What Went Wrong With The Greek Economy

Guests

Tom Gjelten, NPR correspondent
John Ydstie, NPR correspondent

The Greek economy teeters on the brink of collapse. Tens of thousands of Greeks continue to protest harsh austerity measures intended to help stabilize an economic crisis that threatens to spread to Spain and Portugal — and that is wreaking havoc on Europe's common currency, the Euro.

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REBECCA ROBERTS, host:

This is TALK OF THE NATION. Im Rebecca Roberts in Washington. Neal Conan is away.

We're going to spend the majority of this hour talking about one of the biggest killers in America, stroke. Neurologist Olajide Williams just released a guide for stroke survivors and their families. If you're a stroke survivor, or if someone in your family has had a stroke, you can send us an email now with your story: talk@npr.org.

But first we want to start in Greece. One day after three bank employees were killed in violent protests in Athens, the nation's economy continues to teeter on the brink of collapse. Tens of thousands of Greeks have clashed with police over a government plan to impose new taxes and draconian budget cuts, austerity measures the Greek parliament approved in a vote just today.

Greece is required to take those harsh measures if they want to get bailout money from their European neighbors, money they need to make good on debt that comes due as early as next. The austerity is also intended to help contain a potentially contagious economic meltdown that now threatens Spain and Portugal and other nations that share the euro.

Today, we're looking at the bigger picture: what's happened in Greece, how it's reverberating throughout the EU and what Europe's debt crisis might mean for the United States. And we'd like to hear from our European listeners. Are you concerned about the debt crisis? Give us a call. Our number here in Washington is 800-989-8255. Our email address is talk@npr.org, and you can join the conversation at our website. Go to npr.org, and click on TALK OF THE NATION.

To help us understand what's happening in Europe and what it means for us, we're talking with NPR correspondents Tom Gjelten and John Ydstie. First, Tom Gjelten joins us from Madrid, Spain, where he's following the reverberations of the crisis there. Welcome.

TOM GJELTEN: Hi, Rebecca.

ROBERTS: So the Greek parliament voted to approve these austerity measures today. They have to vote again before it'll take effect. Is it safe to say that yesterday's violence didn't really slow the lawmakers down?

GJELTEN: Well, actually three members of Prime Minister Papandreou's own party refused to support that measure, even though it did, of course, pass easily because he does have a strong majority in the parliament, but there is opposition. You can't say that, you know, that all the political spectrum in Greece is supporting this. Between the violent demonstrators outside and, you know, members, as I say, even of his own party, it's clear that there is real divisions in Greece.

And this is bad news, Rebecca, because what this means is that Greece evidently, if we judge from these protests and this opposition, is not going to be able to push through these austerity measures without some political cost. Social cohesion could be hurt, and, you know, this raises the question, as you look at this from afar, and investors are looking at this very carefully, they raise the question of whether Greece ultimately will be able to go through with all these austerity measures.

I mean, the political obstacles, even though they got this passed in parliament today, the political obstacles are really big. I think that's one of the reasons that we see this anxiety in the European markets, and in the U.S. markets, as well.

ROBERTS: Let's take a quick step back. Give us a brief history of how Greece got here.

GJELTEN: Well, basically, Rebecca, Greece, as well as Spain and Portugal and some of these other countries in the Mediterranean area, took the euro as their currency without having demonstrated a lot of fiscal discipline. I mean, you could say they were sort of the profligate spenders.

And what happened is that once they had and Greece is the best example once Greece had the euro as its currency, the Greek government could borrow at very low rates. And what they did is they borrowed too much. They spent too much.

You know, one of the rules of the European Monetary Union is that governments with the euro are not supposed to run fiscal deficits larger than three percent of their gross domestic product, but there was no mechanism for enforcing that rule. And Greece and Spain and Portugal and Italy basically ignored that rule, ran up big fiscal deficits and because they had access to this easy money, and now they're in trouble.

ROBERTS: And you're in Spain, obviously keeping an eye on that. What is the likelihood of this contagion?

GJELTEN: Well, the idea of contagion is really psychological, Rebecca. I mean, the problem is that these governments, when they do run deficits, they can't print money to cover those deficits. They can't print money to pay their debts. They can't devalue their currencies to make them more competitive. What they have to do is borrow, and they borrow on the bond market.

ROBERTS: And we should just explain that they can't print money because they're all on the same currency.

GJELTEN: Exactly.

ROBERTS: One country can't just suddenly start making more euros than others.

GJELTEN: It's not up to them. So they are dependent on investors to loan them money, and the investors are now demanding much higher rates, interest rates, on their loans to Greece, and to an extent to Spain and Portugal as well, and because of this psychological fear.

And having seen how - Greece is now paying more than eight percent more than Germany has to pay on its loans. Spain is paying about point-and-a-half percent more. Portugal is paying about three percent more. And as investors look at what's happening in Greece, they begin to charge more to Spain and Portugal.

And it's not necessarily altogether rational. It's somewhat psychological and emotional, but that's the way the fear spreads in the markets.

ROBERTS: Also with us to talk about what this all means to the U.S. is NPR's John Ydstie. He's here in Studio 3A with me. Welcome.

JOHN YDSTIE: Hi, Rebecca.

ROBERTS: The instability in Europe already rattled U.S. markets earlier this week. Will we see more of that?

YDSTIE: Yes, we will. In fact, the market's down today again about a percent and a half, and, you know, I think that's likely to continue until things settle out.

But remember the U.S. stock market had risen very sharply over the last year since the financial crisis and recently was much higher because of confidence in the U.S. recovery.

So it's not surprising, actually, that given the instability, there's a bit of pullback now. And I think one of the effects on the U.S. economy is that if the European economy slows down as a result of this, the recovery is going to be a little bit slower, and that's investors are telling us that now, that they see profits growing and the economy growing a little bit slower in the U.S. because of the European situation. And also China has signaled just recently that it wants to slow its economy a bit and try to avoid a bubble.

So investors are reanalyzing where they're at right now and concerned about this turmoil in Europe. And as a result, stocks are selling off.

ROBERTS: Now obviously, we don't share the euro currency, but as Tom was saying, there's a lot of psychological aspect here. It was certainly seen, the confidence being an issue in the U.S. in terms of lenders being ready to lend again. Are we likely to see another moment where lenders who lend on a global basis sort of hold tight to their assets?

Well, I think here in the U.S., what you're seeing right now is that because of the turmoil, there's a flight to safety, and luckily for the United States, people want to be in U.S. assets. They want to buy U.S. dollars. They want to buy government treasuries, and what's that what that's doing is strengthening the dollar. It's strengthened significantly against the euro in recent days.

And U.S. interest rates, 10-year Treasury bonds have are a quarter of a percent lower now in terms of their interest rates, so borrowing costs have gone down here, as well.

But so I think in the immediate aftermath, you know, we have a stronger dollar. The problem is that a stronger dollar cuts a couple of ways. Again, if you're an exporting company and you have to sell your products with a more expensive currency, you have to compete harder, and you may lose some sales. And I think that's playing into what we're seeing in the stock market as well, as investors are assessing whether companies are going to be as profitable going forward.

ROBERTS: Let's take a call. This is Josh(ph) in Lansing, Michigan. Josh, welcome to TALK OF THE NATION.

JOSH (Caller): Thank you, good afternoon. My wife and I are getting ready to leave a week from Saturday to spend what we thought was going to be three weeks in Greece on our honeymoon. And I'm primarily concerned about how long these strikes might continue to last.

I heard that the airline industry was kind of crippled yesterday due to the one-day strike. So my first question is: How long might these strikes continue to go on even if they do pass the austerity measures?

And secondly, if we do get into the country a couple weeks from now, could we face a situation where we're stranded in the Athens airport because we're not able to take the ferries or airplanes out to the outlying islands like we had planned on doing?

ROBERTS: Josh, thanks for your call. Tom, can you help him at all in terms of what he might expect in Greece coming up?

GJELTEN: That is certainly a legitimate fear. I would be concerned myself if I were headed to Greece. I do think, however, that so far these strikes have been, as Josh said, they have been one-day affairs. They haven't been, you know, intended to really bring the country to a halt on an indefinite basis.

It's really more to make a point of how strong the unions are and how strong the opposition to these measures are, but they have been sort of one-day, two-day strikes, and then things go back to normal.

ROBERTS: And Tom, longer term, is there a possibility that this might undermine the whole concept of the euro?

GJELTEN: It already has, Rebecca, because, you know, I think that there is a lot of thinking now that the European countries went too quickly into the euro. You know, a lot of this was anticipated because you have this funny situation where all these countries have the same currency, but they have different finance ministries, different governments, different budgets.

There is no sort of fiscal coordination. There is no coordination of budget making across this whole region, but yet they have the same currency. And from the beginning, people recognized that that was potentially a problem. I think the thought was that Europe was going to be so dynamic economically that so the economic growth would just sort of take care of this itself.

But now that we've come into this period of economic retrenchment and downturn, those problems that were there from the beginning have become much more serious, and there is now, you know, I think it's fair to say that if the European countries were to do this over again, they would not have allowed Greece in so quickly into the European Monetary Union. Maybe Spain and Portugal and even Italy might have had trouble getting in, as well.

But there's no bailout mechanism. There's no way for these countries to back out of the euro now. So I think they just are hoping that they can just hunker down and make it through.

ROBERTS: And John Ydstie, if the euro is undermined, and if it's in trouble as a currency, what is that ripple effect globally?

YDSTIE: Well, you continue, I think, to see the dollar strengthen, although I would say the euro is not going to go away. I can conceive that some countries might opt out, Greece or other countries might want to opt out, but I think the euro is we have to keep it in perspective.

It's at $1.25 today. When it was launched about 10 years ago, it was worth $1.17. So it's up in value from where it's launched.

So I think the euro will be there and that we'll, you know, continue to see the dollar strengthen for a while during this turmoil. Of course, the U.S. has its own problems, and this could turn, as well. We've got debt and deficit problems off in the future, and so we could be in this boat sometime soon if we don't well, in the future if we don't do something.

ROBERTS: NPR correspondent John Ydstie here in Studio 3A, and NPR's Tom Gjelten joined us today from Madrid. Thanks so much to both of you.

YDSTIE: You're welcome.

GJELTEN: Good to be with you, Rebecca.

ROBERTS: Coming up, the author of "Stroke Diaries." I'm Rebecca Roberts. It's TALK OF THE NATION from NPR News.

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