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Spanish and Greek Responses to Debt Crisis Unleash Backlash from Citizens

September 26, 2012 at 12:00 AM EST
Protesters expressed their discontent with government austerity measures on the streets of Madrid and Athens this week. Gwen Ifill talks to Jacob Kirkegaard of the Peterson Institute for International Economics for the latest on the unrest in Greece and Spain as Europe comes to grips with its debt crisis.
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GWEN IFILL: The violence in Athens came hours after police and demonstrators fought in the streets of Madrid, Spain. On Tuesday evening, 6,000 people marched on the national parliament building, protesting new austerity measures. Some threw rocks and bottles, and police fired rubber bullets; 38 people were arrested.

The scenes of unrest roiled European markets, and major indexes there fell 1 to 2 percent today.

For more on the economics and the politics at play in Europe, I’m joined by Jacob Kirkegaard of the Peterson Institute for International Economics.

Mr. Kirkegaard, it seems to me that we have spent a great deal of time talking about this unrest in Europe, and there had been a lull. What happened?

JACOB KIRKEGAARD, Peter G. Peterson Institute for International Economics: Well, I think we need to keep in mind that this — the violence we saw today, or the strikes at least in Athens, were not spontaneous sort of reactions of public outrage.

They were sort of strategically planned demonstrations timed to coincide by the Greek labor unions with the crunch time in the negotiations between the Greek government and the IMF, so that, without being too cynical, you could actually say that, if the streets of Athens were burning, it would actually at the margin help the Greek government in the negotiations with the IMF and the troika, because it would show that the Greek people really couldn’t take much more austerity.

So there is a strategic element in these protests.

GWEN IFILL: What about in Spain?

JACOB KIRKEGAARD: Well, in Spain, it’s a little bit of the same thing because tomorrow is the time when the Spanish government announces its 2013 budget. And at the same — and a lot of this budget will also at least implicitly be dictated by the demands of the European Union, because there is a very strong likelihood that the Greek — sorry — Spanish government in the short future will be approaching the European Union authorities for a bailout.

So what the Spanish government is trying to do is sort of preemptively announce many of the reforms that they would otherwise be — be forced upon them. So, again, the protesters are trying to basically make a signal that we can’t take any more at this very moment.

GWEN IFILL: Trying to force someone’s hand. It all sounds so strategic. It sounds like positioning. So it is — what’s driving it? Is it money? Is it politics? Or is it emotion?

JACOB KIRKEGAARD: Well, I think that it’s a bit of both, but it is first and foremost politics, because I think that what we are seeing here — in the case of Spain, for instance, we are — we have a Spanish government that is basically trying to minimize the political costs of approaching the European stability mechanism for a bailout that will give it access to support from the European Central Bank.

Now, if you look at the previous governments in the euro area that have approached the IMF and the European authorities for a bailout, well, they have all been voted out of office at the next election.

And what the Spanish government is really trying to do is avoid that scenario by, as I said earlier, trying to preemptively announce many of the reforms that would otherwise be — they would otherwise be forced to implement.

GWEN IFILL: So what are the sticking points? We saw that the European Central Commission, I guess, bought — did a lot of bond buying a couple of weeks ago.

There was a lot of excitement about that. It seemed like that was turning the corner, yet here we are again.

JACOB KIRKEGAARD: Well, I think what we are seeing here doesn’t negate the progress that was made in Europe over the summer, because the sort of firewall that was created by the European political leaders and the ECB over the summer is still in force.

We still have an answer to the question, well, what happens if something goes wrong in Spain? We know that. It involves the ECB and it is therefore politically credible.

And it involves political conditionality on the Spanish government in return and therefore it’s supported by the German government.

So it’s really not a question about whether Europe has a firewall, but about whether it will be used. And that’s a major step forward.

But it doesn’t, of course, sort of negate the possibility for continued political unrest in Europe.

GWEN IFILL: We just heard in a report one in four people are unemployed in Athens. And we have heard numbers like 25 percent or 50 percent of Spanish youths are unemployed.

Are those numbers correct? And is that also what’s driving some of this discontent?

JACOB KIRKEGAARD: Well, there’s no doubt that the broad setting for all this unrest is the fact that Spain, Greece, the entire euro area periphery is suffering from very deep recessions.

But I also think that we need to keep the — for instance, the 50 percent youth unemployment number in perspective, because 50 percent of what? It’s important to note that unemployment rates are always estimated by the number of people that are looking for work.

And among youth, a large number of Spanish youth will be in school, in education and therefore are not looking for work.

So maybe it will be 50 percent of the 30 percent of the youth that is actually looking for work.

So I’m not trying to minimize the problem. There is a significant risk of actually having a lost generation in Europe.

But the real number of Spanish youth unemployment is not 50 percent of all Spanish youth, for instance. It is considerably lower, but still a tremendous problem.

GWEN IFILL: And how many of those who are not looking are discouraged workers? We have had that conversation here in this country.

JACOB KIRKEGAARD: Absolutely.

I mean, there’s no doubt that people suffer from a lot of the same problems that we have here in the United States.

GWEN IFILL: Is there also a problem with coming to some sort of resolution as far as Germany and other bank money — money givers go, that somebody else is going to get in line, that if you give Greece money, Spain is going to be standing there? If you give Spain money, Portugal is going to be standing there?

JACOB KIRKEGAARD: Yes, there is this problem of political moral hazard going on, which is really, as you say, well, if you give, let’s say, debt relief to Greece, well, then you can be pretty sure that other European countries that also have received bailouts will want the same treatment.

GWEN IFILL: Right.

JACOB KIRKEGAARD: So, what you’re trying to do in Europe, in my opinion, is really to — I believe that ultimately debt relief will have — further debt relief will have to be given to Greece by the Euro-area governments.

But they’re really trying to make the road to that so arduous and so terrible that nobody else in Europe will really want to go down that route.

And as we’re looking at Greece today which has a cumulative decline in GDP of, you know, close to 20 percent and still dropping, I think it’s fair to say that other people in Europe will be looking at that and say we’re not going to go down that route.

GWEN IFILL: Build in some disincentives for the rescue.

JACOB KIRKEGAARD: Yes, absolutely.

GWEN IFILL: Jacob Kirkegaard of George Mason University, thank you very much.

JACOB KIRKEGAARD: My pleasure.