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  May 9, 2012

Austerity, the Euro Crisis and the US

Dean Baker: Austerity policy hitting a dead end, threat to US is a sovereign default leading to financial crisis
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Dean Baker is senior economist at The Center for Economic and Policy Research (CEPR). He is the author of several books including, The United States Since 1980; Social Security: The Phony Crisis (with Mark Weisbrot); and The Benefits of Full Employment (with Jared Bernstein). He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio.


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington.

In Greece and France, the majority of voters have clearly rejected the policies of austerity. Now joining us to talk about the significance of this for Europe, but also for America, is Dean Baker. Dean is codirector of the Center for Economic and Policy Research in Washington. He's the author of several books, the latest being The End of Loser Liberalism: Making Markets Progressive. Thanks for joining us again, Dean.

DEAN BAKER, CODIRECTOR, CEPR: Thanks for having me on.

JAY: So, first, your overall impression of the elections.

BAKER: Well, it really was quite striking in both countries. There was a very, very firm rejection of austerity.

In the case of France, you had Françoise Hollande winning with 52 to 48 percent—not a huge margin, but still a decisive victory. And it's important to keep in mind France is like the United States: it's a country presidents tend to be get reelected. So to see Sarkozy lose by a reasonable margin was a very big blow to the forces pushing austerity there.

The case of Greece is even more striking. There you had the main two parties—in effect, they're Republican and Democratic parties—get together and jointly endorse an austerity package. And in response to that, the Greek electorate overwhelmingly rejected both parties. Between them they got barely more than a third of the vote. This would be comparable to the Democrats and Republicans walking away between them with 33, 34 percent of the vote. Really a remarkable story. Instead, people voted for a left-wing party, a left-wing coalition that was strongly opposed to the austerity plan, and also a far-right party—a bit scary, but, again, a rejection of austerity.

So in both countries you have overwhelming majorities of the electorate saying no to austerity. And that certainly is likely to bring more pressure to bear on Angela Merkel, Germany's chancellor, who's the chief proponent of austerity, getting to be almost the only proponent of austerity in Europe at this point.

JAY: I mean, the European financial and political elite prior to all of this seemed rather confident they could scare the Greek people into this bailout plan, and, you know, threatening that they would have to leave the eurozone and it would create a full-scale crash of the Greek economy, as if that hadn't happened anyway. And the majority of Greek people said no, we're willing to venture into the unknown here. This could—do you think this could put some kind of a scare into the whole European political class?

BAKER: Well, I think so. I mean, I think Greece is going to come to a head sooner or later, and more likely sooner, as a result of this vote. I mean, people have to understand that the country's in a full-fledged depression. It's looking at near 20 percent unemployment. Its GDP is down about 15 percent from where it was before the crisis hit back in 2007. And perhaps the most disturbing is there's no prospect for getting better anytime soon. So if you look at the official projections from the International Monetary Fund and European Central Bank, they show double-digit unemployment's going to persist through the decade in Greece. And even in 2017 they still project that its GDP will be almost 10 percent below what it was in 2007. So it's not as though there's sort of a light at the end of the rainbow here. You're just showing more pain for as far as the eye can see. So it's certainly understandable that the Greek people would say no, you know, this isn't acceptable. And, you know, at this point it's hard to see they have all that much to lose if they are to leave the euro. There's no doubt about that it'd be a disorderly process. It will be very scary if they're to go that route. But it's likely, at least in my view, that they would bounce back much more quickly than if they continue on this current path where it's just pain followed by more pain.

JAY: And do you think these elections and this—at least the expression of public opinion in Europe, if not yet a change of course, is going to affect the American politics at all? Certainly the Republicans essentially run on an austerity program, federally and nationally and at the state levels, even if they don't call it that. And to a large extent President Obama expressed similar views, at least up until he launched his election campaign, and prior to that he was focused almost as much on the issue of debt reduction as the Republicans were, although together with a tax increase and some stimulus. How do you—is this likely to change the American discourse?

BAKER: Well, I think it can, certainly. I mean, people in the United States tend to be somewhat impervious to what goes on elsewhere in the world, but at this point we have economies that are similar to our own—or at least we think of them that way. I mean, this isn't—we aren't talking about sub-Saharan Africa. These are big, wealthy economies that are similar in many respects to the United States, and they're trying the austerity path, and it's not working. So we both have the eurozone, which is pushing this everywhere, going into a recession this year, and also the United Kingdom—again, the same thing: Conservative government was elected there in the spring of 2010, and they've very energetically imposed an austerity package that was quite explicit. That was the policy of the Conservatives during the campaign, and they followed through on their commitment. And the result has been that the United Kingdom's also in a recession. So it's a little hard to imagine that we could have a presidential campaign where we have one candidate—here I'm thinking of Governor Mitt Romney—if he's out there saying, you know, the thing to do is cut government spending and tighten our belts, with the idea that that's going to turn our economy around, when we see countries all around the world are doing exactly what he advocates and going into recession.

JAY: And Hollande in France, when he was elected and he gave his speech, he sounded almost like he'd been elected the president of Europe. He talked about how this is the beginning of a new fresh direction for Europe. What are your expectations of Hollande? And how much can he do?

BAKER: Well, this is a European-wide battle. So in that sense whether he's president of Europe or not is another question, perhaps, but this is an issue that really will be decided at the European level, because France has relatively little room to move within the bounds of the eurozone unless it actually gets movement from the European Central Bank, movement from the European Union as a whole, sort of like California. I mean, California's obviously a very large state, a very large chunk of the U.S. economy, but it's not as though, you know, California's governor can go off on a totally different direction than the rest of the country. It's very much tied to the U.S. economy.

So what you have here is obviously a very important figure, the second most important government in the European Monetary Union, saying that they want to take the economy in a different direction. And the important thing, of course, is that he has support almost everywhere: so the Netherlands, where you had a government that was supporting Merkel that fell last week or the week before, and they're trying to shuffle together a new government; Spain, where you actually had a conservative government come to power, it's saying it can't go any further with austerity; Italy, where you have a technocratic government in power after Berlusconi resigned, they're saying they can't go further with austerity. So you're really getting this across Europe. And Hollande in France is in a position to become the leader of that movement.

JAY: Now, Hollande says he wants to be a new Roosevelt, he wants to do the New Deal for Europe. This is—he's said in the past. I mean, some people see that, both Roosevelt and that, as really a way to kind of save capitalism as we know it in Europe and to kind of prevent more left-wing or, some would say, more progressive reforms. I mean, are we seeing a section of the elite, you could say, kind of moving over to that path, that this is actually increasing the radicalization of Europe's population and we'd better try this other course?

BAKER: Well, I don't know if they're—you have many of the elites in Europe worried that, you know, the countries are becoming too radical; I think perhaps more falling into chaos. You know. And taking a case like Greece, it's not as though there's an organized movement there that's, you know, about to seize power. But what you are seeing is increasing chaos. And it's understandable that the elites would not like that. It's not a good economic environment, it's not a good environment for anything. So I think you might have some more long-sighted people who are saying, you know, look, this is not—this path is not working; we have to try and go in a different direction. So my—I mean, I'm saying this partly out of what I see there, but also I have to say, in hope, that, you know, you will see more people saying, okay, we've got to go in a different direction—and when I'm saying people here, I'm meaning people in positions of authority.

JAY: Now, in some of the interviews we've done and other economists, European economists we've talked to, they've talked about being over the brink in terms of heading into deep recession. And certainly when people talk about the American political campaign, one of the wildcards is always, if Europe unravels further, what would that do to the U.S. economy. What's your take on that as things stand now?

BAKER: Well, there's two different stories with Europe. One part, you know, Europe going into recession, that has a negative impact on the U.S. economy. But that's hugely overplayed. So we're not talking about a counterfactual where Europe's growing, you know, 3 or 4 percent a year. The question is, you know, do you have a Europe growing, you know, 1 percent a year versus shrinking 0.5 percent a year. Well, it's of course worse if it shrinks 0.5 percent a year, but it just does not have that big an impact on the U.S. economy. I mean, only 2 percent of—our exports to Europe are only about 2 percent of GDP. That slows our economy if our exports slow. That's not that big a deal, though.

What would be a qualitatively different story, though, is if you got a disorderly default associated with, say, Italy or Spain, one of the bigger eurozone countries suddenly being unable to pay its bills and the European Central Bank not stepping up to the plate in a big way to prevent a full-fledged collapse. Then you can get a Lehman-type freeze-up situation. That would have a very big impact on our economy because we are so tied in. So at that point you'd see a situation perhaps not quite as bad as what we had in '08, but a situation where large chunks of the financial sector would freeze up because people would suddenly become very distrustful of financial institutions, whether they were solvent. And that would be a very big hit to our economy.

JAY: And these elections have moved us any closer to that? Or not really relevant yet?

BAKER: Well, I guess I'd say not relevant yet. They could lead us closer to that. Particularly, let's imagine that we're getting closer to a story where Greece is prepared to just bolt from the euro. That could take a very disorderly form. It could lead investors to have a run on the Spanish debt, Italian debt. And, again, if the European Central Bank didn't respond vigorously and aggressively to that, then you do run that risk of a Lehman-type collapse. It would be remarkable if they weren't prepared to respond, because at this point, none of that can be a surprise. But, you know, we've seen them act poorly before, so I won't rule out that possibility.

JAY: Thanks for joining us, Dean.

BAKER: Thanks for having me on.

JAY: And thank you for joining us on The Real News Network.


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