Will the eurozone pull through crisis?

Barry Eichengreen

TEXT OF INTERVIEW

Kai Ryssdal: One euro could be had for just a $1.24 cents today. That's the lowest the single currency's been in a year and a half. Foreign exchange markets can be squirrelly in the best of times. The Greek debt crisis didn't help. And neither did a speech last night by former Fed Chairman Paul Volcker. Volcker said he's not sure having a single currency for 17 different countries makes sense anymore. To talk about what might or might not happen in Europe we've got Barry Eichengreen on the line. He is a professor of economics and political science at the University of California, Berkeley. Professor, good to have you with us.

Barry Eichengreen: Good to be here, Kai.

Ryssdal: Well, if Paul Volcker is worried about the euro and whether or not it makes sense to have a single currency over there, should the rest of us be?

Eichengreen: Well, there's plenty of reason to worry. Europe has had its Lehman Brothers moment, but it's put a trillion reasons on the table in the last week to believe that they're now serious and ready to go forward.

Ryssdal: But what about the underlying premise of that currency itself? They threw it out there 10 or so years ago and said: OK, all you eurozone economies catch up and do everything that say the Germans are doing because that's the functioning economy in Germany. I mean, is the premise still valid?

Eichengreen: The premise is still valid, but the Europeans only ever built half a monetary union. They have excellent bank notes, they have an excellent central bank still. But they haven't put in place the structural reforms and the budgetary rules with teeth that they need to make the monetary union work.

Ryssdal: What might those be, then? I mean, what could see the eurozone through this crisis?

Eichengreen: First, the individual countries have to do their homework. The Portuguese and the Spanish -- and I think they're beginning now. They don't want to turn into Greece. The prime ministers of the two countries have put serious budgetary reforms on the table. Now they need to pass those into law, and they need to do the structural reform to make their economies more flexible to go along with the budgetary reform.

Ryssdal: And yet we read this morning in the papers that in those negotiations over that bailout package last weekend, French President Nicolas Sarkozy literally banged his fist on the table and said: I will take France out of the euro if we can't figure this out.

Eichengreen: Well, Mr. Sarkozy is emotional, isn't he? You have to remember the context. The context was we need to solidify this monetary union. We need to come to the support of Greece and the other countries that are under pressure now. So he certainly ratcheted up the rhetoric, it would appear. But the point was to emphasize that the European countries need to move forward and complete their monetary union project.

Ryssdal: If somebody did try to pull out of the euro. Let's say just France because we've been talking about them. How might that work? What would happen?

Eichengreen: I've always likened to burning down your own house, that you would precipitate the mother of all financial crises. Countries would be worried about what you would be doing to your own currency once you reintroduced it. Would you be reintroducing it to do depreciate it against the euro? That presumably would be the reason to put the drachma back in place.

Ryssdal: The Greek currency, right? Yeah.

Eichengreen: So to prevent people from running on your banks, you would have to close down your banking system. To prevent people from running on your bond market, you would have to close down your financial markets for a period. And that would not be good for the economy.

Ryssdal: It's almost like the guy who, you know, holds the gun to his head and says, "Stop or I'll shoot." I mean, is that sort of what it is?

Eichengreen: Pretty much at this point. The guy who holds the bazooka to his head, as people in financial markets have put it. They made a commitment in 1999, when they created the euro, that will be very, very hard to reverse.

Ryssdal: Barry Eichengreen, he's a professor of economics at the University of California, Berkeley. Professor, thanks so much for your time.

Eichengreen: OK, Kai. Thank you.

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