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‘No Clear Path Forward’ for Eurozone as Economic Woes Continue

August 16, 2011 at 12:00 AM EDT
A new report out Tuesday showed overall growth in 17 eurozone countries increased just two-tenths of a percent in the second quarter. Judy Woodruff discusses what Europe's crisis means for the world with George Washington University's Scheherazade Rehman and the Center for Strategic and International Studies' Heather Conley.
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JUDY WOODRUFF: For more about Europe’s increasing economic woes and what’s at stake in the current battle among countries, we hear from two people who closely follow events here and abroad. Scheherazade Rehman is director of the European Union Research Center and professor of international finance at George Washington University. And Heather Conley is director and senior fellow of the Europe Program at the Center for Strategic and International Studies.

And we thank you both for being here.

HEATHER CONLEY, Center for Strategic and International Studies: Thank you.

JUDY WOODRUFF: Scheherazade Rehman, let me start with you.

France and Germany were thought to be the strong countries of Europe. What has suddenly happened?

SCHEHERAZADE REHMAN, George Washington University: Well, it’s not really sudden.

We — they are the strong countries of Europe, but inevitably they will get infected in terms of their growth. Their future is closely tied to the eurozone and to the European Union. Germany’s trade, for example, the exports — two-thirds of the exports goes to the European Union, 40 percent of the eurozone. So, if the rest of the zone is stagnating in terms of growth, eventually, Germany will stagnate. And that’s exactly what we saw today.

JUDY WOODRUFF: So how much of this has to do with the weakness we have been hearing about for months, Greece, Ireland, Portugal and so on?

SCHEHERAZADE REHMAN: It has a lot to do with it.

Understand that that sovereign debt crisis that is going on right now that started 22 months ago is a crisis of fear and real debt issues with these countries. And it’s spreading. But that’s the short-term critical outlook. The real long-term issue is growth.

If there’s no growth, there is no way out of this debt crisis for these countries. And that is the same for the entire eurozone.

JUDY WOODRUFF: And you’re saying that is what the prospects are right now?

SCHEHERAZADE REHMAN: Right now, they don’t look very good.

JUDY WOODRUFF: Heather Conley, so there was this meeting today between President Sarkozy and German Chancellor Merkel. What are we to make of this? They said they didn’t want to do a euro bond, but they said, we need a unified council, we need to look at coordinating tax policy for corporations.

How are we to see that?

HEATHER CONLEY: Today’s meeting was an important step in creating a European fiscal union.

The monetary union was created 10 years ago, but the fiscal policies were never coordinated. Germany and France are leading by example. They’re trying to consolidate their fiscal policy, corporate tax base, corporate and tax base policy. That’s great for the long term. And these are important steps.

Today’s meeting did nothing the short term. And this is where the market is growing increasingly concerned that the two leaders of Europe, the pinnacle leaders of Europe, are not developing bold plans to get Europe out of this crisis.

We saw the volatility last week in the European stock market. The rumors and the uncertainty that are driving — driving this uncertainty is now, as Scheherazade said, spreading the contagion. It’s going to the largest European economies. Even France is now in question.

But we didn’t see that bold political statement about dealing with the immediate crisis.

JUDY WOODRUFF: Why not?

HEATHER CONLEY: Well, politically, they can’t get from here to there.  

And that’s certainly true with Chancellor Angela Merkel. The question of euro bonds, which is ultimately creating a transfer union, where the borrowing costs that — the Germans can borrow at very low rates, would be — in essence, be used by the periphery countries if this euro bond was created.

That is a huge leap forward. It would create a transfer union, but are the German taxpayers willing to sacrifice their credit rating, their borrowing costs for the good of the union? And I think that’s where Chancellor Merkel knows that there’s a huge political red line in Germany. She can’t get that past the German taxpayer.

JUDY WOODRUFF: And the French president, Sarkozy, is in agreement with her on this?

SCHEHERAZADE REHMAN: He is. He has to be, because, without the Germans being involved, none of this will happen.

You have to understand there is a political credibility deficit in Europe, the same as we have here. And, really, this brings to question their economic plan of dealing with this financial crisis. You know, come back to a very old question we raised on this show a long time ago, such severe austerity measures, the appropriate response in a financial crisis where fear is driving some of this.

JUDY WOODRUFF: And how much of that is — how much of that austerity is a factor?

SCHEHERAZADE REHMAN: I think it’s playing right now. We are seeing flat growth across the board in the Eurozone, and — and flat for some time to come now.

JUDY WOODRUFF: And as we look at — again on Germany, Heather Conley, Germany has been saying, we don’t want to continue to prop up our weak neighbors.

But so far, they have been willing to do that. How much longer does that continue?

HEATHER CONLEY: Absolutely. For the last 18 months, German leadership has put one line in the sand, crossed it, put another line in the sand, and has been pushed to do things that are quite extraordinary, the July 21 summit creating a new European stability mechanism creating — adding more funding to this stability fund, were really important decisions.

And they have gone along with it. But I think now is a critical moment. The chancellor’s coalition has weakened. Her coalition partner doesn’t agree with further measures, particularly doesn’t agree with creating euro bonds. She has struggled at home, lost very important regional elections. I’m not sure how much farther she can push the German public and the German Parliament to support…

JUDY WOODRUFF: To step forward.

HEATHER CONLEY: Absolutely. So, this is the problem.

JUDY WOODRUFF: So, Scheherazade Rehman, given that, what happens? What can — what can happen? What are the options now for Europe?

SCHEHERAZADE REHMAN: Well, right now, the only game in town is the European Central Bank. This is the easiest way out for everyone, including Angela Merkel.

And that is, the European Central Bank keeps buying bonds for Italy, for Spain, for Portugal, for Ireland and et cetera, and keeps doing it indefinitely. The problem is, you can’t do this indefinitely. These countries run into trouble with their sovereign debt. They print bonds to get out of that problem.

In order to be liquid, the European Central Bank has to buy these bonds. And if they don’t keep making these loans, the European Central Bank will never get paid back.

JUDY WOODRUFF: So, meanwhile, here in the United States, we are looking at, as the Fed — Federal Reserve, told us last week, weakness for months, two years, at least, to come. What’s the effect of all this on the United States?

SCHEHERAZADE REHMAN: Oh, I mean, clearly, we have seen the effects over the last couple of weeks in the stock market. I think the average American is feeling it every day. These political indecisions on both sides of the Atlantic are taking the stock market up 600 points, down 400 points, and then down 500 points.

And — and I think that the man on the street is feeling this. Policy-makers…

JUDY WOODRUFF: The man on the street in Europe, the man on the street in the United States?

SCHEHERAZADE REHMAN: I believe both, and probably a little bit more here because our pension funds and investment funds tend to be a little more risky on the stock side than the Europeans’, so I think we feel it more.

And, so, therefore, the average person might ask, you know, what’s it to us in terms of how they’re handling their — the problem is, every time they handle, they dangle, they dither, they delay…

(LAUGHTER)

SCHEHERAZADE REHMAN: … we get every day on our pension funds and investment funds.

JUDY WOODRUFF: So, is one side or the other, Heather Conley, having greater effect, or are both just feeding the weakness of the other?

HEATHER CONLEY: They’re both incredibly intertwined. Let’s remember Europe represents 25 percent of American exports. The production and the ties of our banking system are so together that what happens in Europe does dramatically affect the United States. So we have to work together.

There has to be great coordination. And there is — been great discussion between the Treasury Department, the Federal Reserve, the European Central Bank, and the European financial authorities. There has to be some coordination here, because the other problem underneath the debt crisis is the European banking crisis as well. We have very undercapitalized European banks. That affects liquidity here.

JUDY WOODRUFF: Which is two different things, but they’re tied together.

HEATHER CONLEY: Absolutely.

JUDY WOODRUFF: And, again, just to stay with this question, Scheherazade, about the effect on the United States, for Americans looking at this, our — the hope is, let’s hope Europe gets its act together.

SCHEHERAZADE REHMAN: Oh, we have been — we have been trying to tell them to do this for a long time.

JUDY WOODRUFF: I’m asking that. Is that the question? Is that right?

(LAUGHTER)

SCHEHERAZADE REHMAN: Yes.

JUDY WOODRUFF: Is that the hope of America?

SCHEHERAZADE REHMAN: Absolutely. Please get your house in order, because it’s not helping us.

Gordon Brown, who was the former prime minister of the U.K., had a wonderful piece in The Washington Post last week where he said that a loose statement anywhere by anyone will sink markets everywhere. And he’s right.

JUDY WOODRUFF: And so the one thing Americans can hope is that Europe finds a way to get through this. Meanwhile, the Europeans are hoping that the picture in the United States is not as bad we have been told that it is.

HEATHER CONLEY: We are both looking at each other, going, get it together. We are both under increasing pressure from the rating agencies. You have the Europeans damning the credit rating agencies, that they’re to blame for the current impasse.

We are feeling under pressure by the credit rating agencies, although the Fitch report is encouraging. We’re both struggling. The political leadership is not there. And, meanwhile, the markets are taking matters into their own hands.

JUDY WOODRUFF: So, in brief, where does one look for relief, for improvement?

SCHEHERAZADE REHMAN: For the U.S. or for…

JUDY WOODRUFF: For both.

SCHEHERAZADE REHMAN: I think, for the U.S…

JUDY WOODRUFF: Well, specifically, the — Europe, because…

SCHEHERAZADE REHMAN: I think both sets of continents have the same problem: political lack of credibility with the markets. If they can just do that, we will be a heck of a lot better off in terms of volatility in the market.

And then we can really get down to the nitty-gritties of really determining what is going to stimulate growth.

HEATHER CONLEY: What we don’t know is how this European story ends at the moment. The drama has continued for 18 months. Decisions that were made that were supposed to stick for several months, the last major summit on July 21 lasted for three weeks, and Italy and Spain succumbed to contagion. This crisis is getting deeper.

JUDY WOODRUFF: No clear path forward.

HEATHER CONLEY: No clear path forward.

JUDY WOODRUFF: All right.

On that very depressing note…

HEATHER CONLEY: Sorry.

JUDY WOODRUFF: … Heather Conley, Scheherazade Rehman, we thank you both.

Next time, it will be better news, we hope.

HEATHER CONLEY: We hope. Thank you.

SCHEHERAZADE REHMAN: Thank you.