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Debt crisis shows flaws in euro system
Euro notes and coins lie on a table.
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TEXT OF INTERVIEW
Bob Moon: I saw a headline today that nicely sums up the ongoing financial worries across the pond, as they say. It read, "The euro is still trash." Actually, the European currency hit a three-week high today, thanks to a successful Spanish bond auction that offered some encouragement. But the long-term doubts linger on, and the euro retreated again in later in the day. So why is the financial plight of a few countries calling the whole system into doubt?
Our European bureau chief Stephen Beard joins us to explore that question. Greetings, Stephen.
Stephen Beard: Hello Bob.
Moon: We've heard about the debt problems in particular eurozone countries, foremost Greece, Portugal, Ireland and Spain. Why is this a problem for the euro itself? I mean, we've heard talk of insolvency right here in California and a lot of other states in the U.S. And nobody's talking seriously about the greenback going away anytime soon.
Beard: No. It's a fair question. But I mean, if it was just one country -- like Greece, for example, that got into trouble, that defaulted -- it would probably cause a bit of a stir, but the euro would easily survive. The trouble is, investors are now fretting about a lot more, the debt of much bigger economies -- Spain, which is four times the size of Greece; Italy is the really big one. If these countries defaulted, because they represent together such a big chunk of the eurozone, about 20 percent, that would knock the single currency sideways, very severely dent its credibility.
Moon: Well, the single currency for the euro nations has been around for more than a decade. Until the start of this year, it's been really been a success story. Is this just a general fiscal crisis or has it actually exposed some flaws in the whole concept?
Beard: No, it has very much so exposed some major flaws. And the obvious one is that this is just one currency, one central bank, one interest rate. But 16 very different countries, all pursuing their own separate public spending policies -- some prudent, some not so prudent. And this has become a major issue in a recession. I mean, if you think about what happens in a downturn in the U.S., the taxpayers in the more prosperous parts of the U.S. accept that their taxes will have to go to help the poorer parts of the country. That doesn't happen so readily in a collection of 16 different countries, however. Here's Geoffrey Wood, professor of economics at the Cass Business School:
Geoffrey Wood: I think citizens generally feel obliged to have some sense of solidarity. There is no such sense of solidarity between the north and the south of Europe. And why should there be, when the Germans retired at 65, the Greeks at 53?
Beard: And the Germans having forked out more than 20 billion euros to bail out Greece and 100 billion on the eurozone-wide bailout package, are giving every indication that they're not prepared to put their hands in their pockets again.
Moon: So if this debt crisis drags on -- or I guess more importantly, if it expands -- is the euro going to collapse? Is this going to happen?
Beard: Well, it is possible, no doubt about it. There are a number of possible scenarios. I mean, the Germans could rebel and say, "That's it. We've had enough. We're going back to the Deutsche mark." There's another possibility that some or all of these southern European states could pull out. They're being forced to cut their public spending, when their economies are in a pretty fragile state. Ruth Lee, chief economic adviser to Arbuthnot Banking Group, says this is a recipe for trouble.
Ruth Lea: Those austerity packages are almost guaranteeing a situation where economies can't grow, unemployment will rise. You begin to question the whole... cohesion of these countries. I don't think you could muddle through.
Moon: How likely is it that the Germans or the south Europeans would pull out of the euro and that the euro might disappear? And what would that mean for the United States in particular?
Beard: Well, this is still unlikely possible, but unlikely. I mean, German and French banks that have lent billions to these south European countries could kiss that money goodbye because the south Europeans back with their own weak currencies would really struggle to repay their debts. It would mean economic mayhem in Europe, one the U.S.'s biggest markets. It would send the dollar sky rocketing and that would be bad for U.S. exporters. So, we should probably pray and keep our fingers crossed that it won't happen.
Moon: Hoping against hope here. Marketplace's Stephen Beard in London. Thank you.
Beard: OK, Bob.
I cannot believe that you gave Paul LaMonica's "The Buzz" any air time. Mr. LaMonica consistently has terrible analysis of economic conditions and seems to forget some of the most fundamental principles of macroeconomics. I have come to expect a higher standard from Marketplace, and I am slightly disappointed that you cited the reporter's sensationalist headline at the top of this story.
Living here in Germany, in Bavaria, Amberg I'm able to talk to and have friends that are pretty regular Joe's. Some very smart, some very politically savvy and some that just see it when they watch the news in the local coffee house (to relate, German coffee houses are miniture Starbucks mixed with a bar). What I get from the average person is that the Government is out of touch with it's people, humm this sounds familiar as an American. Germans are known for holding money but, when your income tax rate starts at 19% and goes up to 50% and they raise every other tax besides sales to bail out other nations people have a tendency to hold back even more spending. Most German's, though it looks different from the media, would not mind having more of an American business mentality. Talk to a business owner and they "WISH" there was a such thing as a right to work policy or, if you could give two weeks notice and no matter what, you where still fired. Many Germans would like to work pass 65, pass there 50's actually but, unless your in management companies do not like to hire people in there late 40's and above which is funny because the average child bearing age is between 33 - 37. Overtime does not exist in Germany without, almost sever, taxing of income, the total income. Stores stay open later now but, if a stores stays open until 8:00p.m and it's not a resturant it has two shifts. Include items like this with policies such as Kindergild that gives money to familes and single women that have chldren to help increase the decreasing population,(the government actually gives single pregnant women a year off as well as Kindergild to get things in order like finding day care, registering in a local government for government services, buying baby supplies, etc...) and you have a country, that depends mainly on exports, that itself is strung out but statehood, which is what the Eurozone wants without being states, is a foerign concept. When I explain to my German friends that taxes aren't the same from state to state, teachers are state government employees and states govern themselves unless a federal law overrides it, that the president can't just come and take over and they are amazed... bet yet bewildered. Statehood is a very hard concept to grasp. In the long run Germany,a s well as other European countries, are going to have to cut social benefits, defalte the Euro and increase work hours or, since they say they work 8 hours even though you have an hour lunch, four 15 mintute breaks and don't work pass 4:00p.m, make the 8 ours more productive.
