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Europe Struggles for Consensus on Economic Recovery

March 3, 2009 at 6:10 PM EDT
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Britain's Gordon Brown met with President Barack Obama Tuesday and urged international cooperation to stem the global economic crisis. Analysts examine Europe's financial fallout.

JUDY WOODRUFF: In Washington to meet with President Obama, British Prime Minister Gordon Brown pressed for international cooperation to address the economic meltdown.

GORDON BROWN, prime minister, Britain: There is the possibility in the next few months of a global New Deal that will involve all the countries of the world in sorting out and cleaning up the banking system. And there is the possibility of the international institutions for the first time being reformed in such a way that they can do the job that people want them to do and deal with some of the problems that exist in the poorest countries of the world.

JUDY WOODRUFF: The leaders met against the backdrop of a second phase of the financial storm now sweeping through Britain and Europe. Markets there and throughout Asia have taken crushing blows of late, especially yesterday, where in the U.S. the Dow closed below 7,000 for the first time in 12 years.

Monday’s bad news impacted both sides of the Atlantic, as American insurance giant AIG and Europe’s largest bank, HSBC, each reported record losses, spurring huge market sell-offs.

Europe is swiftly sliding into recession. Businesses are closing, and banks are struggling with huge losses. The financial crisis has even sparked unrest in some countries over measures to deal with the downturn, but the scope of what ails the continent varies greatly from country to country and from Western to Eastern Europe.

That has left the 27-member European Union struggling to find unity. Just prior to a meeting of European Union leaders this weekend in Brussels, the Hungarian prime minister called for an E.U. fund of $240 billion to aid former communist countries in the region. He warned that the failure to do so would create a new breach in Europe as bad as the one of the Cold War.

FERENC GYURCSANY, prime minister, Hungary: It means that we should not allow a new iron curtain would set up and divide Europe into two parts.

JUDY WOODRUFF: But the meeting ended in discord, when Germany, which has Europe’s largest economy, rejected a general bailout package for struggling countries. German Chancellor Angela Merkel.

ANGELA MERKEL, chancellor, Germany (through translator): I would not recommend talk about huge amounts of money. Rather, we have already shown — and especially by the example of Hungary — that we help countries that are in need and we will, of course, continue to do this. But I do not think that we can use the same measures for all Eastern and Central European countries.

JUDY WOODRUFF: Back in Washington today, Gordon Brown, the man who for 10 years managed Britain’s treasury, was trying to set the tone for international action.

GORDON BROWN: We’ve got a global banking failure, and it’s happened in every part of the world. It’s almost like a power cut that went right across the financial system, and we have got to rebuild that financial system.

We’ve got to isolate the bad assets. We’ve got to underwrite the financial system so that loans could start again to businesses and families. And we’ve got to get enough lending into the economy so that people — enough credit so that people are able to go about their normal business again.

The economic outlook in Europe

Zanny Minton Beddoes
The Economist
They were borrowing massively from abroad, and they were doing so in a way that would be deemed suicidal for most ordinary emerging economies, but they were deemed to be OK because they were part of Europe.

JUDY WOODRUFF: The prime minister and President Obama will meet again next month in London for the summit of the world's top 20 economic powers.

For a closer look at what's behind the latest wave of problems overseas and its relationship to our troubles in the U.S., we talk to three people following this story.

Simon Johnson is a former chief economist at the International Monetary Fund. He's now a professor at the MIT Sloan School of Management.

Zanny Minton Beddoes is economics editor at the Economist magazine. She covers the global economy.

And Scheherazade Rehman, director of the European Union Research Center and professor of international finance at George Washington University.

Thank you all three for being here.

Simon Johnson, I'm going to start with you. How bad are things in Great Britain and Europe?

SIMON JOHNSON, MIT Sloan School of Management: They're very bad. East-central Europe is in serious trouble. The banks there are under pressure, those banks are owned by Western Europe. It all comes back to Western Europe. And at the same time, there's a big property downturn in Ireland, the U.K., and Spain. They're being hit from all sides.

JUDY WOODRUFF: And what would you add to that, Scheherazade Rehman, and the divide between Eastern Europe and Western Europe?

SCHEHERAZADE REHMAN, George Washington University: Yes, I think Simon is absolutely right. Things are going to get a lot worse. The next six months to a year are going to be dire.

It's a trickle effect. It happens here. It goes to Western Europe, and it goes to Eastern Europe. This iron curtain that prime minister from Hungary is talking about really started with the euro. This is not an iron curtain between east and west. It's countries that belong to euro or the Euroland, they're safe. Everybody outside is not safe anymore.

JUDY WOODRUFF: What would you add to that picture, Zanny Minton Beddoes?

ZANNY MINTON BEDDOES, The Economist Magazine: Well, I think the real issue in Eastern Europe -- and I agree that there's a big problem in Western Europe, too, particularly with the property markets -- but I think the real focal point now is Eastern Europe. And that's the shoe that hasn't yet dropped, but it's likely to drop and, in my view, it's most certainly going to drop.

And the problem is these countries were basically running huge deficits. They were borrowing massively from abroad, and they were doing so in a way that would be deemed suicidal for most ordinary emerging economies, but they were deemed to be OK because they were part of Europe. They were converging with Europe. They were joining the European Union. The bet was that, if trouble hit, they would be assisted by Europe.

And trouble has hit in three very profound ways. They've been hit by the recession in Europe, so their exports have slumped. There's a banking crisis, because banks have fled from them. And they've had a balance sheet crisis. Their currencies have fallen, but their people have been borrowing in euro, and so suddenly they face much, much higher payments.

Add those two together and these countries are in serious, serious trouble. And as Simon said, the problem is that their bankers are West European bankers. So a crisis of a default in Eastern Europe very rapidly becomes a serious banking problem in Western Europe. If you will, it's the kind of subprime of Europe. And that hasn't yet hit as much as it's going to.

European Union slow to act

Simon Johnson
Former Chief Economist, IMF
What we're seeing in Europe is a much more broad-based re-pricing of risk. It's in property; it's in banking; it's in manufacturing. Exports are falling all across Europe.

JUDY WOODRUFF: Simon Johnson, help us in the United States understand how what's going on over there is different from what we have happening here in the U.S.?

SIMON JOHNSON: Well, in the U.S., we obviously have a problem with the banking system. And that is really holding up the entire recovery effort.

What we're seeing in Europe is a much more broad-based re-pricing of risk. It's in property; it's in banking; it's in manufacturing. Exports are falling all across Europe.

And while I agree with what the others are saying about the centrality of east-central Europe, I do think Western Europe is in very big trouble. And that itself comes back to American banks and makes our banking problem even more severe.


SIMON JOHNSON: Well, if you take, for example, the stress scenario, which the government is going to use to assess which banks have enough capital to get through the recession, that scenario is, in my view, predicated on a pretty good global economic performance. That's inconsistent with what we're seeing these last days coming out of Europe.

JUDY WOODRUFF: How do you see that...

SCHEHERAZADE REHMAN: I think we're much more tied in with the U.K. than we are with continental Europe. I'll give you an example. And Gordon Brown is here for a reason. The U.K. and the U.S. financial markets are interconnected.

For example, Citigroup's, all their offshore trust business is done with the Royal Bank of Scotland, which was bailed out by Gordon Brown for over $300 billion. So there is interconnectivity there, but mostly with the financial markets in the U.K. These two markets have to adjust, first, to stabilize first, and then we worry about continental Europe.

JUDY WOODRUFF: If someone is looking at this picture, Zanny Minton Beddoes, and they're saying, "All right, who is or what is the greater responsibility here? Is it the U.S. and it is spilling over to Europe, or is it more Europe spilling over to the U.S.?"

ZANNY MINTON BEDDOES: Well, I think I would put it slightly differently. And I'd say, why is there a reason to be even more worried about Europe than the U.S. right now? And the real reason is political.

You have very profound economic problems that we've discussed, but the real problem is that the Europeans cannot get their act together to react in an appropriately comprehensive and bold manner.

Europe is still a lot of different countries. They have the European Union. They have the single market. They have the euros -- some countries have the euro, but they don't -- they're all at sort of different levels in that and there's no single fiscal authority. They can't do a euro-wide stimulus. They can't even get it together to have a euro-wide rescue package.

And so the problem -- the reason I'm kind of more worried about Europe than I am even about the U.S. right now is not that the underlying problems are necessarily -- economic problems are that much worse, but that there is an incapacity to deal with them with the -- at the kind of pace and boldness that I think is necessary to avert really serious problems.

Brown proposes 'a global New Deal'

Zanny Minton Beddoes
The Economist
Gordon Brown is absolutely right. We need leaders to come together. We need a global New Deal, if you will. But the risk is that they have a New Deal...improving the fire station and not one that focuses on putting out the fire right now.

JUDY WOODRUFF: So how does that affect solution? Gordon Brown comes to Washington this week. Today he's presented what I guess they're calling a global New Deal. Help us understand what that's about, Simon Johnson.

SIMON JOHNSON: Well, it's a bit vague, to be honest. I think it's a promise of further regulatory reforms. It's the idea they're going to clamp down on some of the activities that banks were able to do off their balance sheets before.

These are important problems, but they're things that you need to fix sort of down the road before to pre-empt the next crisis. There's very little concrete on the agenda -- have been put on the agenda by Mr. Brown or yet by the Obama administration that will really address the severity of the problems that we're talking about right now in Europe and around the world.

JUDY WOODRUFF: Why is that?

SIMON JOHNSON: Well, I think the problems are exactly as Zanny said. We talk about it as a global crisis. But, really, the epicenter at this moment is in Europe, and there's this political problem. There's a great deal of awkwardness.

Of course, Mr. Brown, who was here today, doesn't speak on behalf of the Eurozone. And the problems are very much Eurozone problems. The European Central Bank, for example, is running what, in my view and the view of many, is a monetary policy that's too tight under these circumstances. And that makes life very difficult for some of the weaker members of the Eurozone. At the same time, Germany doesn't want to help the weaker members. Very tough standoff right now.

JUDY WOODRUFF: So how is there going to be or is there going to be, Scheherazade Rehman, cooperation or coordination?

SCHEHERAZADE REHMAN: Within the European countries? I agree with Zanny. I think that they don't have the institutional structure to do something that we are doing. I said on this show two months ago, I'd much rather be us than them, at least in the medium term. We are in a deeper hole, a larger hole, but we will eventually get out.

They are going to stumble around for quite some time, because structurally they are tied up. And, you know, and Gordon Brown -- and he may not speak for continental Europe, but I do believe he speaks for Europeans at large when he's coming here to actually convince -- not convince us, but tell us, look, call a horse a horse. We are to some degree looking like the European financial landscape. And we are not admitting it; we don't like the word "nationalization." But we're headed there, for at least five to seven years to come.

JUDY WOODRUFF: How much does it matter to the United States whether and how fast this gets resolved, Zanny Minton Beddoes?

ZANNY MINTON BEDDOES: Oh, enormously. I mean, the world economy is in an extraordinarily fragile position. We have the worst global recession since the 1930s.

If you have another big shock -- particularly one that's avoidable -- and I think, at this stage, just a really nasty scenario in Europe is still avoidable. But if you fail to avoid it, then we have another downward kick to a world economy that's already reeling.

So it seems to me that we're in a -- we're in a fantastically dangerous position. And it's one where -- you know, Gordon Brown is absolutely right. We need leaders to come together. We need a global New Deal, if you will. But the risk is that they have a New Deal that focuses on, you know, improving the fire station and not one that focuses on putting out the fire right now.

Role of American leadership

Scheherazade Rehman
George Washington University
I think it's too late. I think the ugly head of protectionism is there. It's happened in France just now, $6 billion to the French automobile industry. It's not going to stop, and that's going to hurt the poorest of the Eastern European countries.

JUDY WOODRUFF: So what should they be doing, Simon Johnson?

SIMON JOHNSON: They need a European solution. They need a European stability fund of the kind, actually, the Hungarians are proposing. Nobody wants to hear it from the Hungarians, obviously. They're in big trouble, partly of their own making.

But they were also encouraged by Western Europe, by the rest of the European Union. Join the European Union. You're going to be rich. You can have extraordinarily fast credit growth. Go for it. Don't worry about the risks; we'll take care of you if someone goes wrong. Now they're saying to them, "Oh, no, not our business. You go see the IMF." That's a very tough thing to say to your friends and neighbors.

JUDY WOODRUFF: I hear you all describing the problem. What I don't hear is that there's a realistic, politically realistic solution there.

SCHEHERAZADE REHMAN: I think the only realistic answer right now is to understand that anyone who belongs to Euroland or the Eurozone is safe. Everybody outside, it's a gamble.

JUDY WOODRUFF: And you have this -- not just this meeting this week to look ahead, but you have in the next few weeks a meeting of the so-called G-20, the top 20, I guess, most economically powerful countries. Does it matter what comes out of that meeting? How important is it? Is it just another meeting, Simon Johnson?

SIMON JOHNSON: No, I think it's very important. I think what will come out of it is another meeting, that we'll agree to meet again. I'm not very optimistic in terms of concrete deliverables that would really address today's problems. They'll talk about a medium-term regulatory agenda, but that's, I think, largely a smokescreen at this point.

JUDY WOODRUFF: And how important, to you, Zanny Minton Beddoes, leadership from the United States in all of this?

ZANNY MINTON BEDDOES: Oh, enormously important, because, in the end, everybody looks to the United States for leadership. The rest of the world is crying out for American leadership in terms of what to do about this global problem.

And I wish the Europeans would get their acts together to show leadership themselves, but the sorry truth is that right now they can't even get it together to sort out the problem in their backyard, never mind come together more globally.

I think -- now, I'm not cataclysmically depressed, because I think that in the end...


ZANNY MINTON BEDDOES: ... in the end, they will come together, but it's going to take a very nasty crisis, and they'll do it 10 minutes too late.

And right now we still have time to prevent a really nasty outcome in Eastern Europe, but I fear that action won't be taken in time, and so we'll be picking up the pieces of another downward leg in what is already a huge global mess.

JUDY WOODRUFF: Quick last comment...

SCHEHERAZADE REHMAN: I don't think they're going to come in 10 minutes later. I think it's too late. I think the ugly head of protectionism is there. It's happened in France just now, $6 billion to the French automobile industry. It's not going to stop, and that's going to hurt the poorest of the Eastern European countries.

JUDY WOODRUFF: Not a particularly uplifting conclusion, but that's the way it is.


JUDY WOODRUFF: Scheherazade Rehman, thank you. Simon Johnson and Zanny Minton Beddoes, we appreciate it, all three of you.