The Euro: Why Should We Care?

One day after the debt ratings for Greece and Portugal were downgraded, Standard & Poor's on Wednesday has cut the credit rating for Spain. The move sparked a sell-off of stocks in markets all over the world, pulled the euro to its lowest point in a year, and diminished hopes in Europe that the debt crisis could be contained. Michele Norris talks to Ken Rogoff, a Harvard economics professor and former chief economist of the International Monetary Fund, to find out how this could affect the financial picture in the U.S.

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MICHELE NORRIS, host:

It is hard to overstate the economic turmoil in Europe, but with so many people here at home struggling to find work and pay their bills, the question remains: Why should Americans care what happens in Greece or to the euro?

To answer that question, we turn now to Kenneth Rogoff. He's professor of economics at Harvard University. He's also the former chief economist at the International Monetary Fund.

Welcome back to the program, Mr. Rogoff.

Professor KENNETH ROGOFF (Economics, Harvard University): Thank you.

NORRIS: So let's start with that basic question. Why should Americans care about a financial crisis half a world away?

Prof. ROGOFF: Well, this is a profound crisis in our biggest trading partner. It's our biggest export destination. If Europe suffers a crisis, has a growth slowdown, it's going to hit jobs here. It's going to hit our growth. Eventually, it's going to hit our financial markets.

NORRIS: I understand that it would hit our export market also. Up to 20 percent of U.S. exports go to Western Europe.

Prof. ROGOFF: That's absolutely right. I mean, they're our most important export destination, and that's part of how we're still struggling to come out of our recession. And sure, it's better that it's happening in Greece than in California, but I would I think that's cold comfort. This is not positive, and we don't know where it's going to end. This is a very, very delicate situation that could spin out of control.

NORRIS: We've had our own financial troubles in this country. Is it possible that the Greek problem could wind up teaching us some lessons?

Prof. ROGOFF: Well, it's not so much what's happening to us right away, but we have our own government debt piling up. We Americans, you know, love to borrow. And Greece was doing that merrily for years, and then wham, they got hit.

And I don't think our day of reckoning will look like this, but it will come when we have to face higher interest rates, we have to tighten our belts, and we might think it's not so easy when it happens to us.

NORRIS: To the extent that our economy is in some way tethered to the eurozone, can you point to specific areas or sectors in our economy here in the U.S. that are directly affected by what's going on in the eurozone and specifically in Greece?

Prof. ROGOFF: Well, specifically in Greece, it's fairly narrow. Their, you know, big industry is tourism. It's only a very small percent of the eurozone, two and a half percent, something like that. But the fear is that it hits Spain, that it hits Ireland. The U.K. is even nervous about they're still struggling to come out of a recession.

So we export all kinds of things: financial services, all kinds of services, cars is a big export for the United States and Europe, a wide variety of capital equipment. I mean, it's a very important export destination. It's going to have a material impact on jobs if they're not growing.

NORRIS: What about the impact on the dollar?

Prof. ROGOFF: Well, in the short term, the dollar has to benefit from this. I mean, the dollar has its own problems, but the euro's problems are bigger, and people aren't going to be thinking about diversifying out of the dollar right now into the euro. But over the longer term, if Europe were to resolve this, it could make the euro stronger.

NORRIS: Is this, when we talk about this possibly being some sort of virulent contagion, is it something like the Asian financial flu or much more like something like Ebola, which was mentioned in Eleanor Beardsley's piece, something far scarier?

Prof. ROGOFF: The Ebola is a bit hyperbolic. No, it's more like the Asian financial crisis in the sense that investors see what's happening to Greece, and if they see that Europe is not drawing a line in the sand, that Greece goes down, there are a lot of other weak countries that have over-borrowed that are still wanting to borrow more: Portugal, Spain, even Ireland has problems. And they're going to have a very hard time. They're going to have to tighten their belts hard and fast. It may not be politically feasible.

So this could spread very, very fast, and once they run into trouble, you could even see hitting countries in Latin America, Mexico. I mean, there's I do think they will draw a line, but it's not quite clear where yet.

NORRIS: Kenneth Rogoff, thanks for being with us.

Prof. ROGOFF: Thank you.

NORRIS: Kenneth Rogoff is a professor of economics at Harvard University and the former chief economist at the International Monetary Fund.

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