What the EU Deal Means for the US

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

Audio Transcript:

Marco Werman: For a perspective on what this EU deal means for the global economy, we turn to Mark Weisbrot. He's Co-Director of the Center for Economic Policy Research in Washington. He also writes a weekly newspaper column on economic and policy issues. Mark, you've compared the European financial mess to a house on fire. Explain that for us.

Mark Weisbrot: Well, it is kind of like a house on fire in the sense that the financial crisis there is already slowing the European economy. In fact, according to the OECD, the Eurozone is already in recession. The United States, they lowered their projection for the U.S. economy from 3% to 2% for next year. They lowered the forecast for Russia, China, Brazil and most of the world. So, the house is on fire and the owners are basically arguing about fire safety regulations for the future and they're not even really getting that right. Meanwhile you also have... to take the analogy further, you have the fire chief - that's the European Central Bank - saying that he's not going to touch or let anybody touch the fire hose until he gets what he wants.

Werman: But doesn't this agreement essentially show that the European leaders are not letting the house burn down, they are taking this seriously?

Weisbrot: No, because they are not doing what needs to be done in the short term. The whole cause of the acute crisis that is slowing the world economy right now and threatening to cause the second world recession in 3 years is the bond market for Italy and Spain. The markets are afraid that the European authorities are going to do to Italy what they did to Greece where they set in motion this process where the government cut spending, the economy shrinks, revenues to the government fall because the economy shrinks and then they have to cut more. And meanwhile, the interest rates on their bonds go up to unsustainable levels because bond holders begin to believe that they are not going to be able to pay their debt. That is the real problem and the European Central Bank has the ability to end that crisis right now simply by buying Italian and Spanish bonds. It wouldn't even have to buy that many if they just set a guarantee on the interest rate.

Werman: Won't the stricter fiscal and financial discipline implicit in this new agreement help to prevent further 'Italys' and 'Spains' and the EU from going bust?

Weisbrot: No, because the fiscal tightening is what's made this crisis worse. Look at Greece. What happened there, they had a deficit of 115% of GDP when they signed their first IMF agreement early last year, and now it's 162% because they shrunk the economy by cutting spending. I mean, that problem could have been resolved very easily a year and a half ago. Now they could cancel 60% - 70% of their debt and they would still default. This is the fear in the financial market, is that the same thing is going to happen to Italy. That's why they really have to change course, and the most important part of that is just buying up the Italian and Spanish bonds to make sure that those interest rates don't rise to unsustainable levels as they did in the case of Greece and Ireland and Portugal.

Werman: Do you think European leaders still don't fully grasp the gravity of the situation there? Or, are they just politically unwilling to accept tough medicine?

Weisbrot: I don't know if they don't understand the gravity of it, but they have these goals. They want Italy to cut its budget, to raise the retirement age, to do all these...and the other countries as well - Spain, Greece...to make these very unpopular changes that people would never vote for. And so, what they are doing is they are saying, "If you don't do these things, we are going to let your interest rates rise, the interest rates on your bonds go up to the point where you will be at the brink of default." So they are playing a game of brinkmanship and chicken, and they've been doing this for the last year and a half. You can see for yourself, this is the fifth time that the leaders have met and come to agreement, and each time they have an agreement they don't do enough to resolve the problem. That's why this is going to go on, most likely, for years to come.

Werman: Mark Weisbrot, Co-Director of the Center for Economic Policy Research in Washington, thanks for explaining this to us.

Weisbrot: Thank you.