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today's Global Hot Spots >> Sarah Schutt: Welcome to
Our topic today is The Euro Crisis: Greece, Ireland
and the Future of the Single
Our speaker today is Professor Currency.
the Department of Political Science at UW Madison,
and he is also with the Robert
Public Affairs. Professor Copelovitch studies
and teaches international political economy
and international organizations.
He is the author of the book The
Monetary Fund in the Global Economy: Banks, Bonds
and Bailouts. He's a graduate of Yale
University and Harvard
PhD in 2005. University where he received his
expertise and him here We are delighted to have his
Please join me in welcoming Professor Mark Copelovitch.
[APPLAUSE]
Mark Copelovitch: Thank you very much.
Can everybody hear me?
Thank you to Sarah and the WAA Great.
No, you can't hear me?
How about now?
Better. >>Okay.er.
It's a pleasure to be here, although the last time I
was here I had the thankless
the global economy had caught on task of explaining why
This is sort of an equally fire in about 60 minutes.
do the best I can. thankless task, but I'll
what's going on in So I'm hear to talk today about
The title is Greece, Ireland, Eand the Future of the.
Single Currency.
because we actually are at a point now which I really
never thought we
certainly never thought we would be in which is the
question of the sustainability of the single
currency of the eurozone.
And we'll sort of get to that in
eurozone together might entail what keeping the
that is both economically and andpolitically not
sustainable.
couple pictures. But I want to start with a
and pictures. YoSo, flashing back 10 years.ns
This is the eurozone in 2001. This is Christmastime in Paris.
And you see the sort of decorations on the streets
of Paris in the shape of the
celebration of the culmination eurozone, and the
European immigration. The adoption of the single
currency, something that
steel community in started as the European coal and
in large to include 1most of Europe and now we'rea
adopting single currency. This is sort of the culmination
of post-war European
In a very celebratory mood. And we flash forward now 10
years later, and what we're seeing is riots in the
streets of Greece,
European Union and the demonstrations against the
dissatisfaction, International Monetary Fund,
political spectrum, with the austerity programs that
are being imposed on the PIIGS countries,
Portugal, Ireland, Italy, Greece and Spain, in order to
remain part of the
with the debt crisis. singSo the question, the bigdeal
question is, how did we get here and what does the world
look like going forward?
little bit, as I do with my undergraduates, a little
bit of economics
theoretical side before we get to the interesting policy
questions.
eurozone is part of this So while it's true that the
Union and European broader project of the European
the core, what we're integration over 50 years, at
countries that have adopted fixed exchange rates.
They've fixed their currencies
So I want to talk for a second in value to each other.
and what that entails for a economic policy, what a
government must do in order to
So if we think about the maintain a currency peg.
exchange rate regimes, what that language here as one of
the currency is flexible or meafloating.ther
That is, whether the price of the currency, the
dollar, the euro, the yen, is set in global markets
by supply and demand. When you pick up the Wall Street
Journal or the
day the table of Financial Times, you see every
rises and falls based exon a whole lot of things.lar
That's a flexible exchange rate or a float.
What we're talking about with the euro is a peg or a
fixed exchange rate where a government, or in this
case a group of countries, have decided they want
the value of the currency relative to other
currencies to be stable.
say we want one pound to equal X number of dollars, we
want one Deutsche mark to equal X number of lira,
and it's going to try and maintain that peg.
Now that involves the government
policy levers because market using various
demand may want to push that demand, supply and
up or down. So what is it that a government
does? Well, the easiest thing a
government can do, if the markets are pushing the value of
its currency down,
and buying another people are selling your currency
central bank can currency, the government or the
foreign exchange market. directly intervene in the
Bernanke does this The Federal Reserve under Ben
The Japanese government has been periodically.
extensively as the value of the yen has appreciated
in the last year and a half.
government can intervene The central bank or the
The more common and sort of more directly.
this is done is to use widespread way that
If people don't want to hold macroeconomic policy.
example, if people think that there's going to be a
recession in the United States
so the value of the dollar and not one in China
government can use monetary startspolicy.g, the
If we raise interest rates and
to holding the dollar, then the idollar's exchangens
rate might rise or it would be
the currency peg. The other thing you can do is to
use fiscal policy.
And what we're seeing in the You can balance the budget.
like Greece and Ireland that are countries right now
maintaining their fixed exchange facing problems of
market's wondering whether or not they're going to
stay in the eurozone, this is precisely what they're
doing.
on their bonds, the Tmarkets are saying you need to
offer me more return
governments are iengaging in massive austerityd
programs, balancing budgets, etc.
People want to know that you're not accumulating
more and more debt to the point that it's unsustainable.
So this is what it looks
You can ignore the labels on the like graphically.
The example here, just a sort of bottom.
we think about the United States general example, if
the dollar and the peso. and the Mexico and
exchange rates, the price of pesos in terms of dollars, or
here it's actually
be the intersection of the supply and demand curves.
Now let's say that there's a
and all the sudden all of us boom in the US economy
imported goods from Mexico. What is that going to do?
It's going to boost demand in the market for Mexican pesos.
In order to buy Mexican goods,
dollars and buy pesos. we need to sell our
exchange rates, the market So in a world of floating
The peso will go up relative will move.
the dollar will fall relative tto the peso.;
If you were adopting a fixed
don't want to the currency to move, this is where the
government has to do something. So if you remember back to your
introductory
years ago, what we need to do is shift out the supply
curve down to here so the exchange rate stays the same.
Now, how does the Mexican government do that?
Well, this is the easy case.
pesos, and they want to put more pesos out into the
world.
They buy US treasuries and in They goexchange they'remarket.
putting their money out into the
So what that's going to do is drive the exchange
rate back to the earlier
The tougher case is the case equilibrium.
working in the other direction where things are
European countries are dealing which is what the
You can think about an increase in the supply of
Mexican pesos.
is printing lots of Lmoney, trying to stimulate thet
economy, and there's
And so people start to wonder, a lot of inflation.
wonder about the value of the peso relative to the dollar.
As the supply of pesos shift
to fall in value. Well, if you don't want the peso
to fall, what you need to do is increase demand
for the peso back up to our earlier exchange rate price.
That's a more difficult task
ways to do that. because you have two
What do you buy pesos with? You buy pesos with your foreign
exchange reserves which are usually dollars or
euro or yen or sometimes
Well, you don't control the evesupply of your reserves.a.
The Mexican government can turn on the printing press and
create pesos whenever it wants. It can't create dollars.
And if this pressure, downward
continues, eventually you will pressure on the peso
exchange reserves. run out of foreign
1980s in Latin This is what happened in the
It's what happened in the 1990s with east Asians countries.
The classic currency crisis is a
to defend a currency peg at a value the markets
don't believe is sustainable. And eventually you run out of
your reserves and are forced off the peg.
The other way you could do it is
So if I don't want to spend all to of my reserves, ifes.
you aren't willing to hold the
offered you 7% or 9% or 11%? peso at 5%, what if I
raised interest rates, The problem there is as you
more and more and more. you'People pull money out ofomy
the investment and put it in the bank.
It becomes harder and harder to get auto loans and home loans.
The economic growth rate
The unemployment rate goes up. goes down.
indefinitely. A government from a technicalt
standpoint could raise
To sustain a currency peg, interest rates to 500%.
unsustainable. that's politically
eurozone that I'll And what we're getting at in the
of the talk is most trof the problems here are notd
technical economic
what is politically sustainable, domestically within
the countries in the
So that's the sort of mechanics, eurozone but also as a group.
entailed in maintaining a fixed yoexchange rate.is
There are costs and benefits to fixing versus floating.
So if we think about what the benefits are.
The biggest one, the one we most
stability if you're often very dependent onrrency
international trade.
borders or finance If you think about trade across
kinds of risk ainternationally that you don't
have domestically.
currency risk. One of the big ones is
around about 10%, 20%, 30%, 40%, it's going to be
hard to invoice trade.
investors are not going to Over time, international
So the benefits of a fixed want to lend.
particularly when you're a group exchange rate,
trade a lot with each other like of countries that
currency stability is the primary reason to have
fixed exchange rates. The second reason is what's
known as a nominal
which is a fancy way of saying fixing the currency to
have low inflation. So if we pick a country at not
so random, say, Argentina from 1975 up until
about 2000. Argentina, periodically, had
very, very high inflation.
United States as high Notinflation, 7%, 5%, 4%.he
50%, 100%, 250% inflation.
The government borrows, it runs Ideficits, it prints money,?
it cuts interest rates to try and stimulate the economy.
If you're maintaining a fixed exchange rate, which
means you have to hold a lot of foreign exchange reserves
and keep interest rates high, then you
can't have high inflation.
is lots of countries, say, Italy relative to Germany,d
will fix against a low inflation
have to adopt the interest rate coand monetary policyhey
of the low inflation country. This is known as importing
inflation from abroad.
benefits of a fixed So texchanged rate.o big
Currency risk reduced for international trade and
having low inflation. That sounds great.
The costs are over here.
susceptibility to Thecurrency crises.he
And if you think back to the
showed you, as long as you're pegged, the markets
can wonder how long is that peg sustainable?
Can you maintain the economic policies needed?
Do you have enough foreign
That question is always hanging out there.
And it's very frequent and much more common to have
currency crisis with fixed
floating exchange rates. exchange rates than
rate, the dollar may If there's a floating exchange
over a 10-month period. falIf you hold on to a fixedthat
exchange rate too long, as, say, Korea did in 1997-1998,
once you're forced off
two-week period or the peg, that might happen in a
So you'll have a even faster.
The bigger problem is tying your currency crisis.
like monetary policy and hands on things
Politicians like to get deficits reelected.st rates.
They tend to get reelected when the economy is doing well.
And it's very difficult to
rate in the face of very high sunemployment and veryge
slow growth.
economic policy underlings So politicians and their
print money, engage in like to cut interest rates,
and stimulate the economy. deficit spending as ways to try
stimulus, part of the debate we've been having in the
United States about what to do with our
current recession.
want to maintain a Well, you can't do that if you
That international commitment to currency peg.
rate is incompatible with what's the fixed exchange
monetary or policy autonomy. known as domestic
This is the main reason why the United States has not adopted
a fixed exchange rate.
trade relatively less with We are a very large economy, we
lot of smaller countries, and tno president of the Uniteda
States is going to want to tie
monetary policy completely by pegging to the euro
or the yen or the renminbi or anything else,
particularly in the face of a very severe recession.
Now, governments realized this
the costs while they're also and most of them want
So in reality, if we look around minimizing the benefits.
exchange rate regime countries at what type of
last 30 or 40 years, most hcountries are doinge
something in the middle.
countries in the world I would say about 10% of
Like the United States. pProbably about 20% have a very.
hard peg like the eurozone. And most are doing something
in the middle.
currency float unless it Most of them will let the
Canada has done this against the falls by too much.
most of the last 30 years. US dollar for
more than, say, 15% Ior 20%, then you intervene toy
try and move it back
Or you could have something like to equilibrium.
This is what Mexico did in most aof the 1990s..
They would fix against the
months to 12 months they would dollar and then every 6
and fix again and then devalue devalue by about 10%
So it's sort of trying to have again and fix again.
too, if you want to think about yourit that way.t it
So the question is, how do
How do you decide and weigh these costs and benefits
and make a decision?
comes from people like The classic story in economics
economist at Columbia who won the Nobel Prize in 1999 for
his work on the economics of
And the classic story is not a exchange rates.
purely economic story having to poldo with a set of a
economic factors known as the optimal currency criteria.
And it's these four things
So you might want to fix the right here.
more trade dependent. If you're a small country
heavily dependent on
benefit of currency stability relative to, say, the
United States which is a big country less dependent
on trade, is more important.
mobile, factors are Scapital and labor, sometimesy
land also, the things that
If factors are mobile across go into economic production.
international investment, then borders, particularly
currency stability outweigh the acosts of sacrificing
monetary policy autonomy. The big one as far as the
eurozone is these last two
economic shocks and the correlation of those shocks
among the members of
So if you were very vulnerable the eurozone.
might mean is sometimes unemployment will be 5%,
sometimes it will be 10%, sometimes growth will be 9%,
sometimes it will be negative.
autonomy to raise and lower interest rates, engage in
deficit spending to try and counteract the shocks
that you're being buffeted
And if those shocks are bycorrelated with othery.
countries, then maybe you can peg to them.
If you're all booming at the
all in a recession at the same same time and you're
currencies and adopting the timeinterest rate your
necessary to maintain that
If Germany is booming when currency peg makes sense.
then we have a problem, which is Greece is in a recession,
dealing with now. The Greeks would like to engage
in deficit spending and cut interest rates.
The Germans are worried about inflation because the
economy is growing so fast, they want to keep
interest rates very high. So that's the sort of purely
economic story. This is what Mundell won the
Nobel Prize for.
criteria. ItThe problem is there really of
isn't a group of countries
the real world. We have a monetary union in the
United States.
the US like the members We can tof the eurozone.tates of
We are not an optimal currency area.
Biggest way to think about that is to think about the fact that
there might be, if we think of
Mississippi as a California as a country and
in California and a corecession in Mississippi.oom
And so we might want different
Well, we have chosen to have a monetary policies.
go with our economic union. The exchange rate regime is
almost always a political choice.
So when we see countries
rate regimes and they don't fit adopthe optimal currencynge
criteria, we start to look for
adopt a fixed exchange rate. other reasons why you might
me who is a political scientist and not a economiste
starts to think about the political reasons governments
might want to do this.
tell is that certain groups Sor interests within a countryht
have lobbied the government for this policy.
It's not necessarily the best policy for the country
as a whole, but it might be the best policy for groups.
So the export sector or international finance may
want a fixed exchange rate and
It might be that we have a left be leaning governmentul.
that responds to labor and
to tie its hands on monetary unions and is less likely
more with full employment. policy because it's concerned
economics and political Theeconomy is showing that in
democracies, that political institutions matter that say
democracies are less likely to fix their exchange rates
than non-democracies. The general logic there is that
governments that have so get
democracies and they care more about the average
voter and aggregate welfare, B, because they have to
get reelected, they're more concerned with what's going on
and how the economy is
terms of elections. Sometimes the story is one about
international pressure. So sometimes the story is the
international monetary
did in the Latin American feconomies in the early 1980s,it
and says we will bail you out and help you pay for your
financial crisis in exchange for
and floating the exchange rate unhooking your currency peg
And sometimes, as we know in the and devaluing your currency.
union, we have issue linkage. The idea of a single currency in
a fixed exchange
larger project of ratregional cooperation.much
So we can start again to think
union as something that is the about European monetary
broader economic and culmination of 50 years of
Again, these are political integration.
These are political factors leading governments to
adopt a single currency.
pretty much all of The problems we're seeing now,
are the result of politically motivated monetary integration
in a region that doesn't fit
The economics and the politics, tthere's a disconnect between.
them and we're dealing with the consequences of that now.
Now, that's a general story about fixed exchange
rates, the question is, in the
just that the franc and the Deutsche mark and the
lira have been fixed to each
We've replaced them with a other, they've disappeared.
You've created a European sCentral Bank.y.
The equivalent of our Federal Reserve is now the
European Central Bank in
Why would you go beyond a fixed exchange rate to a
monetary union? And here we have three
explanations. One of them at the bottom is the
sort of, again, the broader project of regional integration.
So monetary union in Europe is
of this broader geopolitical thought of as the capstone
From the economic standpoint, prthough, there's twon.
explanations. The first has to do with the
credibility.
said, if you're fixing the And, again, you'll recall as I
always going to wonder how long eyou're going to do that for.e
Well, if you want a credibly
going to do it forever, as the commit that you're
in 1999 that they were doing, getting rid of your
central bank and getting rid of your currency is a
good way to do it.
secure, long-term commitment. You can think of throwing out
the steering wheel in a game of chicken.
You're sort of credibly committing that you're going
to go straight and you're not going to swerve.
You can also think about future governments within the countries
of the eurozone want to lock
So let's say you're a conservative government in
Germany and you're really concerned about low inflation.
Your worried, perhaps, that the social democrats are going
to come in power 10 years from now and start engaging
in deficit spending and having
Well, if you tie their hands on monetary policy, they
can't do that anymore.
credibility. So it's a case of permanent
some research and Tliterature that's out there in
economics, some of
who's here in the weconomics department, showing,
that there are very large trade effects over and
above having a fixed
way to monetary union. exchange rate if you go all the
Andy Rose at Berkeley have some papers showing thatd
countries that have a single currency trade with each
other somewhere on the order
similar countries. of two to three times more than
of the broader project of European economic integrationt
that they would have these
That if we got rid of currency benefits within the eurozone.
currency, there would be a huge rgrowth in trade, the
economy would grow more, there
unemployment, etc, etc, the benefits of deeper economic
integration and high growth.
interesting work that Charles Engel has done looking at the
United States versus
And the case he focuses on is the state of North Dakota.
So if you look at North Dakota's
versus North Dakota's trade with trade with South Dakota
provinces, its neighboring Canadian
South Dakota than with the it trades 22 times more with
There's no economic neighborreason for that.vinces.
If you look at the sorts of goods and the types of
economies that we're talking
prairie provinces and North and aboutSouth Dakota,adian
there's no explanation for that other than political
borders actually matter.
exchange rates, you think if that's part of having borders
across countries, if you get rid of the exchange
rate and the currencies and have a single currency, the
promise is somewhere between 3
trade in the eurozone. and 22 times more
very good and very And again, that sounds very,
So this is the eurozone. attractive.
with a question mark. So you have the countries that
are in, the countries that are out, I'm not going to
say that they're the
anymore because it's countries that want to be in
that's the case, and you not necessarily clear that
have, right now, have the UK and Denmark which
The sort of price of Britain permanent opt outs.
eurozone in the Maastricht agreeing to the
but we don't want to be part of it, we want to keep the pound.
So that's our eurozone. If we think about why, going
through that list of
was created, explanations in why the eurozone
these explanations. So, the first, again, are the
benefits of trade, and
So what this is here is intra-regional trade, trade
within Europe, as a share of
So you can see all the sort of total trade.
If you look at here, Europe as a different regions of the world.
which was the European Union whole, the EU 12,
then the EU 15 when Austria, members in 1992, and
were let in the 1990s, the Sweden, and Finland
exchange rate when you when trade 75% of your trade
with that group of countries is pretty strong.
And again, the benefits of
strong, those numbers were currency stability, very
they continued if you sort of went from 1994 to 1999
up into the 80% range.
argument that a single currency is a good idea.
And you could look at the exchange rates in the run
up to the eurozone and say
problem when we're trading with currthese countries.s a
So if you go back to 1979 and say the exchange rates
between the major economies in
community were fixed at 100. the European economic
then look at what happens. We sort of index it at 100 and
For the next 10 years, they're Do they go up or down?
So if you're very heavily trade movdependent there's aace.
lot of currency in here.
and get rid of that Why not currency risk?currency
The second argument, again, for why one might want to have
a fixed exchange rate is for
And here, again, the argument anti-iseems to hold.asons.
So this is inflation conversions
countries in the eurozone. in the original 12
in inflation. IIt goes back to 1961 and up toe
2005 or 2006. So one thing you notice here is
prior to 1971 there was very
Inflation was low and not very little variation.
Why was that the case? variable.
fixed exchange rates Well, we had a global system of
system from 1945 to 1971. This is how the system worked.
The US pegged to gold.
Everybody else pegged to the US We weredollar, and theyndard.
periodically devalued a little
Inflation tended to be higher in bit against the US dollar.
than the US up until the European countries
the Germans were peg the the 1960s, and so
dollar and then devalue a little Deutsche mark against the
You had low inflation because inflation was low in
the United States and not a lot of variation.
We go off gold during the Nixon Administration in 1971.
That system collapses and all of
world's major currencies are the sudden the
We couple that with the oil flshocks in the 1970s ander.
we have lots of inflation.
stimulate the economy, Governments are trying to
spending, they're trying they're engage in deficit
Most of you in the room remember to print money.
There's a lot of inflation this better than I do.
the way up until the eurozone. variability going on all
and that goes away. It looks like we're going back
to the Bretton Woods period.
effectively what's One way to think about that is
pegging to the German Deutsche mark and we replace it
with is single currency.
with everything that's So one thing to think about it
ways the eurozone has going obeen a success.in many
The trade effects, we've seen some of them.
The inflation effects, we've
inflation in variability. So with all of the costs, that's
something to keep in mind.
why having a single Tcurrency might be a good idea.s
But it's not without costs, as we're seeing.
The last reason, as I mentioned,
of broader geopolitical project. again, is this sort
all of this, but you I'm not going to walk through
monetary union in 1999 is the culmination of something
that started as the pooling of
in the 1950s. GerMoving on to the Europeanteel
economic community, the expansion from six countries to
a very large number of countries and then the
deepening in terms of full
Maastricht Treaty which took economic union and the
monetary union. So the two gentlemen up there
are Jean Monnet who was the high commissioner of the
European coal and steel community and Robert
Schuman, the French foreign minister.
They're the sort of fathers of
I like to think what they're European integration.
looking at Italian and Greek doing right there is
[LAUGHTER] bond spreads.
I could splice that together, I tbut it didn't quite work.ere
So for all of these reasons,
union made sense. Now, at the same time, everybody
realized that the eurozone wasn't an optimal
currency area.
1980s and 1990s. The politicians knew this in the
as close as possible They wanted to try and make it
And the way they did that in the when we started.
was to have something known as Maastricht Treaty
The idea behind these was we the convergence criteria.
macroeconomic policies as close together as possible
and have good macroeconomic policies before we gave
up our various currencies.
will be more correlated when If we did that, maybe the shocks
If we did that, maybe you won't have the need to raise and
lower interest rates or borrow
problems that we're having now. And there were three criteria.
One was price stability or low
So the convergence criteria to inflation.
was that your inflation rate get into the eurozone
one and a half percentage points could be no more than
the three best performing member above the rate of
going to go into the eurozone. states that were
going to be the Netherlands, Germany and France.
Sound public finances, the
So the budget deficit in a given budget deficit.
be more than 3%. year was not supposed to
1997 and hold that up to 1999. You were supposed to be there by
over time your sort of And the debt to GDP level,
deficits was not to be accumulated debt from running
So we're going to have low more than 60% of GDP.
have balanced budgets and we're going to have sustainable levels
of debt and borrowing.
One, which a lot of people knew Twoat the time but wet.
certainly know now, is there was
accounting in some of the less a lot of creative
like Greece and Portugal that moved into European
monetary union. So cooking the books may be a
little strong, but it turns out, people say that the
Greeks numbers were probably
we thought they were. twice That's one problem.ood as
The bigger problem is this: so
were institutionalized in thsomething known as theia
Growth and Stability Pact.
be sustainable, you Ifwant to carry these types ofo
rules forward and have
The problem was, and this is everybody abide by them.
we think of Germany as a hard to remember when
in 2011, Germany was sort of the successful booming economy
at the start of the eurozone. The first two countries to
violate these are Germany and France in 1999 to 2003.
Now, you were supposed to be
monetary fines, and, in the limit, threats that you
wouldn't be able to, say, vote
If you don't live up to the in Maastricht criteria younk.
don't get to dictate economic policy in the eurozone.
Those were not enforced on the
and most prominent countries in twthe eurozone, andes
that set a precedent. It set a lesson for other
countries like Greece and the rest of the PIIGS countries
in the eurozone that maybe
That these were not necessarily we won't enforced.ed either.
They weren't necessarily
credible then we're not going to credible, and if they're not
like an optimal currency area. have something that looks
where we are now. If we think of the successes and
tensions within EMU,
The euro, the Germans were very a lotworried about givingight.
up the Deutsche mark. It's a very stable currency.
It's low inflation. If we give it up, will the euro
be a global currency like the Deutsche mark was and
the franc was?
And it turns out that it is. And will it be low inflation?
that people hold at hard currencies, it's about 60%
dollars, 30% euros and 10%
renminbi and Swiss francs. other stuff, primarily yen and
stable global Scurrencies, inflation in the
eurozone has been very, very low, and we haven't seen 22
times trade growth
that there has been a sort of dynamic increase in the
level of trade within the eurozone by getting rid of
national currencies.
monetary and fiscal Tpolicies doesn't fit all.ze
We have surplus countries and deficit countries.
If you think of countries are not abiding by the
Maastricht criteria, by the convergence criteria, some
countries are running surpluses,
The surplus countries like some are running deficits.
and low unemployment. They want to keep interest
rates high. They're worried about the
economy overheating.
interest rates and they're So they're going to keep
The deficit countries, like the United States, like the PIIGS
countries, high inflation,
They want to engage in Keynesian high unemployment.
They want to cut interest rates. economic stimulus.
deficit spending. They want to borrow more.
They're concerned with growth in unemployment.
They're not concerned with
The problem is you can't use inflation.
you're a deficit country. You already can't engage in
unilateral trade policy.
currency, the eurozone was Before we had the single
The European Union was a free a ftrade area.rea.
So I can't use trade protection if people are unemployed to
sort of protect their sectors.
We can't engage in deficit We can't cut interest rates.
We're wrapped in an economic spending.
terms of policies of adjustment. straight jacket in
that's really the It's thproblem right now.utonomy
And this is where we are. So, one thing to think if we
look in 2011, you get a sense of how serious the great
recession has been. The sort of worst global
economic recession since the
Even the good countries are not Greatliving up to the 60%930s.
to GDP Maastricht criteria. You have a handful.
Slovakia and Slovenia weren't in
1999, so you have Finland and Luxembourg, basically,
and maybe the Netherlands if
Even the Germans and French wdon't look so hot by the.
Maastricht criteria, but they're
better now than Greece and Italy certainly looking
So we have this acronym. and Ireland and Portugal.
The Irish would like to think that they're not one of the
PIIGS, and I'll talk about why
So Portugal, Italy, Ireland, that's the case in a second.
And these are their numbers on Greece and Spain.
the two and three of the the debt and deficit,
the unemployment rates. Massive debt, massive budget
deficits and extremely
If you're Ireland or Spain or Greece, you don't want
interest rates as high as the Germans want them in
the European Central Bank in
inflation because low inflation ois the least of your
problems right now. Those are the PIIGS minus
Ireland.
could find. TSo let me stop for a second.I
Actually, let me go back and
Greece is the one that's been in talk about Ireland.
Greece really is, if you think the news the most.
facing a sort of financial about is a country
really kind of unsustainable bubble type of crisis or
Is the country going bankrupt? sovereign debt crisis.
bankrupt but in theory they can't borrow anymore because
people won't lend to them.
insolvency or bankruptcy case. Greece really looks like an
unsustainably high debt and deficit levels all the way back
into the 1980s and 1990s. So one way to think about
Greece, and this lesser extent Portugal, is these are
classic debt crisis like we saw in Latin America
in the 1980s. You borrowed too much, you
didn't balance the
overtime and eventually there's going to be a crisis.
Eventually the bill is going
Ireland is a very different to beast.o.
Ireland, up until 2009, was the success story of the
European economies. Ireland was known as the
Celtic Tiger. And the name comes from the
Asian tigers, the east
Korea, Taiwan, Singapore, Asthat boomed in the '70s andng,
'80s while the Latin American economies were looking
like Greece.
economy to trade, to They opened up to the world
started producing for export, and they doubled their
GDP per capita, their living standards, over the
course of 20-30 years.
from about 1985 to 2005. Ireland did the exact same thing
and said great economic Apolicies, they're the exampled
you want to follow. They went into the eurozone and
living standards in Ireland were among the highest
in the European Union and in the eurozone.
And all of the sudden the Irish economy collapses
and those numbers that I just showed you, Ireland
looks like Greece.
retrospect, and you can see the growth numbers on the left
here, it's percent change in gross domestic product.
In Ireland, you see the boom in the '90s and the 2000s and
then the massive collapse.
It wasn't that the government What hwas borrowing.land?
Inflation was low, budget deficit, budgets were
balanced and Irish sovereign
Maastricht criteria level all the up until the crisis.
What happened was a lot like
United States. what happened in the
and a housing and construction Massive borrowing by the banks
mortgage crisis within Ireland. You see that in the second chart
you see construction employment doubling.
You see the low unemployment
collapse when the housing and rfinancial bubble burst.e
What happened when the bubble bust is the Irish
government had to step in and bailout, nationalize,
the four largest banks to prevent the financial
system from coming down.
of the sudden became So all of that private debt all
And so those numbers now that you see for Ireland where
it looks like there's massive budget deficit and debt,
it's a different sort of cause. It wasn't bad policies by the
government, it was bad
and the government policies by the financial sector
The consequences that we're is cseeing in Ireland is up.
massive out migration.
migration elsewhere. So you history of Ireland is
migration to the United States From the potato famine on,
what was fascinating about the and other parts of the world,
reversal of that trend. People coming home, Irish
expatriates coming home,
been away three-four even people whose parents had
Ireland because it was the generations to live and work in
Ireland is now losing, the booming economy of Europe.
couple days ago is 800 people a day leaving Ireland
because of the massive
So Ireland is facing a very, unemployment rate.
It's a sort of different crisis than Greece and Portugal and
Spain are facing. What we're seeing now with the
crisis is markets starting to wonder, again, about the
credibility of the eurozone.
spreads, percentage points So what we have here are bond
You see an interesting over German bonds.
Before the eurozone, you see big pattern here.
the other PIIGS countries. spreads for Greece and Ireland,
bond spreads go away completely. Once the eurozone happens, the
It's all euro denominated debt, Wein theory backed bye.
the European Central Bank.
Irish bond or a Greek So wbond on Italian bondg an
shouldn't matter. It's all euros.
Well, now people are starting to wonder.
Now the Greek euro debt, people are starting to wonder
is that eventually going to be Greek drachma debt.
Even France now has tipped up a little bit.
So we're starting to see a
think is going to pay their debt spread of who do we credibly
actually stay in the back and who in the limit might
We've gone back to the world, in single currency.
where it's not credible that many ways, of the pre-euro era
So that's the big problem right this is anow.he same.
And the policy solution thus far
It started with just Greece. has been one of bailouts.
International Monetary It started with primarily the
the other eurozone Fund, a little bit of money from
If it's just a problem with cGreece, they have a lot of.
debt, they're probably bankrupt,
And so Greece goes to the IMF in but we can bail them out.
Starting in May, the thought April of 2010.
International Monetary Fund lends to a lot of countries.
It's got $250 billion, but it can't lend all of its
money to Europe.
elsewhere in the world that Therethe IMF is busy with.rises
The European Union needs its own
So the acronym here is the EFSF, fund to supplement IMF funding.
Fund, which is the pooling of tresources of euro countries toy
get this up to $440 billion.
to become something that That is supposed to, by 2013,
That pot of money is supposed to is even bigger.
more money on private financial markets so we have a bigger
and bigger war chest. And if we have this war chest,
what we can do is help countries pay down their
debts and bring those bond spreads back down without
them leaving the currency union.
markets are starting to Thbelieve that this is thehe
only credible part of that rescue fund.
So if we're depending on Italy
our bailout fund but they're and Spain for $200 billion of
bonds are being thought to precisely the countries whose
you don't really have $620 not be credible anymore,
And if you don't have $620 billion in money there.
why should bond holders of the billion in money there,
believe that it's really PIIGS countries
to be paid back. credible that that is going
starting to see now is So one of the things we're
Default right now, or not paying the question of default.
being couched politely in language known as haircut,
which is a polite way of saying that bond holders will be
chopped off and they might only get 50% of their money back, or
debt rescheduling, which
It means that I paid you is another way to say default.
now I might pay you interest of intere2% over 40 years.years,
You're still not going to get all your money back.
So it's a polite way. Nobody wants to say default.
If you default, the market goes haywire.
So it's a polite way of saying
believe that we're going to maintain the eurozone
and there isn't enough money to bail countries out,
then something else is going to have to happen.
This is the problem.
that's going on. This is the sort of calculation
countries are coming in and thinking about should we
bailout Greece, they're making
known as liquidity on the one a calhand and moral hazardhat's
on the other. So the bailout or the loans in
economic jargon is liquidity. The amount of money we're going
to give you might actually solve the problem.
It might help the borrower
and pay its debt. It might, more broadly, solve
this debt crisis. The problem is there's a
cost to it. And the cost is what's known as
moral hazard. Moral hazard is a concept from
insurance, the gist of
cover your losses, then you have every incentive to
engage in the bad behavior that got you there in
the first place.
the classic examples that you'll The classic example, or one of
insurance is slumlords in New York City who might own a
$2 million building and insure
lo and behold there's an arson it for $4 million, and then
The insurance sort of made the and the building burns down.
The less extreme example is to bad behavior okay.
like auto insurance. think about something
fully covered, I'll drive a little faster on the freeway.s
The issue is the same when we're
If we bailout Greece and we thinalways bailout Greece,ing.
or in the United States if we think about if we
bailout Goldman Sachs or
bailout Goldman Sachs and Citibank, what is thes
incentive to fix the problem and
here again down the line when the bailouts might
have to be even bigger? So if you're thinking about
those calculations, here
When the IMF for the European Union is coming in and
giving money, it's not
It's not free. really a bailout.
of the money. There's policy conditions,
what's known as conditionality, that are attached.
The IMF comes in and says we
in installments over five years wilif you go off theney
fixed exchange rate.
eurozone but in Latin TheyAmerica they did that.the
If you devalue the currency, if you balance the
budget, if you privatize
you do X, Y, and Z. So there's conditions attached.
If you're really worried about
going to be a relatively small moral hazard, it's
strings or conditions attached. If you really think it's a sort
of shorter term cash
bubble, not necessarily something that the government
did to get in crisis, then maybe I will give you a
larger loan with fewer
And here Greece and Ireland are actually informative
and an informative comparison.
with the financial Ireland, for all of its problems
over the last 20 bubble, has a good track record
gotten fairly good years, and they've actually
European Union treatment from the IMF in the
where everybody is countries relative to Greece
years don't suggest that if we give you a bailout0
it's really going to
So countries are being treated solve the problem.
IMF and the major economies within the eurozone in
terms of the bailouts that
Now, again, how you decide it's not an economic question,
it's a political question.
the number in terms of It's very hard to say here is
deficits which is the debcut point between adget
liquidity problem and an
It's a political question. insolvency problem.
might explain how Nowone decides, politically.that
This is my answer based on my research on the IMF
and what I think part of the
What this chart is here is bank exposure to the PIIGS
countries by the major countries
the major country that is have in the eurozone and also
So what do you see here? influence within the IMF.
German public being deeply opposed to bailing out
the PIIGS countries and in spite of Angela Merkel saying
that there are going
Germans thus far have ponied to be no more bailouts, the
the bond spreads have gotten up the money at every stage when
Why are they doing that? really, really big.
exposure of German and Look at all the bank
If Greece goes under and Greece defaults and we have
a 50% haircut,
It's Deutsche Bank and Dresdner who Bank and the entirecut?
German banking system and French
Politically, governments can't banking system.
This is an old story. Again, if we think about the
Latin American debt crisis, Mexico in 1995, the east
Asian crisis in the late 1990s, countries that US,
Japanese, and European banks had
tended to get better deals, bigger bailouts, more money,
fewer strings attached. It wasn't because these
countries were being altruistic,
political interests in it was because they had domestic
financial sectors. protecting their
getting treated more So if we think about who is
treated very tough toughly, the Greeks are getting
so far the Greeks are rightgetting their money.e end
So liquidity and moral hazard,
The problem, though, yes? >> Can you go over that
last thing again
Yes. a little bit more slowly?
billion of debt to the German banks are holding $500
French banks are also holding $500 billion of debt,
not necessarily to the
So this is Germany to Ireland versus Germany to
Spain, Greece, etc. So Greece, Ireland, right.
Greece is actually the French banks.
The big one for Germany is
They're all exposed to Spain. You look at Britain and Ireland,
you look at the United States,
So you can look at the different it's primarily Italy.
who is going to get protected by countries and say
in the eurozone or in the IMF. which major power
of how much my And it's going to be a function
So you can think about it, are financial sector is on the hook.
Well, that's in the eye of the you bankrupt or not?
multiple beholders here. beholder and there's
problem is this strategy The problem is, the bigger
politicized, is unsustainable. of bailouts, even if they're
out there in this SoEuropean rescue fund of $440s
billion, that's enough
If we throw Italy into the to maybe bailout the PIIGS.
country that now has $306 PIbillion due next year,xt
$465 billion due total, I think,
years, there's not over the next three
There's not even enough money if enough money out there.
lent all of its money to Europe. the IMF came in and
enough money. It's the European Central Bank.
The European Central Bank controls the supply of euros.
If it wanted to, it could print money and solve the
debt crisis tomorrow. Now, the euro would fall in
value relative to the dollar and the yen and the
renminbi, there would be
eurozone, but that would a lot more inflation in the
In theory, everybody in the world holds euros like
dollars, these are not Latin
the 1980s that really don't have American countries that
So the question you have to ask accesyourself is, why isurces.
the European Central Bank not doing that?
It's bought up some bonds.
billion of bonds of the PIIGS countries to try and lower
the spreads in installments over
You can compare that, though, with the US Federal Reserve.
The US Federal Reserve spent $2 trillion at the height of the
crisis buying up everything and anything, including worthless
mortgage backed securities, to
the US economy. The European Central Bank could
do precisely the same thing and they're not doing it.
So the question is, why aren't
This gets us to start thinking they doing it?
Here's my attempt, at least, to athink about four.
possible resolutions. One is precisely that.
Very aggressive monetary policy and a weaker euro.
If the European Central Bank
printed a lot of money, bought tolerated higher inflation,
sovereign debt from the PIIGS countries, that would solve the
crisis economically.
Germany. It's politically unacceptable to
deeply, it's deeply engrained in German culture,
the hyperinflation
in the 1920s. The reason Germans did not want
to give up the Deutsche mark
not have a low inflation was fear that they were going to
No German chancellor can go to currency anymore.
going to be okay, we're going to have 8% inflation for a
few years but don't worry,
we thought before. we'll get back to what
influence in the And the Germans have the most
So that works economically but European Central Bank.
Germany politically. it's unacceptable to
of the status quo. You can think of a maintenance
well maybe more bailouts and that's just going
to be the solution. The problem is it's unclear how
that is politically sustainable permanently.
It might bankrupt the core
If Germany and France have to do countries.
European Central Bank is not this themselves because the
how that is either economically gor politically sustainable.e
It's also hard to see how that's
is supposed to be a monetary politically sustainable in what
If you permanently have the unicountries that bailes.
people out and the countries
not politically sustainable. that get bailed out, that's
intentions. ThThere are signs all over thein
place in the Greek
Nazis clothing. The Greeks are not happy withn
the Germans right now.
Germans than the They're even less happy with the
So that's the not a politically Germsustainable outcome.eks.
Nor is austerity alone. The no bailouts rule really is
we don't do this, you solve the problem yourself.
Well, solving the problem yourself in Greece, they've
already cut their budget by 20%.
workers, raised taxes, etc. There's only so much you can do.
Think about the tensions and
we're having in trying to cut the debt and deficits
in the United States. You can't have 40% unemployment.
You can't cut 50% of the
that for 15 years to solve a government budget and do
That's politically debt crisis.
That's politically acceptable on unsustainable.
I was in Berlin a thcouple months ago.y.
I took a nonscientific poll of
Clearly not the sort of mycross-section of Germans.
society, but every one of them
know a lot about this thought that was the solution.
The lazy Greeks need to get their house in order.
Pay more taxes, not be as corrupt, stop working 20 hours
a week, stop retiring at 55,
Again, that's not politically, all of these things.
make those numbers work; economically you can
those numbers work. That leads to the scenario that
everybody, including
to entertain, which me,is debt restructuring, oring
default, and a partial break
The problem with a partial break up of the eurozone.
is it's a very slippery slope to up of the eurozone
of the entire thing. a complete collapse
and unfortunately I couldn't find the picture that I
had in a lecture
undergraduates, is a bunch of mountain climbers roped together
climbing up Mount Everest.
people off without How do you cut the last four
cliff as the winds everybody being pulled over the
and you're approaching the are blowing at 150 miles an hour
It's not easy to say, well, maybe Greece has to go
and Portugal has to go. We'll stop the bleeding there
and everybody else
Because as you think about those will stay in the eurozone.
the markets are going to wonder about whoever else
is now the hind most country. And eventually you're going to
get to the point that the only two countries left in
the eurozone are
And really Germany. So it's not clear how
we get there. That is a politically
and economically
It's possible that you could go sback to what looks a
lot like the European monetary
'80s and '90s where you have system of the '70s,
Benelux countries, Belgium, GermNetherlands and the
Luxembourg, as sort of hard core
else would have some sort of crawling peg against them.y
That would look just like the Bretton Woods system.
The US pegs to gold and everybody pegs and
periodically devalues against the United States.
The problem is, how do you get
So that's a sustainable solution there?
figured out how do you get to that outcome without
having the whole thing unravel. So what is necessary for the
euro to survive if we put these things together?
My thoughts on the four things
So the European Central Bank that are necessary.
up all of the debt and print so mmuch money that youy
have to completely do what the
and spend $2 trillion, but it has to be willing to
tolerate more inflation and do
It's just not sustainable to say more of that.
bailouts to the member states is the IMF and these sort of
So if the Germans are going to going to be enough.
and no deviation from that and insist on tight money
the eurozone, then things will no more inflation in
The ECB, again, it's also going bto have to start
acting more like a serious
like the Fed, like the IMF. So those two sort of go
hand in hand. If you're not willing to step in
and deviate from
and print and buy up your mandate of low inflation
then there isn't bad debt to vex out the economy,
The biggest thing is domestic goipolitical support.y.
So none of this will be sustainable if the PIIGS
countries are pushed to the edge
France, for domestic political or if Germany and
step up and do what needs to be rdone in terms ofo
leading the group and putting up
of agreeing to some of these the money and sort
So domestic politics really is policy changes.
Domestic politics both in the adebtor countries and
the creditor countries. The final question, which I'll
get to in a second, is
and the eurozone was whether even if all of that work
fiscal union in the long-term. sustainable, whether you need a
second and with some pictures. So I'll come back to that in a
So if you put those together, it's amazing how many
pictures can you find of Sarkozy
other or hugging each other. and Merkel kissing each
This is the marriage that has Can been the engine ofue?
European integration all the way
When the chips are down and there's a crisis in the
European Union, it's the Germans
and cooperating and doing what and the French getting together
You can think of them as the needs to be done.
eurozone in sort of the same way hegemons of the
played a hegemonic role in the that the US has
for quite a long time. international system
The second question that's in Sothe news in the lastn.
week or so is, can the
So the first technocrat is Mario technocrats rescue the euro?
of the European Central Bank. It's possible that he could come
in and use his influence. He's very well respected.
He's Italian. He's thought to be less of an
inflation hawk than the outgoing central bank head,
Jean-Claude Trichet,
Maybe he can use his influence from France.
move the European Central Bank and initiative to
higher inflation and playing towards tolerating
last resort role. The two other technocrats to
think of is we've already lost two prime ministers
now in the PIIGS countries. And what has happened?
Well, Berlusconi is gone finally
Silvio has finally gone on it afthis retirement.rs.
Mario Monti, one of the former
is coming in as the sort of technocratic government of
experts in academics. And here, this is Lucas
Papademos who has replaced
He was the deputy governor of Georthe European Centralece.
Bank until a week ago.
in non-politicians The idea here is you're bringing
politicians couldn't do. to do the hard things that the
my perspective, is as Tsoon as these guys come intom
those offices, they're
Technocrats don't really exist. They're going to be in office,
they're going to get
probably going to blrun in the next election, sore
they're going to have all the same domestic political
incentives that the previous guys did.
So if we're resting our hopes on
think we're in trouble. But it might be some combination
of the Sarkozy/Merkel marriage
solves the problem. The bigger question I said is
this, which is even if Sarkozy and Merkel and the
technocrats succeed over the next three, four, five
years in solving
eurozone back on stable footing, what we've learned from
the crisis is it's
can have an economic an open question of whether you
abscess of political union. Even now, Merkel is saying, in
spite of all the
need to more Europe. German opposition, that what we
the 1950s and the crisis in the European Union,
the solution always proposed and pushed forward has
been more and deeper
European Union. This is precisely the debate
that we had in the
So those of you that remember Uniyour American historyset.
classes, this is Alexander
Jefferson, you might refer the Hamilton, Thomas
Assumption of the state debts by debate about assumption.
Alexander Hamilton's argument, the national government.
was from the federalist party, Alexander Hamilton,
can't have a strong central government, we will
never have economic union if we don't have control
of the budget and the debt at the national level.
Thomas Jefferson and the
deeply opposed to that. Much more in favor of state's
rights, favoring a
federal government, worried that Virginia would have
a lot less influence and a lot
overarching, very powerful of autonomy if you had an
They called Hamilton a federal government.
marketing campaign behind it was monarchist, and the story, the
monarch on the other side of the we've traded one
fought a war to get independent of for a new monarch.
A new very powerful central government that controlled
all the purse strings.
debate that the Europeans Thiare having now.the
Can you have unenforceable
single currency. Maastricht criteria and a
monetary policy and one money, but we have governments
that can run deficits and issue their own debt.
It's all denominated in euros but Greece controls some of
it, Ireland controls some of it.
hearing about euro So the jargon that you've been
on the Financial Times bonds in the Wall Street Journal
The question of whether the is European Central Bankon.
needs to be the only one that issues euro
denominated debts.
going to happen in And the fights about budgets are
national capitals. Frankfurt and Brussels, not in
happened in the United States. So it looks very much like what
It was unclear with the Articles The outcome is unclear.
the early United States about how centralized the American
government was going to be. We know now that Hamilton
effectively won out.
centralized federal government. States have very strong
restrictions on their debt
It's unclear going forward. The sort of common language,
common identity,
integration of the continent factors that led to the
of America don't necessarily in the form of the United States
So what it's going to depend on exis governments note.
doing this or doing less of this
Otherwise, the euro is already and more cooperation.
if everybody is blaming each crumbling, otherwise
to have a euro going on. other, we're not going
percentages on it, So I'm loathe to put numbers and
outset of the global but when people ask me at the
the euro collapse? financial crisis in 2008, would
are you crazy? I pretty much think I said,
It's not clear, I don't think the euro will completely
collapse, but I think it's a
think that we might end up perfectly plausible scenario to
European monetary with with some sort of two speed
And, again, the question is, how some countries leaving.
get to that outcome without the whole thing coming undone?
So I'll stop there and have some
Thank you very much. time for questions.
If you want to [APPLAUSE]
I'll it get you the microphone raise your hand,
They might not hear you sin the back, though..
Audience: One of the most frightening things, I think, is
that Italy is the third largest economy in the eurozone,
and it's too large to bailout,
Well, we've talked about and so what do we do?
The problem is you can bailout the menu of options.
economies, but you can't bail onall of them out.e
So it's a question of politically which is the
decision? You could have a rescheduling or
default of 50% of their debt. We could bail them out.
The European Central Bank could bail them out.
They could print enough money to
So it's really a question of cover Italy.
losers from each of those there outcomes.rs and
If Italy gets completely bailed out because the
European Central Bank starts
buying up Italian bonds, then the banks are going to
get their money back, the eurozone will continue.
If there's default, things might
but again, there's sort of costs go up in flames,
There's no good choices. to each of these.
choices of we can just We're sort of past the easy
think about making you bail you out and not really
So in the end it's going to be change your policies at all.
bailouts, austerity and default, some combination of
debating right now is the mix of and what we're
But none of those on their own those three things.
to solve the problem. reallyYes?going
I'm wondering what
China to help bailout the hapEuropean Union, what youby
know about that and how that's
So this is another been dealt with.
It does turn out that there's a country that has $3 trillion in
foreign exchange reserves and is
besides buying wondering what to do with it
That would be China. US treasury bills.
IMF or the European Union. That's a lot more money for the
have actually explored this, So it's possible, and the Greeks
help them pay their debts. that China could come in and
come free. Well, that's not going to
motivation in international affairs, at least
in the things that I've studied.
whose conditions do you So thate the least?n is,
So the IMF is going to have a set of conditions
because the Americans and the Japanese and the Europeans
have a lot of influence.
to come from Germany and France. The EU, the conditions are going
give the money free. Well, China is not just going to
conditionality would look like. It's also unclear, it would be
great to stick it to
and say the Chinese theare riding to the rescue.ans
That would sort of fit with the broader narrative of the rise
of China in the global economy. But if the goal was to find
something better to do
or US treasuries, withdistressed Greek debt isold
probably not the thing you
[LAUGHTER] want to invest in.
going to be a major So part of the solution.at's
Mostly because if push comes to shove and the
Chinese really credibly said
dollars, that would probably be himpetus for then
Germans and the Americans to
mobilize some alternative which would be politically
more palatable. Yes?
Do we have the mic back already?
What are the odds Okathat in the long run thet.
eurozone and the euro are going to be tied to Germany, France
and a few other smaller countries that are stable?
So that we would have the sort of hard core?
Yeah, the hard core would become the eurozone
and the euro. >> I think that purely as
the outcome is unlikely.
to say you would I think it would be more likely
euro one and euro two. have, there would be the sort of
that would be the Theurozone, and everybody elsend
would sort of be in limbo in transition into being
in the eurozone.
do you get there? AI think, at this point, it's aw
conceivable outcome to
Luxembourg, Austria, say Belgium, Netherlands,
You're not going to have a Germany, Italy, France, Spain.
The Italians have been there in eurozothe European Unionlians.
all the way back to the beginning in 1951.
And Spain is too big probably not to be in there.
But you could have that and everybody else sort of
pegged to the euro. So I'm not sure how
likely it is. I think it's a conceivable
outcome, but, again, the
How do you do that where you problem is how do you get there?
Italy and Spain? could cut it off at
the answer to that. And I don[INAUDIBLE]ople know
What's that?
is you save it that way. >> How you get there
that five countries are going to leave, why not the sixth?
Why not the seventh?
negotiate with. Ther>> I was wondering abouts to
the time line of the banks
Was that gradual over the period exposure to the PIIGS.
Or was it a bubble? since th>> This year?f the EU?
Yeah. >> That's all of it and so
it's cumulative.
over time because if there's a >> No, the time line
which I think it was... bubble in >> Right.few years,
Then how much has the global income inequality
fueled all of that? >> So, I don't know about
inequality but part of
problem in the eurozone is what's driving this and the big
So a lot of this is German surpluses and deficits.
they're running massive trade cosurpluses that go intoe
the banking system and then get recycled back towards Greece.
So it is cumulative in the sense
Some of that is debt from that that15 years ago.ne number.
Some of it is debt from five
It accumulates over time. That sort of gets at the
big problem.
The Germans want to tell the It's unsustainable.
because it was over-borrowing in story that we need austerity
Well, the only way you can run a those countries.
is running a surplus. dAnd the same way that thee
Chinese want the story to be that we, as Americans, have
lived beyond our means and
economic policies, the only way they have massive surpluses is
because we're buying
So part of what's going on here is if we're going to
move towards balance, you're
have Germany move from a massive also going to have to
and you wouldn't have the tradrecycling of the debt.nce,
But again, how you get from here
difficult question. >> Hello, Mark.
Yes, hi.
could bring this discussion a little bit closer to home.
So if we look at our own PIIGS
States, California, and Illinois, and the tremendous
deficits of those states have been running.
Not Wisconsin?
Texas that seems to be more like, say, Germany.e
So how are we...
like Greece. >> Well, Texas now looks
Turns out they were cooking the books.
[LAUGHTER]
can you maybe draw some analogies about what's happening
in the United States vis-a-vis
government because it seems like our states and the federal
home about some of our own we need to be informed here at
It illustrates the fiscal problems.
to Hamilton and Jefferson. difference to sort of go back
United States we also have So we have a fiscal union in the
So people move around the a lcountry easier whenity.
there's high unemployment in one
and not the other. part of the country
because of the housing market. That's harder to do right now
is people can't Onmove right now because theyout
can't sell their houses that are under water.
But we have a fiscal union. So there is redistribution from
surplus states to deficit states through federal
government, social security,
through Washington, DC. The other thing we have is lots
of states are in
much states can borrow. dLots of states have balancedw
budget amendments.
the debt that they want. They can't just run up all of
of Hamilton and Jefferson about assumption was the federal
government is going to have ultimate say about how much
borrowing there can be in the country.
And they're going to control all
So there severe debt problems in of the issuing of the currency.
but it's different. California looks like Greece in
terms of levels of debt,
in which there are but there are lots of ways
California to make sure that California doesn't default.
That's different from saying
Greece across sovereign states. GSo the problems within theo
United States are different and budget constraints are
different primarily because we have that unified federal
government that is moving money across borders.
You can think about New York
sending it to Mississippi. taxpayers are paying taxes and
paying taxes and sending it Oregto Illinois. are
That isn't happening right now
these direct bailouts within the except in the form of
the European monetary union. European Union or
all the time we have today. So thank you very much for your
great questions,
If everybody would please join everybody, and thank you, Mark.
This is the best turnout we've me in thanking Mark.
Thank you very much. ever had for Global Hot Spots.
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