Eurozone's Looming Financial Crisis

For a long time, much of the world saw the eurozone sovereign debt crisis as Europe's problem. Now world leaders, including the United States, realize a eurozone meltdown could have dire consequences for everyone. They are working up a massive rescue plan whose contours are beginning to emerge. Although Britain does not use the euro, that nation's politicians are using their party conventions to issue dire warnings about the euro's fate. And one eminent economist is proposing a novel solution to limit the impact of the European debt crisis.

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STEVE INSKEEP, host: It's MORNING EDITION from NPR News. I'm Steve Inskeep.

DAVID GREENE, host: And I'm David Greene. Here's a sign of how widespread Europe's financial crisis could become. Even countries that do not use the euro have been talking more and more about how the trouble with European debt affects them.

INSKEEP: The U.S. Treasury Department has been offering Europeans advice, hoping to avoid another shock to the world economy. And Britain is deciding how it wants to respond to the crisis just across the English Channel.

GREENE: The British never joined the eurozone. They've stayed aloof, holding on to their famous British pounds, but they're tightly linked to the rest of Europe not to feel the pain of the crisis.

INSKEEP: Some are talking about years of lost economic growth. NPR's Philip Reeves reports from London.

PHILIP REEVES: Autumn has begun in Britain and so has the speech-making season. The big political parties are holding their annual conferences. Right now it's the turn of the main opposition party, Labour. One subject looms large.

(SOUNDBITE OF CONFERENCE)

ED BALLS: The conference, let's face the facts. These are the darkest, most dangerous times certainly in my lifetime.

REEVES: Ed Balls is Labour's shadow chancellor, which means he holds the finance brief.

BALLS: Britain, the world, is facing the threat of something that most of us have never read about other than in the history books: a decade of economic stagnation.

REEVES: For a long time, this crisis tended to be seen as Europe's problem. British politicians congratulated themselves for not joining the euro. The world's heavyweights watched from the sidelines and urged the dithering 17 eurozone nations to sort themselves out. Attitudes have changed.

NGAIRE WOODS: I've just stepped off a plane back from Washington, D.C., the annual meetings of the IMF and World Bank, where all finance ministers and central bank governors were collected to work out what to do about the crisis.

REEVES: Professor Ngaire Woods is director of the Global Economic Governance Programme at Oxford University.

WOODS: And I think it's fair to say it was one of the most sobering meetings ever. There was certainly a sense that this was a crisis in the offing that could expand very rapidly. What was disappointing about the outcome of the meeting was that there was no clear plan for how we move forward and I think that's what we've got to look for in the next couple of days.

REEVES: It's now widely accepted Greece cannot avoid default, that it must have its debt restructured, and that this could trigger a banking crisis in Europe that'll spread to the U.S. and beyond. Woods says two things therefore need to happen first.

WOODS: One is to ensure that European banks, including Greek banks, the morning after they restructure, are recapitalized so there isn't a run on the banks. And the second thing they're going to have to put into place are huge liquidity lines to countries like Italy and Spain so there isn't a run on those countries.

REEVES: As world leaders frantically attempt to hammer out a rescue plan that'll end the eurozone crisis once and for all, speculation is running riot. This roughly centers on a plan with three parts - an orderly Greek default in which, say, half of its debts are written off, recapitalizing Europe's banks, to make sure the Greek default doesn't cause their collapse, and a massive increase in Europe's bail-out facility, raising its firepower from billions to trillions of euros.

There are many obstacles, though. Some of those measures may need approval by each of the 17 eurozone nations. Their parliaments still haven't finished signing off on an earlier agreement to beef up Europe's bailout facility. And none of this really solves the eurozone's fundamental structural problems, which is why another even bigger idea is circulating in the corridors of power - the creation of a very large, very tough European monetary fund.

WILL HUTTON: It would be an IMF for Europe, but with one currency. You would have a governing board, the same way that the IMF does. It would be managed as an intergovernmental institution within the eurozone. Two-thirds of the votes would probably be held by eurozone people, and a third by non-eurozone people.

REEVES: That's the economist Will Hutton, principal of Oxford's Hertford College. It's often argued the only way to ensure the eurozone's ultimate survival is through fiscal and political union, and that means a loss of sovereignty for its 17 nations. Hutton challenges this thinking.

HUTTON: I don't accept that. There's no need, actually, to kind of rob countries of their desire to fix their own tax rates or their own spending rates. What you need them to do is to have the budget - the gap between spending and tax needs to be closely coordinated by the European Monetary Fund.

REEVES: Hutton says such a fund should have been created when the euro was launched. Now he's not at all sure it'll come soon enough to rescue the world from crisis.

HUTTON: If it is, we'll get through this. If not, I think the euro could go down.

REEVES: Philip Reeves, NPR News, London.

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