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GUY RAZ, HOST:

From NPR News, it's WEEKENDS on ALL THINGS CONSIDERED. I'm Guy Raz.

And this is the sound last night from the streets and public squares across Spain.

(SOUNDBITE OF CROWD SINGING)

RAZ: We are indignant, they sing. The Indignados, now a mass movement in Spain, railing against austerity measures imposed by the European Union. In Greece today, Alexis Tsipras, the head of a far-left opposition party, held a news conference where he said he wouldn't join a coalition government that continued along the path of austerity.

ALEXIS TSIPRAS: (Foreign language spoken)

RAZ: Tsipras called the European bailout plan for Greece blackmail. Of the 17 countries that are part of the euro, eight are now in recession, more are expected to go into recession this year. So how did it happen? That's our cover story today: Europe's economic implosion and how it could eventually affect us here at home. Former top economic adviser to President Obama, Christina Romer, will answer that question in a moment.

(SOUNDBITE OF MUSIC)

RAZ: Let's start with Greece. Last weekend, voters threw their support behind far left and far right parties that oppose the terms of the European bailout. Greece has borrowed $240 billion euros to keep its economy afloat, but as a result, the government's had to slash pensions, government salaries and public services along with raising taxes. And now, more than half of all young Greeks are out of work.

And this week, as reporter Joanna Kakissis explains from Athens, the dueling political parties were supposed to figure out a way to form a new governing coalition.

JOANNA KAKISSIS, BYLINE: And that hasn't happened because there's been a split between parties who oppose the terms of the bailout and parties who support the terms of the bailout. And the parties that support the terms of the bailout are the mainstream parties who just were pummeled at the polls. People really punished them.

The party that came in second is a party called Syriza. They're a leftist party. They were in 2009 a very small party with, you know, just a tiny percentage of the votes in Parliament. But now they've surged because people have really connected to that message that the euro is associated with pain, and the bailout is associated with pain. And they want some politician to go to Brussels and stand up to the Europeans and say no more austerity. There's got to be another way for us to recover from this recession.

RAZ: That's Joanna Kakissis from Athens. Greece is now in its fifth year of recession with no relief in sight. And while America's economy is set to grow by as much as 3 percent this year, Europe's will contract. A growing chorus of economists and politicians in Europe are blaming one thing: a strict austerity regime engineered by Germany.

And to find out why the Germans have been so rigid in their demands for fiscal discipline, we called Martin Wolf, chief economics commentator for the Financial Times.

MARTIN WOLF: The Germans rejected Keynesianism fundamentally root and branch. To them, economics is a branch of moral philosophy, and it's immoral to promote growth by increasing fiscal deficits. That's the lesson they took out of the '20s and '30s. I think it's completely misguided, but anyway it's deeply entrenched.

Second, the Germans feel our fiscal position's OK, and our economy is doing OK. It's not doing great, actually, but it's doing OK. Why should we use our credit to support the borrowing by weaker countries in Europe who have mismanaged their affairs? So imagine that the U.S. didn't have a federal government and you had a state - I don't know, Texas, let us say - which had a really strong fiscal position and all the others were rather weak, how willing would the Texans be to guarantee the borrowing of all the other states? The answer is they wouldn't. So that's essentially the political set up in Europe, is not one in which there is this will to collective action because there isn't a collective act (unintelligible).

RAZ: So it increasingly seems that the White House along with the International Monetary Fund have been opponents of this European austerity plan, and some even suggest that the White House was happy to see Sarkozy lose the election in France. Of course, we don't know that for sure. But their argument is you cannot cut your way to growth. Is that a message that is backed up by evidence, by recent evidence?

WOLF: My response to all this is this is all nonsense economics in the sense that we seem to have got ourselves in a way of thinking about economics that there are permanent, eternal truths, which apply in all circumstances irrespective of precisely what's happened and why you are where you are. There are circumstances depending on the nature of the crisis that has occurred in which cutting the fiscal deficit sharply is fully compatible with a recovery. But in the current circumstances in Europe, I do not expect these programs to generate significant recovery with the possible exception, a very small open economy with very competitive external sector of Ireland.

RAZ: Let's talk about Greece for a moment. Greece has been in recession for five years, has a 20 percent unemployment rate, and it's rising with no end in sight. Portugal is in a somewhat similar situation, and Spain may be headed towards that place. What advantages does Greece have in staying in the eurozone right now? Why not just get out of it and default and deal with the consequences?

WOLF: It has to be stressed that for Greece leaving the euro, introducing a new currency, has its own gigantic risks. The process itself will be immeasurably chaotic. The legal situation Greece will be in is unclear. In EU law, leaving is illegal and technically - technically - it would leave the European Union itself, which could mean that it would lose all the trade benefits of being part of a single market.

There will be some very complicated negotiations around that set of questions. Then there's obviously the question of introducing the new currency, creating a new banking system in a context in which the government would more or less have imploded. And there will be civil strife, I think. It's not clear whether they could stabilize this currency. They might end up in hyperinflation.

RAZ: Is the euro going to survive?

WOLF: I have wobbled on this, and I try to be as dispassionate as I possibly can. But at the moment, looking at the next 10 years and the adjustments that are required, because they certainly haven't fixed it yet, I would tend to put it subjectively somewhere between one-in-three and one-in-two chances of collapse. And at the moment, I'm closer to one-in-two chance of collapse.

RAZ: That's Martin Wolf, the chief economics commentator for the Financial Times. Mark Blyth, a professor of international political economy at Brown, has been writing about why he believes austerity will ultimately fail in Europe.

MARK BLYTH: It hasn't worked at all, and it was quite predictable that it wouldn't work. Here's the problem. It's kind of two truths simultaneously. So the first truth is you can't cure debt with more debt. Now, this begs the question as to why they keep giving the Greece more money. But nonetheless, you can't cure debt with more debt.

But here's something else that's true. If everyone tries to pay back the debt all at the one time, all you end up doing is shrinking the economy. When you shrink the economy, you end up reducing the amount of taxation that you can collect, thus the amount of debt you can pay back. So your debt-to-GDP ratio gets worse rather than better over time. And all of the countries that have gone on austerity programs over the past two years, they now have more debt rather than less. That's the problem.

RAZ: What happens if Europe sticks with its austerity regime? Will these economies eventually recover?

BLYTH: No. They will not. That's the tragedy of the whole thing, which is why even the Germans now are talking about tolerating a higher rate of inflation domestically and putting money into the various European development banks to offset the contraction. Ultimately, the eurozone is a doomsday device. No one really wants to admit this, but it's turned out it is that way.

You have all of these very levered banks. European banks are, on average, about three times the size of American banks. They're chock full of really bad assets. So you have incredible vulnerabilities in the eurozone. You can't devalue. You've got no independent exchange rate. You can't run the printing press to monetize the debt.

What they've built is the gold standard. And that - the last time we tried to run a gold standard in a democracy in Europe in the 1920s and 1930s, we know how that ended, and it didn't end very well.

RAZ: Mark Blyth from Brown University. So what about the ripple effects on our economy? Christina Romer, who was once President Obama's top economic adviser, says they could be significant.

CHRISTINA ROMER: Europe is one of our biggest trading partners, so when they fall back into recession, they're buying less from us, and that means less demand for American businesses. Our financial markets are intimately connected with European financial markets. So if they have a break up of the euro that starts a financial panic, there's no way that New York is not affected by that.

RAZ: Many economists, including members of the Fed board, are predicting that economic growth in this country will be somewhere between two and three quarters to 3 percent, maybe a little higher this year. What practical impact would a return to recession in Europe and in many more countries in Europe, because, of course, some countries are already in recession, what impact would that have on our own recovery in that growth trajectory?

ROMER: What I think really worries American policymakers is what happens if things get much worse, what happens if this political instability in Greece suddenly has Greece leaving the euro and, you know, suddenly we're seeing financial panic again? That's when the effects could be very large. Because if you have a true financial crisis in Europe, if you have countries starting to leave the euro, if you have much more severe recession, then it's a whole new ball game.

RAZ: Can we still have a relatively strong recovery in this country? And we're not there yet, obviously, but could we even if most European countries continue to slide downward in their economic growth?

ROMER: It's certainly going to be hard. You know, when we look at our own country and how are we going to get a robust recovery, a piece of that that the president has really emphasized is the importance of exports, that that's a source of demand, that we really need to put our people back to work.

And if Europe stays with very high unemployment, very low economic growth - they're one of our major trading partners - it's going to be really hard to get that piece of demand up for the United States. So I think until everybody starts growing again, it's going to be hard to see the really strong kind of growth - not the 2 percent growth, but the 4 percent growth that would really cause the American unemployment rate to come down quickly. That's going to be hard to do with Europe as distressed as it is.

RAZ: That's Christina Romer. She's the former chair of the president's Council of Economic Advisers. In a moment, the latest from Germany on how voters there have sent a punishing message to Chancellor Angela Merkel's ruling coalition. Stay with us. You're listening to ALL THINGS CONSIDERED from NPR News.

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