Eurozone Prescriptions Easier Said Than Done
ROBERT SIEGEL, HOST:
Some of the prescriptions for Europe's economic crisis are a lot easier said than done, for example, greater fiscal union. Matthias Matthijs teaches political economy at the Johns Hopkins University School of Advanced International Studies. And he says when it comes to economic integration, all the low-hanging fruit is gone. Professor Matthijs joins us. Hi.
DR. MATTHIAS MATTHIJS: Hi.
SIEGEL: And what's so difficult about fiscal union?
MATTHIJS: The difficulty about fiscal union is that it goes through the very heart of national politics these days. An old saying is that politics is about who gets what, when and how. When you talk fiscal policy, about taxation and expenditure and you share it, you talk about redistribution. And distribution is at the heart of everything at fiscal policy, and that's something very new for the European Union. So far, there were just fiscal rules. You stuck to certain budget rules, 3 percent, 60 percent debt. But the rest was all nationally determined. Now, if they want to move to a fiscal union, that means that certain countries will have a say over other countries' fiscal policies.
SIEGEL: Fiscal policy is a fairly broad, if vague, phrase. The columnist Paul Krugman likes to point out that in our federal system, if a state goes broke, it may not have much money to spend on services, but Social Security and Medicaid and Medicare come from Washington, so they're still OK. There's nothing comparable to that in Europe.
MATTHIJS: No. There's nothing comparable to that in Europe. So the euro dreamers - the United States of Europe crowd - wants to have a European pension, a European maybe health insurance. The problem with that is that there's just no political will to do this because all these systems are so old and they've been nationally organized for so long. So that would mean that now suddenly German taxpayers would finance Greek pensions, and there's simply not the will or the electoral support for this.
SIEGEL: You would say the possibility of that is somewhere between zero and zero, or is there any chance at all?
MATTHIJS: Somewhere between minus one and zero.
SIEGEL: And zero. And yet, fiscal union wouldn't be very meaningful if it didn't get at the items that occupy most of the budgets of governments?
MATTHIJS: No. That's a good point. I think the only way to create the kind of solidarity would be to have a kind of common European pension, but I think we're a long way from it because that's the beautify of the American system, as Krugman rightly points out, right? Even states that suffer, they can get through federal transfers money. But to set that up now, I just don't think they can do this in the next week.
SIEGEL: Sylvia Poggioli quoted the Italian prime minister, Mario Monti, today, saying there's only one week to save the eurozone. He means between now and the European summit. Why? What is it about this week unlike every other week of the past year that is so critical?
MATTHIJS: Because of the financial market pressure on both Spain and Italy, but especially Spain right now. The bond rates have surged up, and they're unsustainable. So basically, the problem is Spanish banks. Simply, they're too big to bail at this point, given the amount of money we have in the EFSF, the European Financial Stability Fund, and that's why Spain is too big to fail. If they will allow this to happen, then there will be a run on the banks from the periphery to the north, and that's the endgame for the euro.
SIEGEL: Let's say that Italian Prime Minister Monti's warning that there's only a week to save the eurozone, let's say it's unheeded, and there's a run on the banks in Italy and the breakup of the - worst case, what does that do to us? What does that do to us here in the United States?
MATTHIJS: This affects your markets. This affects your banks because what happens is the run on the banks starts in Southern Europe. This quickly spreads to the Northern European banks, especially banks in Germany and France who are heavily exposed to bonds in Italy, bonds in Spain and so on. If those banks go down, then it affects London and New York just as much because there's a heavy, heavy trans-Atlantic entanglement of the financial sector. So this is terrible news for the United States.
SIEGEL: Professor Matthijs, thank you very much for talking with us.
MATTHIJS: You're welcome.
SIEGEL: Matthias Matthijs of the Johns Hopkins University School of Advanced International Studies.
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