JEFFREY BROWN: And we look more now at Greece, Europe and the connection to the U.S. with Nariman Behravesh, chief economist at IHS Global Insight, an economic forecasting and consulting firm.
Well, Nariman, Greece is the immediate focus here, but other European countries are facing a similar problem, correct? How widespread is this?
NARIMAN BEHRAVESH, chief economist, IHS Global Insight: That is correct.
There are about five countries that investors are particularly worried about: Portugal, Ireland, Italy, Greece, and Spain. And the acronym for these is the PIIGS, if you will, unfortunately.
All of these countries have large amounts of debts. And the recession that we just went through — and some of them are actually still going through, like Spain is still going through a recession — have exposed the fault lines, if you will, and have made this problem far worse than it was before. And, unfortunately, as the story was said earlier, in the case of Greece, they essentially lied about the numbers.
And, so, all of a sudden, the picture in Greece is looking a lot worse than it did just, you know, a few months ago. And not only are the — are the investors focused on Greece, but, all of a sudden, they’re beginning to worry about the others, especially Portugal and Spain, a little less worried about Italy and Ireland right now.
But those three countries, Greece, Portugal and Spain, are particularly worrisome.
JEFFREY BROWN: So, you have these countries that have their own problems, but then there is the further contagion worry, I guess, and the impact on the rest of Europe.
Explain that. I saw one quote today that described this as the biggest test of the euro in its 11-year history. How does the problem in Greece affect Germany and other countries in Europe?
NARIMAN BEHRAVESH: Well, it’s a very good question, in the sense that the big worry is that, what if Greece defaults on its debt? What will happen? What’s the scenario?
There are a couple nasty scenarios, one in which Greece leaves the euro zone. It is one of the 16 members of the single-currency area. That would be a disaster politically, economically, for the rest of the euro zone, because it would start to put pressure on these other countries that are in trouble. And you could start to see a big splintering of this sort of unified currency area.
The alternative, which is, in the end, a better alternative, but, to some extent, unpalatable to especially the Germans, is that they bail out Greece. They save the euro zone, but bail out Greece. And, here, I think the Germans probably will eventually come around, but they’re very worried about the precedents that this will set, because Greece has been quite profligate in its behavior.
So, they don’t want to reward that. They don’t want to create what’s referred to as moral hazard, in the sense of, again, you know, providing guarantees that only means that, a few years from now, they’re going to do the same thing. So, they’re — they’re left between two very bad choices here.
JEFFREY BROWN: And their citizens, presumably, would have to take on the problems of Greece and these other countries.
Now, we reported in the news summary that there was at least some sign, some talk about a potential aid package. What do you — do you know anything more about that or how solid that is?
NARIMAN BEHRAVESH: There certainly were rumors today about that. And what we have heard is that what’s the most likely scenario is that there will be debt guarantees. Namely, Greece’s debt will be guaranteed, in some sense, of course, in return for very serious and hard concessions by the Greek government in terms of cutting spending.
If they do that, then that will calm the markets. Already today, it did calm the markets quite a bit. But it’s going to be something like that, where, essentially, the euro zone and Germany in particular, but the European Union sort of backs Greece, provided there are these sort of major concessions by the Greek government.
JEFFREY BROWN: All right, now, when you say calm the markets, because we saw that’s what happened today — and that includes the U.S. markets — so, that’s what happened today — in recent days, as you know, U.S. markets have been taking a fall, and largely put on these problems in Europe.
So, explain the connection there. How does — how does a budgetary problem in Greece translate to problems on Wall Street?
NARIMAN BEHRAVESH: Well, we are facing a global market, and not just in Europe, but in the U.S. as well. Of course, our debt levels are rising. So, I think markets are kind of jittery about this whole debt situation.
So, they pushed down the U.S. markets as well. But some of it is psychological. I often joke that there — there are times when the markets — you know, for the markets, all news is good news, regardless of how bad it is. Well, in the past couple of weeks, it’s been all news is bad news, regardless of how good it is.
And, in the U.S., the news actually has been fairly good. So, it’s a little puzzling about why the markets took it out on the U.S. You can understand why they did it in Europe. But, on the U.S., it’s a little more puzzling.
JEFFREY BROWN: Now, back to Greece, though. At this point, as that piece showed, there’s going to be all kinds of political pressure against these austerity steps. So, this is not over by any means, correct?
NARIMAN BEHRAVESH: That’s correct.
Well, you know, in Greece strikes, especially public sector strikes, are a national pastime, a national sport. And the reason is very simple. In the last 10 years, the public sector spending on wages and pensions, which is about 51 percent of the overall budget, has doubled.
So, the public sector unions were treated very nicely. They got lots of bonuses, some people say because they went on strike so much. We won’t debate that. But, right now, what — what is going to have to happen is, at a minimum, wage freezes for the public sector unions, and they could go the route that Ireland just did, which is actually cutting wages.
That’s hugely unpopular. And I suspect there’s going to be a lot of political turmoil in Greece as they try to push these kinds of measures through. I mean, it’s not going to be easy.
JEFFREY BROWN: All right. And the next step, I gather, is a European Union meeting Thursday to consider what to do.
We will leave it there for now. Nariman Behravesh, thanks very much.
NARIMAN BEHRAVESH: Thank you.