Germany, France Tend To A Euro In Crisis

The swings in the U.S. market underline the contradictions in the European Union's economic underpinnings. The two most powerful nations in the EU plan a summit to seek a way out. Guest host Jacki Lyden talks with NPR's Tom Gjelten.

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JACKI LYDEN, host: As we've mentioned, this wild week was like nothing we've seen since the financial crisis of 2008. Back then, the panic was prompted by the fear that big Wall Street banks might be failing. This time, much of the trouble has originated in Europe. Governments there are dealing with their own debt crisis, and it's worrisome enough to call into question the future of the euro currency. Here to review the developments in Europe is NPR's Tom Gjelten in Berlin. Hi, Tom.

TOM GJELTEN: Hi, Jacki.

LYDEN: So, what's happened that's caused such concern in Europe this week?

GJELTEN: Well, Jacki, there was tremendous gyrations, fluctuations on the European stock market, even more than on Wall Street. People here are really anxious about the future. Europeans like the euro currency. They associate it with prosperity, and I think they're worried they're going to lose it. Also, they're really angry at their leadership. A meeting was announced this week for next Tuesday in Paris between German Chancellor Angela Merkel and French President Nicolas Sarkozy. And that was the first time, I think, that people really had some sense that the European leaders were going to be getting it together. So, just a tremendous amount of anxiety about the future in Europe.

LYDEN: What went wrong? The euro was so ballyhooed when it was introduced in 1999.

GJELTEN: You know, Jacki, I think this goes to the very design of the European Monetary Union. The idea was that all countries would use the same money. This would be issued by the European Central Bank, which kept a tight lid on money supply. That meant the money was sure to hold its value. So, banks were not afraid to lend. But what happened is that governments were free to set their own tax and spend policies. You had over-borrowing, overspending. Now, a lot of these governments can't pay those loans back. They face the prospect of default. So, politically, this contradiction between monetary union and political independence has really come to the fore and it's causing this crisis.

LYDEN: Tom, this week, of course, we were looking a lot at the American stock markets, but there was even more panic, as you have pointed out, in the European markets.

GJELTEN: That's right, Jacki, and I think the reason for that is we began to see the outlines of a real worst-case scenario. Basically, these governments that did the most borrowing are now having trouble making interest payments on their debt. They face the prospect of default, and that would be disaster not just for those governments but for all those banks that loan those governments money - not just Spanish banks and Italian banks but also French banks. And that's just the first stage because there are other banks in Germany and in the U.S. that have invested heavily in those French and Italian and Spanish banks. So, if the bunch goes, the second bunch of banks could follow. You'd have a real global banking disaster. And I think that people figured that out this week and that's why investors here got so nervous.

LYDEN: Sounds like a really bad movie. Is there a plan to deal with the situation?

GJELTEN: European authorities are desperately trying to block this chain reaction from playing out. They're spending billions of dollars buying that troublesome government debt to keep those governments from defaulting and take the pressure off the banks. But the problem, Jacki, is where does this end? You know, France's position's now in question. If you're going to intervene in this way to stabilize the whole system and keep Europe together, it would take trillions of dollars - I should say trillions of euros, and euros are even more than dollars.

LYDEN: Now, Germany seems to be as a major player, perhaps the savior. What's the German view on whether to move toward more European Union or less?

GJELTEN: Well, Jacki, the Germans know that actually the fate of Europe is in their hands. Germany is the only country with the wealth to back up this huge European bailout. It's a huge political challenge for German politicians because you've got German financial interests who are worried about bank failures. They're lining up behind the rescue plan. But because that rescue plan will be so expensive, there's a lot of opposition to it among ordinary Germans. I mean, this is the biggest political challenge that Germany has faced since reunification.

LYDEN: NPR's Tom Gjelten, speaking to us from Berlin. Thanks so much for reporting in.

GJELTEN: Good to talk to you, Jacki.

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