RAY SUAREZ: For a closer look at economic woes here and abroad, we turn to Scheherazade Rehman. She is director of the European Union Research Center and professor of international finance at George Washington University.
And, Scheherazade, teetering governments, debt downgrades, in the U.S. positive, GDP growth, but not as much as people expected. Is there a thread that connects these data points, a pattern in all of this?
SCHEHERAZADE REHMAN, George Washington University: Well, I think the pattern is pretty clear. We in the United States are experiencing very, very slow growth.
And what we are seeing in Europe is, they’re getting worse very fast.
RAY SUAREZ: Well, you saw David Cameron run down the litany of overburdened debt in British institutions. Is confidence lagging in Britain that the Cameron medicine is working?
SCHEHERAZADE REHMAN: Well, I think, you know, the question is, is this the right medicine for the right time?
And this is not just for the U.K. This is for all of Europe. Too much austerity, we know, yields no growth. And we are seeing the results of this right now. And no growth means no jobs and no debt repayments down the road. And so this is a recipe for asking for trouble. And we are seeing this in governments.
The French president lost the first round of elections. In eight days, he is going to go for the second round. It doesn’t look very good. But this is a natural byproduct of not doing enough crisis management.
RAY SUAREZ: So when you say crisis management, you mean cutting when times are good so you are prepared when times are bad?
SCHEHERAZADE REHMAN: Absolutely. That’s what Germany did.
But now times are very, very bad. We’re in the middle of a crisis. And, yes, austerity measures will yield growth in the long run and things will get much better. But in the middle of a crisis, we need to do a lot more in terms of stimulating and providing liquidity.
And it’s only after almost two years last November that the Europeans got their act together with a new European Central Bank governor, Mario Draghi, who did aggressive crisis management. And things were beginning to look — to get a little bit better.
The problem is, it’s the same scenario. Is it too little and too late now, because Spain is now on the brink?
RAY SUAREZ: Now, all the countries we’re talking about are democracies. Is there a conversation back and forth between politics and economics? Can the economic technicians, the mechanics keep on doing their work without hearing from the people?
SCHEHERAZADE REHMAN: And the answer is — and the answer is no.
And, you know, one of the biggest uncertainties in the market right now is government execution risks. We are seeing election cycles in the United States. We know nothing’s going to happen for the next year at least, nothing major. We are seeing it all over Europe and governments are basically frozen because they are being voted out of office.
There’s too much pain on the ground.
RAY SUAREZ: So is there a rebellion gathering against austerity?
SCHEHERAZADE REHMAN: I believe so. I believe that they are going to have to ease off, and the market is a little bit afraid of this, because austerity programs have been promised. Certain countries have bailouts.
And there will be a backlash against this. And when that happens, the markets will become even more anxiety-ridden. Look, today, every little shock dips us down into an anxiety zone. And any little piece of good news exhilarates us. And we’re going to see this to go on probably for another few years at least.
RAY SUAREZ: Well, let’s take a little bit more about Spain, because they didn’t do the kind of overborrowing that got some of the earlier crisis countries into trouble. Their problems really started with the burst of a real estate bubble.
But now that they are lowering the targets for percentage of GDP that the government can borrow, but they have got a shrinking GDP, they have to keep borrowing less and less, government can’t prime the pump. Government can’t kick-start the economy.
SCHEHERAZADE REHMAN: You’re absolutely right. And don’t forget, government borrowing costs are going up.
Spain is now crossing the threshold of over 6 percent for its borrowing costs for its bonds. And once you hit 7 percent, they’re in trouble. That is about the mark when Greece, Ireland and Portugal began to talk about bailouts.
And the moment we talk about Spanish bailout and it becomes a serious issue, then the other shoe drops which we’re very afraid of, and that’s Italy. You know, if the contagion spreads to Italy — and they have a liquidity problem right now — if that turns into a solvency problem, then there’s going to be some real trouble ahead.
RAY SUAREZ: But isn’t Spain paying its debt? Why this cycle where you are sort of chasing — chasing yourself down the sink, really?
SCHEHERAZADE REHMAN: Well, you know, and that’s why some crisis management up front would have helped. It would have helped in terms of — and with the austerity packages, mind you.
It’s just when the markets panic, they don’t — they don’t see the discrepancy and the differences between the different economies. Southern Europe just looks all the same. And they’re applying the same kind of remedy, which is going to yield a very specific result. And that is no growth or a contraction, which is exactly what we’re seeing in most of these countries.
RAY SUAREZ: Well, you have got what is going on in Europe, and then you have got North America. These two giant economic zones, do they talk it back and forth with each other? Can failure in one inevitably spread to the other, or success in one create a virtuous cycle and lead to better times in the other?
SCHEHERAZADE REHMAN: And I think this is a very good question.
The problem is that we are experiencing such slow growth. Is this growth sustainable between 2 percent and 3 percent? Yes, of course. But the real question in the United States is, is this growth enough for what we have experienced to recover in our jobs market? Is it enough for us to recover the wealth loss that has happened over the last four years?
And the answer is, no, it’s not enough. And so, our very, very slow growth, although helpful to Europe, by no means are going to drag them out of the problems that they have. And anything going south in Europe will most definitely slow us down even more.
RAY SUAREZ: So, the bad times in Europe can take that 2.2 GDP down even further?
SCHEHERAZADE REHMAN: Absolutely.
RAY SUAREZ: Scheherazade Rehman, thanks a lot for joining us.
SCHEHERAZADE REHMAN: Thank you.