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How Europe’s Turmoil Rattles World Markets

Greece's political turmoil intensified Tuesday amid calls for fresh elections. Ray Suarez gets the latest from reporter John Psaropoulos. He then turns to Fred Bergsten of the Peterson Institute for International Economics and Nicholas Burns of Harvard Kennedy School for more analysis on the economic impact worldwide.

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    And for more on the situation in Greece, I spoke a short while ago with John Psaropoulos, a freelance reporter who writes for the website The New Athenian and for other news organizations.

    John Psaropoulos, welcome.

    Have all other alternatives been exhausted? Will Greece have to hold another national election, after having one just over a week ago?

  • JOHN PSAROPOULOS, The New Athenian:

    The party leaders and the president have come to the end of the constitutional road map. There are no other ways to delay a repeat election.

    The party leaders held three rounds of discussions amongst themselves. And then they held several rounds of discussions with the president. I think the president's deadline nationally was May 17, when Parliament would have had to convene with or without a government simply in order to dissolve itself. I think he didn't want to reach that point.

    It would have given a sense of utter futility to the democratic system. And he preferred to admit defeat in forming a compromise this time around. And I think the dynamics of why that compromise wasn't possible are quite clear. The radical left, Syriza, knows that it stands to make between seven and 10 more points in terms of the popular vote in a repeat election.

    That is what the several opinion polls tell it in the last week. And so I think that party was determined both to stick to its promises to voters to denounce, rather than renegotiate, the bailout, to rip it up, start renegotiating — start negotiating a new agreement with the eurozone from scratch and to go forward to elections in order to secure its greatest possible self-interest.


    In brought terms, what are the main blocs offering in way of a choice in that coming vote?


    Well, the austerity program is what is redefining politics here in Greece.

    On the one hand, you have a moderate grouping of the Socialists and Conservatives, the two parties that have held the coalition together for seven months. But they have been hammered in the election because of the pursuit of the austerity package as faithfully as they could under a consensual prime minister, a man who came from neither party, but is a former central banker.

    On the other side, you have the radical left, which has quadrupled its standing in the polls, stands to increase that — that percentage of the popular vote even further in a repeat election. and they have a dream of uniting the left in an anti-bailout government which would try to denounce the bailout agreement altogether, annul the legislation that enshrines them in Greek law.


    Quickly, John, before we go, in the run-up to what is going to be the next election, are more Greeks now willing to openly contemplate what had been unthinkable, a departure from the euro?


    No. At least 75 or 80 percent of Greeks, according to all the polls that have been taken in the last year, are in favor of remaining within the eurozone.

    I think the scenario of going to the drachma is one that terrifies Greeks, and the proof of that is in the fact that hundreds of millions of euros were withdrawn from banks in a single day on Monday, as it became apparent that talks were breaking down between the parties. More than 65 billion euros have been withdrawn from banks during the past two years of austerity, partly because people have been living on savings as they have lost their jobs, but also partly because people have been putting money away in their homes in cash or sending it to bank accounts overseas, so that Greek banks won't be able to change that into drachma currency in an overnight switch to the drachma.

    People are truly very worried about that scenario here.


    John Psaropoulos joined us from Athens.

    That's a lot.


    Thanks for having me.


    Now: how the turmoil in Europe affects the United States and the rest of the world. We get two views.

    Fred Bergsten is a former Treasury official. He is now director of the Peterson Institute for International Economics. And Nicholas Burns had a 27-year career in the Foreign Service, including as U.S. ambassador to Greece from 1997 to 2001. He's now at Harvard's Kennedy School of Government.

    And, Ambassador Burns, you just heard John Psaropoulos in Athens. If the worst happens, if the Greeks can't get it together, is there still this fear of tumbling dominoes? Is it still the crisis it was portrayed as a year ago?

    NICHOLAS BURNS, former U.S. undersecretary of state for Political Affairs: Well, I think so, Ray.

    We're witnessing a political earthquake in Greece. The two major political parties that have governed the country for the last 40 years have been repudiated. As you just heard, a new radical leftist party is ascending in Greek politics. There's every reason to believe, when they hold this second election in the middle part of June, that party is going to be the ultimate winner. It will likely be able to form a coalition government.

    Its demand to the European Union will be — and the IMF — will be that the austerity package, so carefully and laboriously worked out over two years, will be eradicated. And if the European Union should give Greece a big break, I don't think the European Union will be in — have the mind-set to do that.

    So we're facing a crisis both in Greece, but more importantly through all of the eurozone, because of what happened in the Greek elections.


    Fred Bergsten, you heard from Athens the majority of Greeks want the austerity straitjacket removed and they want to stay in the euro. Can they have that and not send shudders through the system?

    FRED BERGSTEN, director, Peter G. Peterson Institute for International Economics: No. The Greek public is fundamentally inconsistent.

    And what is needed now over the next few days or weeks is for them to understand that. If they really did try to jettison the whole austerity package, then they would be forced out of the euro. I think there's no way around that.

    I do not think that would have a cataclysmic effect on the rest of Europe or the United States or the world economy. Greece is a tiny country. Fire walls have been erected that I think would protect the rest of the eurozone from spillover from Greece. And I think, if Greece did drop out of the euro, the results for the Greeks would be so horrendous that the Italians, Spanish and everybody else seeing that would be redoubled in their efforts to stick with their programs and avoid a like outcome.

    So I don't think the spillover is going to be huge. But, before we even get to that, two points. As your man from Athens said, there's a run on Greek banks. I'm not sure they're going to get to their elections next month, because the Greek banking system may be jeopardized and bankrupted if this bank run continues.

    That would in turn force the issue. Are the Greek politicians going to get together, bite their tongues, and stick with their reform program, augmented to include new growth elements, or are they going to thumb their nose at their European creditors and drop out of the eurozone with horrendous results for their countries?

    My bet is that they would get back with the program. And despite the abhorrence of the program by the Greek electorate, understandably, their desire to avoid being kicked out of the euro would be even greater. So, it's going to be messy, but I think the outcome, whether driven by bank runs or by a new election, is going to be to force them back into the fold, at least to an important degree, enough that the Europeans can keep lending them money.

    Everybody saves face. A growth element will be added to the package. There will be a little modification in the austerity requirements. But it will be basically back to the program as has existed for the last couple years.


    Ambassador Burns, it sounds like Fred Bergsten is a lot more optimistic than you are.


    Well, I see two scenarios.

    I think there will be major effort by the two traditional Greek parties to convince the Greek people that they actually cannot have it both ways. They can't reject austerity and hope to stay in the European Union. If they reject austerity, the European Union will likely cut them off. They won't be able to pay their bills and they will have to default.

    So there is going to be a major campaign and debate in Greece, probably the most important moment in Greek politics in several generations, to convince the Greek people to return to the center. But here's the second scenario, which I think is probably more likely.

    If this left alliance does win — it's called Syriza — it's headed by Alexis Tsipras, a dynamic, young Greek politician. He is a true believer in the radical cause. And he will want to see the austerity plan abolished.

    In that case, I think you do see the scenario of Greece leaving — in many ways, leaving the eurozone and having to fend for itself. And that will be a disaster for the Greek people. It's the poorest country in the European Union. They have been the recipient of billions of dollars of aid over the last 15 years. The E.U. has rebuilt the country.

    Greece will be far better off in the E.U., but the politics may run in a different direction.


    The flip side of the politics is that if the leftist parties in Greece stick to their anti-austerity stance, and that gets Greece kicked out of the eurozone, it's their fault. The leftists would be at blame.

    They would lose all political hope for the future, I believe, and therefore I think with some face-saving changes at the margin, they will capitulate, go along with a unity government that will have to basically stick with the program.


    Let's move it from Athens to the heartland of the United States.

    If you're picking up the papers in advance of going car-shopping this weekend, if you're shopping for a nice attractive low interest rate, perhaps looking at refinancing, or just heading to the mall on Saturday, does this rock your world in any way, if you're an American consumer?


    I do not think it rocks your world. In fact, it may even help your world a little bit. Remember that this European crisis has shielded us from our own follies.

    We have a huge debt and deficit problem here. We had a big crisis last summer that supposedly was going to lead us to default on our own debt. Congress took action, supposedly, but it was no action at all. It punted the issue. Standard & Poor's downgraded the United States.

    But what was the result? A big drop in U.S. interest rates and a stimulus to our economy. Why was that? In large part because the Europeans are doing worse than we are. So they're protecting us from our own follies. They're giving us a longer noose to hang ourselves.

    I don't like that, because I think we ought to be getting our own act together. But, in fact, the economic effects on the United States so far have probably been favorable. Now, if Europe actually blew up, of course, that would be to the contrary. But I don't think that's going to happen.

    If Greece does leave the eurozone and there's some market disruption, it will simply mean more flight to quality. People will buy dollars. People will buy U.S. treasuries. The shopper in the mall or the guy buying a car will get a lower interest rate.


    Then, Ambassador Burns, how come the markets teeter and shudder every time there's new bad news from Greece, here, Wall Street?


    Well, I certainly agree with what Fred Bergsten has said in many ways, but there's a political and psychological impact as well.

    There's a lot of talk nowadays about the rise of Asia. And of course all of it is true. It's very, very important. But we're still very much tied to Europe politically, militarily and economically. We have a leading trade and investment relationship with Europe. President Obama is going to be hosting the NATO leadership in Chicago this weekend.

    It's our most important military alliance. So when the stock market went down on Monday, partly, I think, it's a function of the fact that we are so close and tied and integrated with what happens in Europe. I agree that a Greece default can be accommodated economically.

    Greece is about 3 percent of the GDP of Europe. But if it leads, that Greek default, to a further crisis or if it exacerbates the crises in Spain and Italy, then that's going to have — be a major problem for Europe economically. And that will have an impact, certainly, I think on the United States.

    So I think Americans do realize and must realize that Europe still matters greatly to us economically and politically.


    Nicholas Burns, Fred Bergsten, gentlemen, thank you both.


    Thank you.

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