Europe’s economic crisis has deep roots

Bob Moon Sep 13, 2011

Europe’s economic crisis has deep roots

Bob Moon Sep 13, 2011

Kai Ryssdal: You could probably create a chart of American economic news coverage the past, what, year or so, and it would go like this: A lot of stories about the U.S. budget fight, then European debt crisis, then the debt ceiling thing, then European debt crisis, then the jobs bill fight, then the European debt crisis.

Point being, one of those stories keeps coming back. And not necessarily in a good way.

There’s a fresh case of Euro-induced jitters today. Everybody from to global banking executives to political leaders are alarmed about the eurozone’s failure to get its debt dilemma under control. Our senior business correspondent Bob Moon explains we’ve been close to the edge with this crisis before. But perhaps not this close.

Bob Moon: Europe has seen this coming for years.

Sir Howard Davies is the former deputy governor of the Bank of England. He says it all came to a head when the shaky mortgage-backed securities that the U.S. had exported to European banks helped push some nations to the brink of default.

Howard Davies: The initial crisis began, of course, way back in 2007 in subprime lending in the United States, then rolled forward from being a financial system crisis into being a fiscal crisis in Europe. Partly because governments, of course, took the strain, provided funding to keep the economies going and then they ended up with large amounts of debt. And that problem is one they find extremely difficult to resolve.

Many European governments could ill afford those bailouts when they’d already been spending extravagantly and creating their own housing bubbles and other financial troubles — particularly in Greece.

Michele Boldrin is an economics professor at Washington University in St. Louis.

Michele Boldrin: Some of the problems have purely to do with the fact of the Greek government and public expenditures completely out of control. And they haven’t been able to bring it under control.

Which continues to breed fear that European banks could be on the hook for billions in loans they made to Greece.

At the University of California at Berkeley, economics professor Barry Eichengreen says there’s a Catch-22, though, as Germany presses for further austerity measures.

Barry Eichengreen: Greece is being told to cut domestic spending. They stop spending, firms stop producing, the economy shrinks and the government’s revenues go down even faster than anticipated.

Eichengreen says that’s created a fiscal spiral with no easy solution.

Eichengreen: The markets have already concluded that there is going to have to be more help for Greece, and possibly the other southern European countries, to enable them to get growth going again.

Today, the markets seemed to find reason for hope in Germany’s determination to prevent a Greek default. Prof. Michele Boldrin is also hopeful, but realistic.

Boldrin: You know, forecasting when humans are in the middle is always complicated. When those specific humans are politicians of very different nations with a huge conflict of interest, it is even more difficult — it is impossible.

Stay tuned.

I’m Bob Moon for Marketplace.

Ryssdal: Stay tuned, he said. So tomorrow, part two of our little economic saga from Europe: What happens if?

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