European Debt Crisis

Greece reaches austerity deal

David Brancaccio Feb 9, 2012

David Brancaccio: How’s Europe, scale of one to ten, with ten being a financial cataclysm? Let’s put it down to five, after Greece’s Prime Minister confirmed that fellow politicians have agreed to the severe budget cuts demanded of them. Without serious and painful budget cutting there is no European bailout for Greece and without a bailout, an ugly default is in the cards. So the euro zone mess is a five, a notch more stable than overnight.  It’s a subjective reading, of course.

Joining us is Matthias Matthijs a professor of political economy at the Johns Hopkins and American Universities. Professor Matthijs, good morning.

Matthias Matthijs: Good morning.

Brancaccio: So the sticking point for Greek politicians overnight was a reluctance to cut pensions further, that apparently has been resolved. Is a new austerity plan in Greece, do you think, good or bad for Europe?

Matthijs: Well, I mean the market seems to like it, the European Central bank seems happy. I mean this is a significant step I think. They have agreed, the political parties have agreed. Now of course they’re going towards elections in Greece and we’ll see what will come out of this. I mean, this actually has to be implemented now. It’s one thing to agree on this.

Brancaccio: Yeah you put in an austerity plan, it has an effect, there’s real pain that comes from these cuts.

Matthijs: There is real pain. It means firing public sector workers. It means people have to be re-trained. It means that, kind of a dramatic nosedive of the economy, austerity measures in the short-term. So I think the financial picture is interesting because bondholders have accepted up to 70 percent of losses.

Brancaccio: That is a huge haircut, if that’s the case.

Matthijs: Yeah, that’s a big, big, big haircut. I think the question is what is the European Central Bank is going to do, with its holdings of Greek debt. And Mario Draghi was very clear not to discuss that with the press or anybody else.

Brancaccio: Yeah, the European Central Bank chairman just wouldn’t go there about those details. But it leaves a problem — even if now Greece seems on track to get the $172 billion worth of European bailout money, they have to grow their economy moving forward.

Matthijs: Yep. And it’s not quite clear how that’s going to happen. I mean, normally, one of the traditional ways of growing out of a problem if you want to isolate the country, is to export to the rest of the world economy, starting with the European partners. Main trading partners are then Italy, Spain, Germany — and there’s no sign that these economies are picking up soon. I mean, Spain and Italy are going to be in recession for all we know, and not just this year but next year also, according to the IMF. Trying to get a deficit under control is difficult if you only focusing on austerity, but I think that’s a message I’ve been telling you for quite a while.

Brancaccio: Matthias Mattijs at John Hopkins University and AU. Thank you very much.

Matthijs: You’re very welcome!

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