France, Greece Elections: Threat to World Economy?

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This story is based on a radio interview. Listen to the full interview.

Audio Transcript:

Marco Werman: We're gonna take a step back now to consider what these votes in Greece and France might mean for the global economy. Jacob Kirkegaard is a research fellow at the Peterson Institute of International Economics in Washington. So, Jacob, this morning on CNBC, billionaire Warren Buffet said Europe is gonna have a hard time resolving its fiscal problems because of these election results. Do you agree with that?

Jacob Kirkegaard: Yes and no, I mean I think we shouldn't, it's hard to underestimate the challenge that's facing Europe, which is much more than fiscal. It really has to do with the design, a redesign of the entire euro area. But on the other hand, I don't think that these elections, at least not the one in France, is going to prove a particularly complicating event. The issue in Greece is somewhat more complex and there might be some downside there, but by and large I think we shouldn't always sort of dramatize the effects of these elections.

Werman: So what do you think as an economist then? Is it possible say in France for Francois Hollande to restore the social services that Sarkozy dismantled and have growth to occur at the same time?

Kirkegaard: I think in short that Francois Hollande is going to be forced by the sort of general political and economic circumstances in Europe to disappoint a lot of his voters because I do not believe that he'll be able to usher in a new era of growth and austerity in Europe. And with respect to France's own economic challenges, I don't think that he will be able to restore the public services that Nicolas Sarkozy reduced in his term in office because the challenges, the fiscal challenges that France itself faces are simply too great. So the reality is that most of the policies he's gonna have to implement are not gonna be that different, in my opinion, from the policies of his predecessor.

Werman: So your point is that the priority for France, for Greece, for everyone remains getting their economic houses in order, solving Europe's indebtedness. What is at stake for the United States if Europe doesn't do that?

Kirkegaard: Well there's no doubt that if the European, the broader European strategy of having deepening euro area integration combined with fiscal austerity at the member state level, if that fails and we therefore have a potential catastrophic unraveling of the euro area, including a number of sovereign defaults in addition to the one we've already had in Greece, I mean let me just say I don't think this is going to happen, but were it to happen, the effects on the US economy would be very dramatic because such a scenario would lead to an almost instant major financial crisis in Europe. So if the European strategy fails, the dramatic, the impact on the US economy will be dramatic.

Werman: If we are looking at some European leaders on the road to a face-off of some sort with Angela Merkel over austerity, do you think it's gonna make a difference whose side President Obama falls on?

Kirkegaard: Not really. I think this is first and foremost a domestic European policy dispute, if you like. And I think the Obama administration will have relatively limited leverage over any of the players in Europe. And I think the Obama administration will also, as they have done so far, been quite hesitant to inject its self directly into what is an internal European dispute, not least of course because as the year 2012 progresses, we here in the United States become closer and closer to our own fiscal point of fiscal reckoning toward the end of the year.

Werman: Jacob, would you take a bet on how all of this European economic stuff may affect the election campaign here or is it just not black and white enough for sound bites?

Kirkegaard: No, I would take a bet that the effects of the European crisis on the US election and the US economy, I should say the effect on the US economy and therefore on the election, will be much smaller than we saw in both 2010 and 2011 where obviously the negative spillovers from the European, an accelerating European crisis, had a significant negative impact on the US economy. I don't think that there's going to be that many negative surprises from Europe this year, and therefore I think the impact on the US election is gonna be relatively limited.

Werman: Jacob Kirkegaard at the Peterson Institute in Washington, thank you very much.

Kirkegaard: My pleasure.