JEFFREY BROWN: A short time ago, after the markets closed, we got a broader look at some of the connections between the troubles in Europe and the market’s reaction in recent days.
And joining me is Paul Krugman, professor of economics and international affairs at Princeton University and a columnist in for The New York Times. And Robert Barbera is chief economist at the Investment Technology Group, a research and market analysis firm.
Paul Krugman, some of what’s happened today now seems to stem from a trading or human error, but I would like to focus here on the turmoil in Greece. Why is it, do you think, that it is rattling our markets so much?
PAUL KRUGMAN, columnist, The New York Times: Well, you know, in a way, there’s nothing we didn’t know, which is that this is a terrible, terrible situation for Greece, and that the Eurozone has got big, big problems that — structurally. They really have a problem. We don’t actually know how this gets resolved.
But I think it’s finally coming to people — it’s coming to a head. These things tend to drift on. People are suddenly looking at it and saying, how is this going to end? How is this going to work out? And this is big. Greece is not big, but the Eurozone is one of the world’s two great economies, and it’s in deep trouble.
JEFFREY BROWN: Robert Barbera, how do you see the connection?
ROBERT BARBERA, chief economist, Investment Technology Group: Yes, I think Greece, obviously, as a nation, we really don’t much care about the GDP effects.
But the fear is that Greece is playing the role of Lehman Brothers, and that you could have a domino-like effect, where there’s a run on Greece, then a run on the other weaker sisters, and, ultimately, a problem for sovereign debt. I think that’s the — the angst that’s driving the financial markets over the last couple of weeks.
JEFFREY BROWN: Well, let’s start with Greece itself, and then broaden it out.
Mr. Barbera, the immediate impact — the immediate thing under demonstration and debate in Greece is the austerity program. Now, is that the right — is that the right measure for Greece? Is — what are the pros and cons that have markets wondering about?
ROBERT BARBERA: I think the problem is that most of us know that there’s no way that there’s enough austerity that could be squeezed out of Greece for them to make good on the debt.
So, we all believe that, ultimately, there will have to be some restructuring. And, so, you have got riots in the streets about a certain amount of austerity, and the reality that you just couldn’t squeeze it enough to make good on the debt. And I think that that’s a real stumbling block.
JEFFREY BROWN: Paul Krugman, what do you think about that?
PAUL KRUGMAN: Yes. Yes, I think — in fact, if anything, I think that’s too optimistic.
The point is that, even with a restructuring of the debt, Greece needs to do some enormous austerity. No one really knows how this works. Even if you don’t count interest payments, Greece was running a deficit last year of almost 9 percent of GDP, which is saying it has to do — even if it completely stopped paying its debt, it would have to make an enormous adjustment, which looks like it’s not politically possible.
How is this going to work out? And it’s very hard to tell — I find it very hard to tell a story that doesn’t end with Greece dropping out of the euro, with something that — they need something to give their economy a boost, something that makes their exports more competitive, something that — that gives them some alternative to just — to doing nothing but slashing spending and raising taxes in the face of high unemployment.
That’s not on the table. In a way, it can’t be on the table until it becomes inevitable. But I think the point is that — that it’s not as if somebody could say, OK, let’s be a nice guy, unless the European Union is prepared to come through with massive aid, not just a debt restructuring, but massive aid. And they’re not ready to do that.
So, we’re really up against a wall here.
JEFFREY BROWN: And, so, Mr. Barbera, does that, then, call into question the entire — well, the entire question, the future of the so-called Eurozone and euro?
ROBERT BARBERA: Yes.
JEFFREY BROWN: Where — where are we there?
ROBERT BARBERA: Yes, I think professor Krugman makes a good point about Greece. I don’t disagree with that.
I think the — what they’re trying to buy is time, because I think you can make the case that Greece is a uniquely bad situation. True, Portugal has a difficult situation. So does Spain, Italy, Ireland. But what they’re trying to do is buy — buy time, so that, if you get some further down the road, you could actually contemplate both a big restructuring of the debt, in the midst of all these very difficult adjustments, perhaps them leaving the euro, without it causing the chain reaction.
And, hence, the effort to say the IMF and the Eurozone will write some checks and backstop some bonds to get some distance from this moment, the thought is, if you had have an expansion that works out for a couple of years, you could then have Greece in the midst of this turmoil and have it less be potentially contagious.
JEFFREY BROWN: But, Paul, Paul Krugman, you’re worried more about the contagion or the potential for spread to other parts of Europe.
PAUL KRUGMAN: Yes.
I that think if — if Greece doesn’t resolve this, and events are moving pretty fast, then people are going to say, OK, Greece is the extreme case. Nobody else has the combination of debt and overvaluation that they do. But other countries, you know, are in that direction. So, Portugal doesn’t quite look like Greece, but there’s a resemblance.
Spain has actually been, fiscally, quite responsible, but they’re — they’re — they’re in trouble because their costs and prices are out of line. So, it starts to call the whole structure into question. I don’t think it’s a sovereign debt issue, by the way, generally.
If you look at what happened to bond markets today, U.S. interest rates dropped, British interest rates dropped. This is a Eurozone problem. But, unfortunately, the Eurozone is a big player in the world economy.
JEFFREY BROWN: But, then, I want to bring it back to us, then, and start with you, Robert Barbera.
So, how does that affect — well, I mean, some people talk about, if you want to continue the snowballing effect, it calls into question our own potential long-term debt. Is it — is that what we’re worried about, or the immediate…
JEFFREY BROWN: No?
ROBERT BARBERA: No.
I think — and I hear a lot of that, and I just find it — it’s — it’s fanciful that you can get from the Greek situation to our bond market and worry about our fiscal situation. I also have one of the more optimistic outlooks on the U.S. economy. And I have been very happy with the numbers that have come out year-to-date.
The data have looked good. And, at the margin, if you think about the histrionics of the last couple of weeks, the two big things that have happened in the U.S. are that mortgage rates have come down rather substantially, and oil prices have come down rather substantially.
In fact, even in the corporate bond market, yields have been coming down. So, if we don’t get the domino-like effect and have a big crisis for Europe overall, I just — I just can’t make the case that this knocks us off our pins.
JEFFREY BROWN: And the volatility that we see in the markets, and mostly in the downward direction over the last few days, you’re — you’re not worried that that will continue?
ROBERT BARBERA: Well — well, no, you’re absolutely right. The market has been really down and painful over the last couple of days. But, you know, over the last 14 months, it’s been an impressive recovery.
And it’s — it’s, unfortunately — I think the tough part about the market today, independent of the trading glitches that may have occurred, the tough part about the market today is, it reminds you that the public did take a big step towards corporate bonds, junk bonds, and the bond markets right now have recovered and — and have a great deal of underpinning, but the public has not come back to the equity market, and — and that the…
PAUL KRUGMAN: Could I weigh in here?
JEFFREY BROWN: Yes.
PAUL KRUGMAN: The main substantive thing for the U.S. economy, I think, is that we’re seeing the euro drop. And that means that U.S. exports become less competitive. You know, we are counting on exports as being one of the drivers of recovery. So, this is not a good thing.
We are seeing some — it’s fairly prosaic. This is not — this is not a Lehman type, well, the markets come crashing down. But one of our biggest trading partners has suddenly, because of its own problems, become a lot more competitive, and we have become less competitive.
And that — that’s not good news for the economy. It’s not 1,000-points-on-the-Dow bad news, but it’s not good news.
JEFFREY BROWN: All right. We will…
ROBERT BARBERA: Yes, but…
JEFFREY BROWN: No, go ahead.
ROBERT BARBERA: … in addition, the fixed-rate — the fixed-rate mortgage is down a lot, and so is the price of oil.
I mean, if you added the three up right now, and — you know, on an econometric basis right now, the last two weeks is a push.
JEFFREY BROWN: OK. Day to day, we will keep watching.
Robert Barbera and Paul Krugman, thank you very much.
PAUL KRUGMAN: Thanks a lot.
ROBERT BARBERA: Thank you.