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As Obama Kicks Off Trip, How Far-Reaching Is Europe’s Economic Crisis?

May 23, 2011 at 12:00 AM EDT
President Obama kicked off his trip to Europe with an ecstatic welcome from a crowd in Dublin. The jubilant scene came amid troubled economic realities facing the Eurozone. Jeffrey Brown discusses Europe's continued financial struggles with the Financial Times' Gillian Tett and Harvard University's Kenneth Rogoff.

JEFFREY BROWN: Finally tonight, amid roiling international markets, we update the financial crisis in Europe, as President Obama begins a six-day, four-country visit.

The president kicked off his trip in Ireland today. His stop included a visit to a house once owned by his great-great-great-grandfather in the town of Moneygall, complete with a pint of Guinness at the local pub. That was prelude to an ecstatic welcome from a crowd of nearly 30,000 in Dublin.


PRESIDENT BARACK OBAMA: My name is Barack Obama…


BARACK OBAMA: … of the Moneygall Obamas.


JEFFREY BROWN: But the jubilant scene came amid a backdrop of troubled economic realities facing Ireland, along with a number of other countries, Spain, Portugal, Greece, and Italy, in the southern parts of the so-called Eurozone.

In Spain today, demonstrators remained camped out in central Madrid’s Puerta del Sol square after a week of protests over the government’s handling of the economy — Spain’s unemployment tops 20 percent — and tough austerity measures aimed at bringing spending under control. The anger led to a drubbing for the ruling Socialist Party in local elections held yesterday.

ALBA RECONDO, Spain (through translator): What we want is to be listened to, to get real reform. We don’t want this to just be an anecdote or three days camping, and that’s it.

JEFFREY BROWN: Also this weekend, Italy got another kind of shock when credit agency Standard & Poor’s lowered its rating from stable to negative, citing slowing economic growth.

And that came just after Greece’s credit was pushed further into junk bond status by ratings agency Fitch. Greece has been rocked by protests in response to government austerity measures undertaken in response to a large bailout package offered by its European partners last year.

For its part, Ireland too was forced to take a bailout last November and has seen protests, though not on the same scale as those in Greece. Its package came with conditions that called for a number of austerity measures, including slashing government jobs and increasing taxes.

Meeting with President Obama today, Irish Prime Minister Enda Kenny acknowledged the ongoing crisis.

ENDA KENNY, Irish prime minister: I have explained to the president the seriousness of which Ireland and its new government led by myself and the presence here of the (INAUDIBLE) are dealing with the issues that affect our country.

JEFFREY BROWN: Addressing the crowd in Dublin later, President Obama compared Ireland’s financial troubles with America’s and offered some reassurance.

BARACK OBAMA: I think we all realize that both of our nations have faced great trials in recent years, including recession so severe that many of our people are still trying to fight their way out. And naturally our concern turns to our families, our friends and our neighbors. We’re peoples, the Irish and the Americans, who never stop imagining a brighter future, even in bitter times.

JEFFREY BROWN: Tomorrow, the president travels to the United Kingdom, which has recently implemented its own set of austerity measures for a two-day state visit.

There was late word that President and Mrs. Obama actually left Ireland early to avoid the ash cloud from the Icelandic volcano and arrived in London this evening.

And we continue our update of Europe’s troubles now with Gillian Tett, U.S. managing editor of The Financial Times, and Kenneth Rogoff, professor of economics at Harvard and co-author of, “This Time Is Different: Eight Centuries of Financial Folly,” a book exploring various banking and debt crises throughout history.

Gillian Tett, I will start with you.

If you look at the markets and at this weekend’s event, is there a new concern that Europe’s problems are nowhere near being under control?

GILLIAN TETT, The Financial Times: Well, absolutely there is a new concern, because, basically, what people in the market are starting to ask is whether countries like Greece, Italy, like Spain are going to be able to repay their debts.

And if they can’t pay, who is going to take the loss? Is it going to be the long-suffering taxpayers, who are already getting pretty angry? Is it going to be the bondholders, or will the richest parts of Europe, like Germany, be forced to cough up money to support the weak? And, right now, there are no clear answers. European leaders have produced a series of Band-Aid solutions, short-term solutions that are essentially papering over the cracks. The concern in the market is growing because those questions are still very much unanswered.

JEFFREY BROWN: And, Ken Rogoff, I note that the IMF issued a report last week. It said contagion to the core Euro area and then onwards to emerging Europe remains a tangible downside risk.

Translate that for us. How serious do you see the situation?

KENNETH ROGOFF, Harvard University: Well, the trouble is, is the smaller countries, the periphery countries, Greece, Portugal and Ireland, are in deep, deep trouble, but if they default on their debt, that hits the banks in the richer countries, and the governments there have to bail them out.

And people are afraid there will be a chain reaction that might hit Spain and then Italy, and maybe even hurt Germany and France.

JEFFREY BROWN: Well, Ken, talk about Italy in particular. Was it a surprise, this downgrading of Italy’s credit rating over the weekend?

KENNETH ROGOFF: No, I wouldn’t overstate it.

I mean, remember, they downgraded the United States, too. I think it’s a recognition of reality. Italy’s definitely not on the front line. It’s really Spain that’s the immediate problem if the other three countries have problems. Spain has a 20 percent unemployment rate and a very, very tough road to travel to get back to a sustainable fiscal policy.

JEFFREY BROWN: Well, so — so, Gillian, speaking of Spain, we mentioned they had this election over the weekend. That goes to the political pressures that all governments are under in any sort of austerity measures or that they undertake.

How strong are these pressures being felt in Spain and other countries?

GILLIAN TETT: Well, political anger across Europe is rising right now, not just inside countries like Spain that are suffering from the austerity measures. But countries like Finland are seeing growing levels of political protest because the Finns, who are in a pretty good position, are saying, we don’t want to help the weaker countries.

And so, political tensions are certainly rising. And what really worries the markets right now is that many of those political pressures are quite unpredictable. You can’t put them into a spreadsheet and predict the future, as you can perhaps with GDP. And so, it’s very uncertain right now what is going to happen. And, of course, markets hate uncertainty.

JEFFREY BROWN: And, Ken Rogoff, how much is this — is there the debate continuing over these austerity measures and exactly how severe they should be, in terms of their impact on economic growth in particular countries?

KENNETH ROGOFF: Well, it’s particularly acute in the countries which are in most desperate straits, Greece, Ireland, where President Obama was visiting, Portugal, also Spain, because these countries are looking like they might have to be in a recession for a very long time in order to repay their debts.

And still, at the end of it, they will still have a lot of debt and they still might have to default. So, it’s just not clear if the austerity measures that the Germans want, that the ECB wants and others are realistic. Is it politically sustainable?

Frankly, at the levels of debts that some of the smaller countries have, we have seldom seen it. And the political resistance you’re seeing in Spain, the resistance in Ireland and Greece, I think it’s just the tip of the iceberg if they try to continue along this path. But they’re hoping growth will pick up and some of this resistance will subside.

JEFFREY BROWN: Gillian, can you fill in the picture a little bit more in Ireland, where the president was today?

GILLIAN TETT: Well, I have a lot of Irish relatives, a large part of my family come from Ireland.

And I can tell you the picture right now for people on the ground in Ireland is really pretty grim. I mean, frankly, to my mind, it’s surprising that more of my relatives aren’t more angry.

But if you step back for a minute, the big question hanging over the Eurozone is this. Europe is at a crossroads. If it wants to keep on board the weaker countries, the countries like Ireland or Greece, and ensure they remain part of the single currency, the richer countries are going to have to help them, and there’s going to have to be more union in the form of federal union, probably common bonds being issued, fiscal transfers, things like that.

But that concept is still very scary for many Europeans, both inside countries like Germany and even in places like Ireland. And so, in some ways, if Europe is not willing to accept more union and more coordination, then you will see potentially more fragmentation going forward.

JEFFREY BROWN: Well, that — Ken Rogoff, that goes to — there’s been a lot of commentary, of course, about a — an economic and potentially political split within Europe of the mostly northern countries that seem to be coming back and getting stronger and mostly southern countries that are not. Do you see that happening?

KENNETH ROGOFF: Well, I think Gillian Tett framed it very well, saying that there’s just enormous uncertainty.

I think the most likely outcomes, that they manage to hold the euro together, Europe together, but they take a more realistic attitude towards having to deal and confront with the debt problem, which right now they’re really wishing away. They just say, suck it up, you Greeks; suck it up, you Irish. Just run surpluses forever and everything will be fine.

And it won’t be. And they can probably afford to deal with this problem. I think it’s a manageable problem, but, politically, they don’t seem prepared to manage it. And it’s absolutely true they probably, in the end, if they want to stick together, need more unity in ways they can’t imagine at the moment. And we will see if it happens.

JEFFREY BROWN: And, Ken Rogoff, the inevitable sort of ‘why we care,’ of course, question for Americans is, what — what are the implications now for the financial and economic troubles in Europe?

KENNETH ROGOFF: I can only tell you that I was at a meeting of European financial leaders as the U.S. financial crisis was unfolding, and they were almost giddy, thinking they had done things right and wouldn’t have a problem, not realizing the tidal wave that was coming across the Atlantic.

If they have a financial meltdown in Europe, our companies are connected. Our banks are connected. Our investors are connected. It won’t be good for the United States. I think Washington must be pushing very hard for them to try to find at least a patch that takes them out a couple years, hoping that there’s a miracle. But I’m not sure that it’s coming.

JEFFREY BROWN: Gillian Tett, what are you hearing from Americans as they look across the ocean?

GILLIAN TETT: Well, there are two points to make.

Firstly, if you want to look at the potential connectivity, just look at the number of American money market funds, number of American pension funds that hold Eurozone debt assets. They could be affected if things get worse.

But, secondly, in many ways what’s happening in the Eurozone is a pretty big wakeup call for Washington right now as it looks at its own debt problems. And it shows that, frankly, trying to sweep problems under the carpet for a long period of — period of time simply doesn’t work.

JEFFREY BROWN: All right, Gillian Tett and Ken Rogoff, thank you both very much.

GILLIAN TETT: Thank you.