on the United States. It would make things somewhat worse here.

  • 10:44:09

    WEISBROTBut I do want to say that the catastrophic ideas that people have that, you know, you could get a Great Depression or something like that, or we're headed for another recession, a double-dip, I don't think that's all that likely. You know, you see this promoted a lot because the administration, for example, wants to say they saved the U.S. from another Great Depression. Depression -- the Great Depression wasn't caused by a single financial crisis. It was a long series of events that took place over years.

  • 10:44:39

    WEISBROTAnd so even if you had a meltdown in Europe, the Europeans would do what we did here to bail out their banking system. They would do what they needed to do to avoid a great or a very serious recession. The situation we're looking at in the United States now is not really a result, as a lot of people believe, of just the financial crisis that happened in 2008 when Lehman Brothers collapsed. That contributed something. But, mainly, we had a big housing and real estate bubble that burst, and that's what we're looking at right now, the results of that.

  • 10:45:17

    REHMAll right. To Shaker Heights, Ohio. Good morning, James.

  • 10:45:22

    JAMESHi, Diane. And to your guests, hello. You know, Diane, real quick, it's sometimes hard to sit here and wait to talk to you because you guys go over so many things, that you want to ask other things. But I'm going to try and stay with my original one because there was a comment that was just made.

  • 10:45:35

    REHMOkay.

  • 10:45:37

    JAMESAnd it comes on the policy. If the financial meltdown did not have a direct cause on this and it was the housing market, if we -- you know, if Europe, specifically Greece and Italy, told their people, in five years we're going to cut their version of Social Security, Medicaid, Medicare, we're going to cut education, we're going to cut health care, how was that really going to do in the short interim as far as, like, getting their debt together?

  • 10:46:02

    JAMESAnd it's amazing how all these countries, at the same time, are having debt problems right after this housing market situation. And the other was could your guest who mentioned the German job sharing. Could he kind of expound on that?

  • 10:46:14

    REHMSure. Mark.

  • 10:46:16

    WEISBROTYes. Well, the first part of your question, it turns -- cutting health care and pensions and the things they're doing, they're just making things worse. And that's really the problem. As I said, they're going in the wrong direction in terms of policy in Europe. They need a stimulus and not austerity. Now, the...

  • 10:46:36

    REHMBut, in the meantime, you've got this super committee here in the United States looking at cutting without increasing revenue.

  • 10:46:48

    WEISBROTThat's right. And that's the problem here, too. Now, work-share -- we actually do have work-sharing at the state level where states are able to use unemployment insurance to keep people on the job. And it's very small, and it's not used very much. And there was some proposal by the administration to increase that. And that is -- basically, the way it works is, instead of laying people off, employers have, in Germany, more choice to simply -- to reduce their hours but not reduce them by as -- not reduce the pay by as much as the hours. So it works out fairly well. It helps them keep people on the job.

  • 10:47:28

    WEISBROTIt reduces turnover. It makes -- it's more efficient for the employer. And they don't throw people out on the street.

  • 10:47:34

    REHMSudeep.

  • 10:47:35

    REDDYWell, these are all great points. And to the caller's question of how do you actually deal with a problem like this, the discussion that we've had in our country, and that a lot of Europe is having, is all about short-term cuts. And we need to somehow get to a discussion about longer-term issues. You can't deal with the Medicare problem simply by deciding you're just going to cut it all away. You have to somehow refashion it, deal with something more on a longer time horizon. And that's the problem.

  • 10:48:05

    REDDYThe Fed Chairman, Ben Bernanke, has brought up this point in Congress without much success, that what we really need in this country is long-term deficit reduction and short-term stimulus. And that's a message that the U.S. is actually going to be taking to the G-20 to get everyone else on board, to try to get the world to focus on what can you do in the short-term to boost growth in the long term to deal with the budget problem because that's why all of this debt discussion matters, is because it may not -- it may be sustainable now, but it's clearly not sustainable over the next 10 or 20 years.

  • 10:48:39

    REHMAmb. Kimmitt.

  • 10:48:41

    KIMMITTJust to tie the two together, the labor reforms that were put in place under the Gerhard Shroder Social Democratic government in the late '90s, I agree, significantly helped Germany during the crisis. But, as they came out of the crisis, the Germans were the first to through difficult fiscal consolidation in 2010. You may recall that President Obama criticized Mrs. Merkel at the Toronto G-20 Summit for consolidating too quickly. Her belief, maybe growing out of their experience during the Weimar period, is that she had to get her fiscal situation under control.

  • 10:49:18

    REHMQuickly.

  • 10:49:19

    KIMMITTOnce she did, that sent a signal to business that, while they weren't sure how much better things were going to get, they knew that they weren't going to get worse in terms of tax and regulation policy. It was a point of which they pivoted. Now, I think that Germans, as well as we and others, need to do more on the growth side. But I think laying that former fiscal foundation, both in Europe and the U.S., is an important step in that direction.

  • 10:49:43

    REHMCan anybody help me understand whether there's a comparison between the crisis that Europe is undergoing now and the Asian debt crisis?

  • 10:49:59

    WEISBROTYou're talking about the Asian crisis in 1998.

  • 10:50:03

    REHMExactly.

  • 10:50:04

    WEISBROTYes. Well, there's one similarity, and that is that that -- that was brought on a lot -- the Asian crisis was brought on mainly by a quick outflow of capital. A lot of hot money came in, and then it went out in '97. And that was the major proximate cause of that crisis. And you have some of that in the peripheral European countries as well, the ones that joined the euro. They lost a lot of capital when -- and they had bubbles that burst as well, like in Spain, for example, and Ireland. So there was that -- there's that similarity.

  • 10:50:39

    WEISBROTBut I think the most important similarity is that the response to both crises has been policy going in the wrong direction. I mean, that is when the IMF first became an issue for the world, was they made the crisis in Asia worse by imposing what economists call procyclical policies, that is policies that actually made the recession worse, raising interest rates and cutting -- and fiscal consolidation.

  • 10:51:05

    WEISBROTAnd that is what -- it's ironic because the IMF has been doing this for decades in developing countries. And now you have the IMF -- it's really not them in charge as more the other European authorities -- doing the same thing to peripheral Europe that they used to do only to developing countries.

  • 10:51:22

    REHMSo what you're saying again and again is that you believe these extreme austerity measures are really preventing growth rather than spurring it.

  • 10:51:36

    WEISBROTIt couldn't be more clear. Look at Greece. They're shrinking 5 percent annually. Now, every six months, the IMF has had to revise its projections for Greece downward. And, of course, then the debt as a burden goes up relative to the economy, and interest rates rise as well. So, yeah, it's really the wrong direction.

  • 10:51:56

    REHMAnd here's an email on that very issue from Polly in Ohio. She says, "If Greece, Italy, Spain and the U.S., for that matter, lay off large numbers of government workers, how does that help? It reduces the public payroll but increases on employment compensation, decreases spending, and may have the opposite effect of what's desired." Sudeep.

  • 10:52:28

    REDDYThis is short-term, long-term problem. And it's something that you can deal with, with a little bit more planning when you're not under pressure from financial markets. And that's one of the problems.

  • 10:52:37

    REHMBut, clearly, they are. So...

  • 10:52:40

    REDDYThat is their problem. And that's why if you were to -- and it will only get worse. If you don't figure out a plan for stronger growth or dealing with your longer term budget issues right now, then it's just going to become more expensive. And whether it was the Asian financial crisis or the one we're dealing with now, it's pretty obvious that once you get to the moment of a meltdown, of a crisis, it's far more expensive to deal with the problem than doing it in advance. And that's just the problem coming up with political will, to deal with it in advance.

  • 10:53:09

    REHMSudeep Reddy of The Wall Street Journal. And you're listening to "The Diane Rehm Show." And a caller in Charlotte, N.C., Good morning Def. (sp?)

  • 10:53:23

    DEFGood morning, Diane. I love your show.

  • 10:53:25

    REHMThank you.

  • 10:53:27

    DEFMy comment I have is -- actually, I'm Greek. And I know the Greek politics for a long, long time. And I live here in this country for a long time. And they are the same problems. What happened to Greece right now is going to happen here 10 years from now because Aristotle said, in order for any country to flourish, your middle class would be bigger than your upper and bigger on your bottom. So that's my comment. And the middle class disappear in Greece. The Greek rich people have $500 billion in Swiss banks without paying taxes, and look what happened into this country.

  • 10:54:08

    REHMAmb. Kimmitt.

  • 10:54:10

    KIMMITTI think a very good observation. The caller obviously knows a lot more about Greece, perhaps, than I at the street level. What I would say is that these policies for growth and opportunity certainly have to be aimed at the middle class, grow in the middle class, getting people back to work, both in Europe and in the United States. My own view is it needs to start by getting a better balance between commitments and resources at the governmental level. But it has to also be combined with policies that are going to stimulate growth over the mid- to long-term.

  • 10:54:43

    KIMMITTAnd I think, right now, I would agree that there's been a lot more focus on austerity, that is, solving the immediate crisis, then Europe deciding what it's going to do to grow, not just in the core, but in Europe more broadly.

  • 10:54:56

    REHMMark.

  • 10:54:57

    WEISBROTYes. Well, I think, again, there's -- you know, you have to look at macroeconomic policy. If you don't mind getting back to the economics, you have three basic policies that a country can use to get out of recession, restore growth if the economy is weak. One is fiscal policy, spending and taxing. You basically stimulate the economy by spending more. Two is monetary policy. The central bank controls interest rates.

  • 10:55:25

    WEISBROTAnd third is the exchange rate. If you let your currency fall, you get a stimulus from that as well. And the euro zone countries are all in a position where those policies are either not being used, or they're mostly being forced to push them in the opposite direction. They don't have control over exchange rate or monetary policy 'cause that's the European Central Bank. And I want to emphasize how right-wing the European Central Bank really is compared to our Federal Reserve.

  • 10:55:53

    WEISBROTI mean, the quantitative easing that the Federal Reserve has done, you know, keeping interest rates near zero, committing to keep them even longer, the European Central Bank is not doing that. And then, of course, they're being forced to have their fiscal policy in the wrong direction. That's why, I think, the most important thing for people to understand is that this is a policy failure, and it's really hurting people for nothing.

  • 10:56:14

    REHMSudeep.

  • 10:56:15

    REDDYDiane, if you were to look at the protest that we're -- we've been seeing in Greece, the things that we've been seeing in the U.S. with Occupy Wall Street or the Tea Party protest, they all tend to converge on this awareness that we have of a great difficulty in figuring out long-term what will benefit the middle class, what will benefit most people in the country.

  • 10:56:34

    WEISBROTAnd that's, I hope, starting to change the conversation about focusing just on the short term, partly because of the way we process news, partly because just the short-term political expediency of parliamentary bottoms -- bodies, you don't tend to look beyond the next year or two. And if we can change that conversation, you have a much better chance of actually fixing some of these problems.

  • 10:56:57

    REHMSo you think these protests both in Greece and in this country are having an impact?

  • 10:57:05

    REDDYThey're starting to. Whether they will actually lead to real change is the big question.

  • 10:57:08

    REHMSudeep Reddy of The Wall Street Journal, Mark Weisbrot of the Center for Economic and Policy Research and Amb. Robert Kimmitt -- he is former deputy secretary of the U.S. Department of Treasury -- thank you all.

  • 10:57:28

    WEISBROTThank you.

  • 10:57:28

    REDDYThank you, Diane.

  • 10:57:29

    KIMMITTThank you, too, Diane.

  • 10:57:29

    REHMAnd thanks for listening. I'm Diane Rehm.

  • 10:57:32

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth, Lisa Dunn and Nikki Jecks. The engineer is Erin Stamper. A.C. Valdez answers the phones.

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