Why Europe's Debt Crisis Matters To Americans

Greece's financial problems are not Greece's alone; just look at the scale of the newly announced European bailout plan. Reuters finance blogger Felix Salmon talks to host Guy Raz about Europe's debt crisis and why it matters to Americans.

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GUY RAZ, host:

For more on Europe's debt crisis, we turn now to Felix Salmon. He blogs about finance for reuters.com. Felix, welcome to the program.

Mr. FELIX SALMON (Financial Blogger, Reuters.com): Thank you.

RAZ: Okay, I'm looking right now at the cover of the latest Economist magazine. You may have seen it. The headline...

Mr. SALMON: It's one of the best Economist covers in years. I love it.

RAZ: The headline says: Acropolis Now. There's a photo of German Chancellor Angela Merkel dressed in military fatigues, shouting: The horror, the horror obviously an allusion to "Apocalypse Now." Can Europe's debt crisis be resolved without Germany?

Mr. SALMON: No. You need Germany because Germany has got the money, and so if anyone is going to be bailing out Southern European countries like Greece, it's going to have to be Germany.

RAZ: Now, what's not entirely clear to me about the situation in Greece is that my understanding is the country accounts for about two-and-a-half percent of Europe's total economy. So why was there a possibility that the entire eurozone could collapse because of Greece?

Mr. SALMON: It's true that Greece has a small economy. It's smaller, actually, than the economy of Ohio. But it has an outsize importance because it's a sovereign, and thats the important part here, that it's one of the members of the eurozone. And if Greece were to default, there's an extremely high chance that it would have to leave the euro, and there's no mechanism for any country leaving the euro, and that would essentially put to an end the great European-unity project, which was started by Angela Merkel's predecessor, Helmut Kohl, only about 10 or 15 years ago.

RAZ: So they figured out how to get people into the euro, but nobody thought about the possibility of ejecting somebody from the eurozone.

Mr. SALMON: In fact, they deliberately made it impossible because they felt that if there was a way out, then people might take it. So they tried to structure things so there wasn't a way out, so that countries would be forced to live up to the Maastricht Treaty, three percent deficits, 60 percent debt-to-GDP ratios.

And of course, that just simply never happened in Greece. The latest Greek deficit is 13 percent, and it has a debt-to-GDP ratio of almost double the maximum allowed under the European rules.

RAZ: What does the crisis in Europe mean for our economy? I mean, how does it affect us here?

Mr. SALMON: Right now, the global financial system is based around two incredibly strong, important currencies, the euro and the dollar, and what happens to the euro has enormous effects on what happens to the dollar.

It's all a little bit theoretical, and it's all extremely unpredictable. No one really knows what's going to happen if a eurozone sovereign like Greece or Spain were to default or to devalue, but it would cause all manner of ripple effects and repercussions.

Remember that Greece is still investment grade from two of the three credit rating agencies, and it's baked in to the European Currency Union in a way that it can't really leave without massive fault lines appearing across the continent.

And that is not good for the U.S. If things start falling apart, and especially if the currency union starts falling apart, a lot of the companies in the U.S. which do business in Europe are going to see their business changed and altered in negative and unpredictable ways.

RAZ: That's Felix Salmon. He is a financial blogger for Reuters. Felix Salmon, thanks so much.

Mr. SALMON: Thank you.

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