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Debt crisis shows flaws in euro system

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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.

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