How Europe Saved Itself. For Now. : Planet Money What the solution to Europe's debt crisis has to do with a bar on the coast of Spain.
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How Europe Saved Itself. For Now.

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How Europe Saved Itself. For Now.

How Europe Saved Itself. For Now.

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(SOUNDBITE OF FILM, "BATMAN")

LEE MERIWETHER: (As Catwoman, laughing).

ADAM WEST: (As Batman) Surrender. Catwoman, stop, I said.

MERIWETHER: (As Catwoman) I don't think you mean that, Batman. Miss Kitka dies if you take one more step. Go.

(SOUNDBITE OF SONG, "MAKE MY")

THE ROOTS AND BIG K.R.I.T.: (Rapping) I did it all for the money, Lord. It's what it seems. Well, in the world of night terrors, it's hard to dream. They hollerin' cash rules everything. Just call it cream 'cause when it rises to the top, you get the finer things.

ZOE CHACE, HOST:

Hello, and welcome to PLANET MONEY. I'm Zoe Chace.

ROBERT SMITH, HOST:

And I'm Robert Smith. Today is Tuesday, March 13. And that was the original Batman, Adam West, you heard at the top of the show. Today on the podcast - the European debt crisis.

CHACE: But this might be our last podcast ever...

SMITH: I'm praying.

CHACE: ...On the European debt crisis because the European crisis is over - kind of.

SMITH: Today we ask, can we now just stop worrying already about Europe? Potentially good news podcast coming up in just a minute after the Indicator with Jacob Goldstein.

JACOB GOLDSTEIN, BYLINE: Today's PLANET MONEY Indicator - 10. Yahoo is suing Facebook this week. And this lawsuit - it says that Facebook is infringing on 10 of Yahoo's patents. And I think just to step back and look at this lawsuit in the big picture, the key thing about it - it's not that Yahoo is saying that Facebook stole particular lines of code from Yahoo or stole particular Yahoo algorithms or anything like that. What Yahoo is saying is that its patents cover the whole idea of Facebook. And just let me read you one sentence from the complaint that Yahoo filed in court. It says, Facebook's entire social network model, which allows users to create profiles for and connect with, among other things, persons and businesses, is based on Yahoo's patented social networking technology.

SMITH: Not to take sides in this lawsuit, but this seems crazy. Listen; I've seen the movie. I've seen "The Social Network." And at no point does Mark Zuckerberg say, hey, I'm going to go through the patents for Yahoo and steal this idea of people communicating online.

GOLDSTEIN: Right. I thought that was the Vongalai (ph) or whatever their name is - right? - the twins.

SMITH: The Winklevii.

GOLDSTEIN: The Winklevii, yeah. This is what Yahoo is saying here. And to be fair, the way patents work, it doesn't matter whether Zuckerberg knew that Yahoo had these patents or not. If you have a patent and someone goes out and copies it, you can go after them. But there is, I think, importantly, a much broader context here. Loyal PLANET MONEY listeners will probably remember that our own Alex Blumberg did a whole hour last year on the subject of patents in the software industry. And the big idea in that story was the whole patent system is broken for software because companies - they have all these big, broad patents that cover anything anybody could possibly do on the Internet. And we've been seeing lots of these lawsuits in the whole mobile universe with Google and Apple and other big players buying up giant patent portfolios and suing one another. And now with this Yahoo-Facebook lawsuit, it seems like this whole patent war has come to social media, as well.

SMITH: Now, assuming for a moment that Yahoo has a case here, didn't they notice Facebook? I mean, Facebook's been around for years now.

GOLDSTEIN: Hiding.

SMITH: If they indeed invented this technology, why haven't they come out earlier to say something about it?

GOLDSTEIN: Well, I mean, I don't know exactly. But a couple of smart things that people have suggested in the reporting I've been reading today - one is Yahoo has a new CEO who's come in in the past month. And so maybe, you know, he's sort of leading this charge, saying, hey, we should get what's ours. That's one possibility. And then a second possibility - Facebook, of course, is getting ready for its IPO. It's getting ready to sell shares to the public. And there was a Reuters story that pointed out that, you know, you don't want to be dealing with some massive patent lawsuit when you're getting ready for your IPO. And, in fact, this story pointed out, Google cut a deal with Yahoo back in 2004 just before Google's IPO, where Google agreed to give Yahoo lots of shares in order to settle some licensing deal.

SMITH: I love it. When billions of dollars are flying around, everybody wants their cut.

GOLDSTEIN: Sure.

SMITH: Thank you very much, Jacob.

GOLDSTEIN: Thanks.

SMITH: And on to the podcast - how Europe hauled itself out of crisis.

CHACE: The first thing you might think of with Europe crisis is Greece. Greece had a lot of debt. They just finally concluded a deal with their creditors. Greece is going to get a big bailout - Greece saved.

SMITH: But if you followed news of the European debt crisis, then you know that Greece was never really the problem. It was just the match that was going to start the fire. It was the other European countries that were going to go up in flames - the big ones, the ones that are too big to fail.

CHACE: Spain and Italy.

SMITH: It was the chain reaction that people were worried about, that Greece would sink Portugal, and Portugal would sink Spain. And then the Spanish banks would sink France, and the French banks would go under.

CHACE: Right.

SMITH: ...Et cetera.

CHACE: That's the fear, the Armageddon scenario. And that was, in fact, where we were heading last fall. And last fall, Spain and Italy were having trouble keeping their governments running. Every week, it seemed it got more expensive for them to borrow money.

SMITH: European governments urgently needed money. And the more they needed, the harder it was to get. Even their own banks pulled back on lending them money.

CHACE: And this was the real core of the crisis. And while all these Greece negotiations were the big spotlight, someone in Europe was quietly fixing this real problem. Someone came up with a solution to make sure that Italy and Spain were fireproof.

SMITH: To show you how they did this, we have to go back in time a bit and half a world away from Europe. When the United States had its financial crisis three years ago, things were similar to what we're describing here in Europe. And at that time, our government and our central bank stepped in and acted decisively.

CHACE: I reminisced about this with Financial Times reporter Lisa Pollack.

LISA POLLACK: Paulson getting out this gigantic bazooka and forcing the banks to take money and the Fed just injecting huge amounts of money into the economy and buying up all sorts of assets - in part, it was so dramatic, and it was so fast, and it was almost awe-inspiring. Whatever you think about the morals of that or the effectiveness of it, it really was incredibly impactful. And in Europe, it's like watching a train wreck really slowly, like, just frame by frame.

SMITH: There is one person who can stop a train wreck - Superman. And Zoe, we did a whole podcast that talked about superheroes and their modern-day financial equivalence - in other words, the central banks of Europe and the United States. In our financial crisis - so we said in the podcast - our Fed acted like Superman. The Fed jumped in, stopped the train wreck, did what central banks do using their secret superpower - they created money.

CHACE: In that podcast, when we talked about Europe's central bank, the ECB, we used a different superhero. The ECB is like Batman - moody, tortured, dramatic, much more reluctant to act, to jump in front of the moving train.

SMITH: And there are a couple of good reasons why the European Central Bank is not like the Fed, why the ECB is a different kind of superhero than the Federal Reserve is. Reason No. 1 is, frankly, it's against the rules. The ECB was forbidden from giving money directly to governments, no matter how much Italy and Spain might have needed it. And then there's reason No. 2. The ECB wasn't sure that it really wanted to be the hero. It wanted European governments to take responsibility for their own problems.

CHACE: So instead of using their superpower last fall, the European Central Bank held the European economies hostage. That's how Jacob Kirkegaard sees it. He's an economist with the Peterson Institute.

JACOB KIRKEGAARD: Essentially, the ECB, I would argue, waited and kept the crisis going, if you like, until the point in time at which the gun in front of the heads of European politicians were big enough for them to begin to act.

SMITH: And you know what? Countries in Europe were so desperate to get money from the ECB that they did act. They did change. Silvio Berlusconi, the head of the Italian government, was forced out, not by his notorious sex life but by the bond markets. Spain's government also changed. And in December, all the European governments came together, and they signed a brand-new promise, a fiscal pact. It's exactly what the ECB wanted to hear - promising to stop spending so much money.

CHACE: They agreed to austerity. And this, the European Central Bank liked very much. This was countries taking responsibility for their messes. But even after the governments changed, they still had trouble borrowing money. The crisis wasn't over just because there was a new guy running Italy. And the European Central Bank - their hands were still tied. Remember, they are not allowed to print money and loan it directly to governments, even when they actually like the governments a little bit more than they used to.

SMITH: Ah, but like any clever superhero whose hands are tied, the ECB found a way around this. The solution - it has to do with this guy.

CHADD RITENBAUGH: I have a little bar - a drinks bar in the port of Marbella - just sun, sand and sea.

CHACE: It's just kind of empty at the moment.

RITENBAUGH: It is.

CHACE: This is Chadd Ritenbaugh. He owns a bar on the Costa del Sol in Spain. And Chadd had this problem. And the solution to his problem is the solution to Europe's entire crisis. Here's Chadd's problem. He bought a bar in 2009. Now he wants to sell, and some people want to buy. But nobody seems to be able to.

RITENBAUGH: Nobody's out buying bars right now and I think, in part because, you know, just banks in Spain are just not lending a cent - a euro cent.

SMITH: And Chadd knows this because he himself tried to get a loan to support his bar - no dice.

RITENBAUGH: Just, like, 40,000 euros - and couldn't lend us anything. We'd say - you know, it was almost comical - well, how about 20? How about 10? No, no, no. How about five? No. Absolutely nothing.

CHACE: (Laughter).

Chadd is stuck at the edge of Spain and right in the heart of the European debt crisis. The European Central Bank sees Chadd out there on the beach, utterly cut off from credit without a bank in the world to lend him money, and the superheroes seized the opportunity to save someone. And through saving Chadd, they can save the European economy.

SMITH: You see, the European Central Bank is not just a superhero, it's a super bank. It is the bank of all banks. It is the bank where the banks bank. And the European Central Bank sees these Spanish banks pull back on lending. It sees the French banks overwhelmed with dodgy loans. And the ECB figures out how it can save Europe without breaking any of the rules. They can help the banks.

CHACE: So in December, right after all these political changes have happened in Europe, the ECB rolls out this program to prop up the banks of Europe. They essentially open up a fire hose of money and say to the banks, come and get it. It's called an LTRO, a long-term refinancing operation. It's technically a loan at 1 percent for three years. But the interest rate is so low, it's basically like free money. Here's the superhero himself, Mario Draghi, talking about the program.

(SOUNDBITE OF ARCHIVED RECORDING)

MARIO DRAGHI: But we should be aware that there are parts of the euro area where the credit contraction is visible. And certainly, the LTRO - the three-year LTRO that we've decided - has come at the appropriate time to avoid a further credit contraction.

SMITH: The dude sounds so smooth, which is what is kind of amazing about Mario Draghi because this is a...

CHACE: That's his style.

SMITH: ...Huge, huge deal. This is a ton of money. Think about this in your own life. If a bank offered you a 1 percent loan that you didn't have to pay back for three years, you would take as much money as you possibly could - pay off credit cards, pay off the car, maybe even invest the rest of the money. You can get more than 1 percent. This is like free money.

CHACE: And the banks slurped it up. They took more money than anyone even thought they needed - $1.3 trillion - 1.3 trillion dollars' worth of loans. That money is now sloshing around Europe, filling holes, propping up banks.

SMITH: By the time the ECB got finished, it didn't really matter whether Greece defaulted or not. The banks of Europe finally had enough money to ride out any problems they might see.

CHACE: That's the main thing the money did - prop up the banks. But there was another benefit that the $1.3 trillion helped with. That money started to flow back to the very governments who needed it most, Spain and Italy.

SMITH: Yeah, think about it. The banks who were so afraid to lend to Italy and Spain - they now had a big, big reason to lend. They had a ton of extra money. Remember, the banks were paying 1 percent to get these loans. And if they could turn that around and lend that same cash to Italy and Spain at 5 percent - that's like market rates now - well, do the math. I mean, that's just pure profit. You can make a lot of money by getting cheap loans and then relending it out at higher rates.

CHACE: So the ECB couldn't save Italy and Spain directly, but they could save the banks. And the banks could save the governments. It was like the ECB was reaching through the banks to tap the shoulders of the governments, saying, see, we actually do have your back, even though we were really messing with you guys over the last couple months.

SMITH: And this has worked great. Italy and Spain can get loans, and they can get it at a decent rate that won't bankrupt them.

CHACE: So it's kind of a happy ending. The ECB finally acts as a superhero without violating its code, rescues the banks of Europe. The banks help out the governments. Combine that with the bailout of Greece, and we are at the end of the euro crisis. Goodbye.

SMITH: The end of the crisis but not the challenges that Europe faces - not all the problems they face, just that sort of urgent crisis 'cause remember, Chadd, the guy who owns the bar in Spain - he still isn't seeing any of that $1.3 trillion. The money hasn't worked its way out to the broader economy yet. But economists think that it will eventually. When banks feel secure, they generally start lending again.

CHACE: The bigger challenge is that Europe is in a recession. And the clock is ticking to improve the economy there. Remember, we told you that these loans from the ECB, this flood of money, was for three years.

SMITH: Yeah. What happens after three years when the banks have to pay back $1.3 trillion?

CHACE: That's the big question. And this whole thing we've been talking about, the ECB rescue - this is a big bet that Europe will get better. The hope is that in three years, the European economy is improving, the banks are stable, Italy and Spain are happy and successful, the banks can pay back the money, say, thank you, ECB, Batman can return to his Batcave knowing that Gotham is safe.

SMITH: And if Europe's economy doesn't get better, if what we see over the next three years around the continent is more recession - depression, even - if the banks can't pay back the loans, if this debt upon debt upon debt collapses...

CHACE: Then the euro crisis is back.

SMITH: It's back. And that's why superhero movies have sequels.

(SOUNDBITE OF FILM, "BATMAN")

WEST: (As Batman) We have just one trump card left, Robin. Heaven help the world if we fail.

(SOUNDBITE OF SONG, "MAKE MY")

THE ROOTS AND BIG K.R.I.T.: (Rapping_) 'Cause everything that wasn't for me, I had to chase. I had to take, I had to take.

(Singing) They told me that the ends won't justify the means. And they told me at the end...

CHACE: As always, let us know what you think. Email us at planetmoney@npr.org, or find us on Facebook and Twitter. I'm Zoe Chace.

SMITH: I'm Robert Smith. Thanks for listening.

(SOUNDBITE OF SONG, "MAKE MY")

THE ROOTS AND BIG K.R.I.T.: (Rapping) Trying to control the fits of panic unwritten and unraveled, it's the dead man's pedantic. Whatever. See; it's really just a matter of semantics when everybody's fresh out of collateral to damage. And my splaying got me praying like a mantis. I begin to vanish, feel the pull of the blank canvas. I'm contemplating that special dedication to whoever it concern, my letter of resignation.

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