ECB is using crisis to unravel the European welfare state, but this could push the US economy into deeper recession
Story Transcript
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay, coming to you from Baltimore.
In Europe, the crisis deepens. The Financial Times has a piece today essentially saying what will happen to the global economy if Greece dot dot dot—if Greece dot dot dot unravels. Of course, I assume that’s already happening. Of course, the next issue is what happens with Spain.
Now joining us to talk about the euro crisis, particularly Spain and how it might affect the United States and the global economy, is Mark Weisbrot. Mark is codirector of the Center for Economic and Policy Research in Washington, otherwise known as CEPR. He’s also a regular columnist for The Guardian and, of course, has appeared on The Real News many times. Thanks for joining us again, Mark.
MARK WEISBROT, CODIRECTOR, CENTER FOR ECONOMIC AND POLICY RESEARCH: Thanks, Paul.
JAY: So first of all let’s kind of focus on Spain. You were there recently. You just got back about a week ago. What is the situation? And I guess the issue here is partly what’s happening with Spanish bonds and such and the debt deal. So where are we at?
WEISBROT: Well, it’s definitely getting worse there, or it has been the whole time I was there and more recently. You know, unemployment is 25 percent. Youth unemployment is more than 50 percent now. And the government has begun to cut back on health care spending. They had big cuts, they passed big cuts while I was there in health care spending, $7 billion—sorry, €7 billion, actually, which—it would be like—in the United States it’s the equivalent of cutting 25 percent of our Medicaid program. And Spain has a good health care system. And so they’re sacrificing a lot. They also have passed big cuts in education. So people are feeling it, they’re angry, and the government is still going in that direction. And they have a banking crisis as well.
JAY: Yeah, what’s happening with the banking crisis? ‘Cause there’s a issue now of whether or not Spain’s going to pour more money into some of the banks.
WEISBROT: Well, they’re going to have to do something. And the big issue right now is whether they’re going to get help from the European authorities in doing that. They don’t want to have a full-fledged, you know, IMF troika program like Greece and Portugal and Ireland, so they’re trying to avoid that—at least, it seems like they’re trying to avoid that.
And on the other hand, they could use some help stabilizing the banking system. And, of course, the banking system’s probably getting worse, because as this crisis has worsened, the price of Spanish bonds falls, and the Spanish banks are holding hundreds of billions of dollars of Spanish bonds. So they get hit very hard by that as well. Now, the situation is—.
JAY: Mark, at CEPR you made a proposal that the U.S. Fed should actually step in and buy Spanish bonds. Why should they? And what effect would that have?
WEISBROT: I think that’s important for people to understand, that the European Central Bank could put an end to the most acute aspects of the crisis very easily by simply intervening in the Spanish bond market, that is, buying Spanish bonds. They wouldn’t even have to buy very much of it, because as soon as the price of Spanish bonds would begin to rise, the hedge funds and the private investors and speculators would all move in the same direction. And, again, they did this in November. They’ve done this before last year. They’ve spent very little money, and they’re not really even spending it, because they’re getting, of course, an asset and they can create the money in order to do it. So it’s really costless to them and to the European taxpayer to intervene in this way. And if they were to do that, of course, they could lower the interest rates on Spanish bonds, because the bond yield goes in the opposite direction of the price. So when you buy the bond and you push the price up, you’re pushing the yield down. And they probably [inaud.] in the last few days, ’cause the yield has gone down quite a bit. But we won’t know that right away.
But in any case, they were putting that off and they were letting this crisis get worse and worse every day, to the point where you saw a lot of panic in the markets. I mean, that’s why, you know, all that money flooded into the U.S. treasuries and pushed the yield down to all-time record lows. And, of course, a lot of it also flooded into the German bonds, those government bonds as well.
JAY: So just in case there’s some people that don’t get it, yield means, essentially, how much interest does the government have to pay on the bonds. And right now U.S. Treasury is paying lower than it’s ever paid. And that’s what you’re saying, right?
WEISBROT: Yeah. Well, that was last week. It’s come back a little now because the markets have stabilized a little, because either the ECB is really intervening now, which it probably is, or just the markets are anticipating some kind of intervention. Everybody knows they have to do something at some point. But they really did let it get to a severe crisis, and one that, you know, actually has impacts throughout the world economy, slows growth, increases unemployment everywhere.
So that, I think, is the most important thing that is not emphasized is that they can do this at any time. This isn’t a crisis caused, really, by the financial markets. The financial markets, of course, are bidding up the yields, the interest rate on Spanish bonds, by selling them and shortselling them and speculating against them. But the ECB, the European Central Bank, at any time can completely overpower these markets, and everybody knows that.
JAY: Yeah, a couple of months ago, President Obama essentially said that. He was asked about the euro crisis, and he said, you know, they’ve got plenty of money there, they can solve this if they want to. And, you know, I’ve mentioned this a couple of times. It’s a little ironic, ’cause you can say the same thing about the United States. But at any rate, yeah, the ECB, they’ve got plenty of money. So why don’t they fix this?
WEISBROT: Because they don’t want to, because they’re actually using the crisis and the acute crisis to force these changes that the governments are doing—you know, cutting pensions, cutting health care, cutting government spending in general. Some of the changes don’t even have—don’t even reduce the deficit. Like, in Spain they passed this labor law reform which basically curtails the rights of workers to challenge when they’re fired for no good reason, and also weakens the industrywide bargaining system they have. It makes it easier for employers to get out of the collective industrywide bargaining union. So they are using the crisis to implement all these unpopular reforms.
And from a right-wing point of view, especially in Spain, for example, where you have a right-wing government, these are strategic reforms. The intention is to undermine and, from their point of view, try to dismantle the welfare state. That’s what they want. That’s what the ECB wants. That’s what some of the European governments that are allied with them want. And that’s what they want to get gain out of this crisis.
JAY: Well, but there’s lots of support for doing exactly that in United States as well to the United States, not just in Europe. Certainly the whole Republican cabal, etc., would like to have (and some of the states do have) very similar policies. So what are the politics of the Fed trying to do—intervene to try to kind of obstruct or prevent some of this?
WEISBROT: Yes, well, one difference between Europe and the United States is that they have so much more to lose. We don’t have industrywide bargaining. We don’t have unions the size of their—we don’t have most of the social protections that they have. And so there isn’t that much you can get rid of here compared to Europe. And that’s one big difference. So it’s a much more ambitious project that the European authorities have. I mean, here, you know, they’ve tried to go after Social Security, and they still might chip away. It’s still under threat. But it’s very hard to do here because it’s one of the only real protections that we have.
Now, in terms of the Fed intervening, I mean, I don’t think they’re really going to do that. But we put this on the table because it—first of all, they should do it, and people should know that they can do it and they should do it. And the mechanics, of course, would be very simple. I mean, they can buy Spanish bonds just like anyone else, and nobody could stop them, really. If the European Central Bank didn’t like it, there wouldn’t be anything they could do about it. And, of course, Spain would welcome it, and so would the rest of the world. So it would be a great thing to do. It would also step on their toes. And I think that’s one reason—the toes of the European authorities. And that’s one reason why the U.S. government wouldn’t do it or the Federal Reserve wouldn’t do it. But it does make sense. And it shows—it would show, if they ever did it, how easy it would be to resolve, again, the immediate part of the crisis. It wouldn’t put an end to the whole—.
JAY: I guess when President Obama—President Obama has his own immediate electorial interest not to let the European crisis more seriously damage the American economy. I mean, how serious a threat is that?
WEISBROT: It’s, I think, the biggest—in the last couple of months, at least, it’s been the biggest threat of anything, any other things you could think of, to President Obama’s reelection. And he certainly knows that, and so does his team. And, you know, he sent his—just a couple of weeks ago the administration sent Lael Brainard over there. She’s the under secretary of the Treasury for international affairs. It was, I think, the 18th time that she’s gone to Europe. And, of course, she went to several capital cities. And you can be sure that her message was exactly that, that they want—the Obama administration wants the European authorities to stop playing with fire and to at least do something to restore growth in the short term.
JAY: Well, I suppose some of the right-wing European governments wouldn’t mind seeing a Republican administration in office here—not that they haven’t gotten along with President Obama. But just to wind things up, how dangerous a moment are we in, in terms of what’s happening with Greece, Spain, and how it might affect the global economy?
WEISBROT: Well, it’s a moment where there is a definite possibility of a worse financial crisis. I don’t think it’s going to get to that, because I think the European authorities eventually—you know, they let it go to the brink, and then they intervene and they do something. They’ve done this several times already in the last two years. So that’s the most likely outcome. And I think it may be already happening as we speak.
But nonetheless, the recession in Europe will continue to cause these problems, you know, not just the demand—of course, the European economy, take the whole E.U. or—you know, that’s big, that’s bigger than the U.S. economy. It’s about a quarter of the world economy. So that has an impact just directly. But more importantly, Europe has the largest banking system in the world. It’s several times larger than ours, even. And so that is causing problems throughout the world in world financial markets. So it’s definitely hurting world economic growth. And I think it will continue to do so until the situation there is stabilized.
JAY: And right now there they’re like—the authorities are playing chicken to see if they can’t wring even more concessions out of various peoples of various countries of Europe. Thanks very much for joining us, Mark.
WEISBROT: Sure. Thank you.
JAY: And thank you for joining us on The Real News Network.
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