JUDY WOODRUFF: And now to worries about austerity measures in Europe.
There was new fallout today from the continent's debt crisis. In Ireland, the government announced elections are likely next month, after Prime Minister Brian Cowen resigned as leader of his political party. And, in Spain, officials said troubled banks there need $27 billion in fresh capital.
NewsHour economics correspondent Paul Solman has an update, part of his ongoing reporting on Making Sense of financial news.
(CHEERING AND APPLAUSE)
PAUL SOLMAN: As 2011 festively dawned across Europe, economists there brooded. For all the celebration, was Europe's financial system about to implode? Greece and Ireland alone were hobbled by more than half-a-trillion dollars in debt, debt costing more and more to refinance as investors lost faith.
Would European Union survive? Would its currency, the euro? Now, since the NewsHour faces financial pressures of its own, cost-consciousness trumped a trip to Europe, and we opted instead for a grand tour of Denver, where Europeans were among the roughly 10,000 so-called dismal scientists attending America's annual economics convention.
At plausibly appropriate venues, we interviewed visiting European economists, starting with one from Iceland.
OK, I hope you will bear with the hokiness here, but Iceland, so we took you to the ice rink.
THOR GYLFASON, economist: Oh, I'm warmer at home on most days, actually.
PAUL SOLMAN: You're warmer at home?
THOR GYLFASON: Yes.
PAUL SOLMAN: Thor Gylfason's country experienced the first of Europe's financial ice storms, and provides some perhaps useful lessons. Like everywhere else, the crisis boiled down to bankers making bad loans.
THOR GYLFASON: The banks lost seven times the value of Iceland's national income in a given year.
PAUL SOLMAN: And yet:
THOR GYLFASON: Our unemployment is measured in single digits. Our income didn't plunge very deep.
PAUL SOLMAN: So, why isn't Iceland, if you will pardon the expression in this context, not flat on its rear? How come Iceland is coming back?
THOR GYLFASON: Icelandic authorities made several right decisions after the crash. They called in the IMF.
PAUL SOLMAN: Iceland's economy actually grew in the last quarter of the year. Partly, that's because Iceland's currency has depreciated, boosting its exports, and because the government didn't bail out the banks.
Instead, with the International Monetary Fund's help, it modified its loan agreements with foreign creditors to pay back maybe 40 percent over years of what its banks borrowed.
In Greece, the government is still struggling. Its debt was run up by the state itself, hiring too many government workers with too generous pensions while collecting too little in taxes to pay the tab.
When reporting there last summer, two questions hung over Athens like smog: Would Greeks stomach a lower standard of living when jobs and pensions were slashed? Would tax collection be reformed?
DIMITRI VAYANOS, economist: So much negative has been said about Greece.
PAUL SOLMAN: At Denver's Civic Center Park, we asked Dimitri Vayanos whether, seven months later, progress had been made.
Is the average person paying her or his taxes?
DIMITRI VAYANOS: Not -- not fully. And, of course, everybody wants everybody else to pay their taxes. If Greece was able to collect taxes according to the European Union average, at this point there wouldn't have been any debt problem right now.
PAUL SOLMAN: Are you personally more or less hopeful or the same as you were in July?
DIMITRI VAYANOS: Now I'm a bit less hopeful, because some of the people in the government are not fully understanding of what needs to happen, or, somehow, things are not moving as fast as they could be moving.
PAUL SOLMAN: Yes, says Vayanos, the government is making tough budget cuts. But tax reform is being held up in the courts, and red tape still restrains economic growth, as it has for decades.
Ireland's crisis, by contrast, has come as a surprise. After booming for decades, it too is now crushed by debt. We took Canice Prendergast to an Irish pub, if not to drown his country's sorrows, at least to explain them.
CANICE PRENDERGAST, economist: We had housing prices going up the order of 15 percent a year for quite a long time. Everybody was buying a second home. Everybody was building additions to their houses. People didn't give perhaps as much pause as they should have.
PAUL SOLMAN: To paraphrase bank robber Willie Sutton, real estate is where the money was, where the bank loans went, until they went bad.
Unlike Iceland, Ireland assumed the debts of its failing banks. It now owes creditors, mainly European banks and the IMF, more than its entire GDP.
CANICE PRENDERGAST: I think most people think that they're unsustainable.
PAUL SOLMAN: So, then I'm obliged to ask you the central question: Do you default some time in the future?
CANICE PRENDERGAST: I think we do. I think, at that point, then everything gets restructured.
PAUL SOLMAN: Ultimately, that is, Ireland will renegotiate the terms of its debt with foreign investors, as Iceland is doing.
But wait a moment. If Iceland stiffs its lenders, Greece is broke, and Ireland's debts are unsustainable, what happens to European creditors? That's the question playfully posed in this Australian comedy routine that's gone viral on the Internet, a mock quiz show.
MAN: Correct. How much does Ireland owe?
MAN: Eighty-and-sixty-five billion.
MAN: Correct. And who do they owe it to?
MAN: The European economies, mostly.
PAUL SOLMAN: The host is pretending to quiz the contestant, a financial consultant named Roger.
MAN: Correct. And how are Germany, France and Britain going, Roger?
MAN: Well, they're struggling a bit, aren't they?
MAN: Correct. Why?
MAN: Because they have lent all these vast amounts of money to other European economies that can't possibly pay them back.
MAN: Correct. So, what are they going to do?
MAN: They're going to have to bail them out.
MAN: Correct. Where are they getting the money to do that, Roger?
MAN: That's a good question.
MAN: I don't know the answer to that one.
PAUL SOLMAN: Again, Professor Prendergast:
CANICE PRENDERGAST: Nobody knows quite how bankrupt the entire system is. And I think that's the huge concern in the E.U. at the moment and the huge concern for Ireland, which is, what are we likely to see when these cards eventually end up falling?
I think the smart money at the moment thinks Spain and Italy might be the straw that breaks the camel's back.
PAUL SOLMAN: Spain, the world's 10th largest economy. Like Ireland, it suffered a crippling real estate implosion that threatens its regional banks and thus the state itself if it has to salvage them.
At a tapas restaurant, our Spanish expert, Tano Santos, elaborated.
TANO SANTOS, economist: The problem they have is loans to real estate developers and loans to construction companies. Between both of them, it's around 450 billion euros.
PAUL SOLMAN: So, in U.S. terms, that's $7 trillion in potentially bad loans?
TANO SANTOS: That's exactly right.
PAUL SOLMAN: Unlike Ireland, Spain hasn't bailed out the banks that financed the bubble -- yet. But there's now serious talk that it will.
TANO SANTOS: This is a very important question is whether Spain is going to go the Irish rout and start bailing out troubled financial institutions. This is something that shouldn't happen. I think -- I hope that our authorities have learned from the Irish experience on what a catastrophic route this is.
PAUL SOLMAN: So, finally, what about Germany, whose banks so indulgently financed the debt of its neighbors? Germany is the backstop for current plans to expand Europe's bailout fund.
But, at Denver's Cafe Berlin, economist Harald Uhlig said Germans are now feeling put upon.
HARALD UHLIG, economist: They're unhappy, right? They recognize that -- that Greece has lived beyond its means, that there was a big housing boom in Spain, that there was a huge expansion in Ireland, a big credit expansion in Ireland. And now they all have to pay for all that.
And this is particularly disappointing because the Germans have been told at the beginning of the monetary union that there would be no bailout clause. I mean, this has been told to them millions of times.
PAUL SOLMAN: And, yet, Germany keeps being tapped.
HARALD UHLIG: Yes, but Germany doesn't have pockets that are deep enough to bail out half of Europe. I mean, they can't bail out Ireland and Greece and Italy and Spain and Portugal. It's just too much.
If Spain were to fall, if there was a bailout of Spain, then you would see serious discussions in Germany about a breakup of the -- of the Eurozone and, you know, fracturing of Europe down the road. And I think that would be a bad prospect indeed, after spending so many decades of getting Europe coming together, and there would be a big price to pay.
PAUL SOLMAN: And a potentially big price for us all.