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EU Pulls Greek Economy Back From Brink. Now What?


This is TALK OF THE NATION. I'm Neal Conan in Washington. After months of dithering and half-measures, European leaders took some important steps on the eurozone debt crisis in Brussels last night. While details remain vague, the deal promises to pull Greece back from the edge of default and provide a bigger buffer for some vulnerable EU countries like Spain and Italy.

Financial markets around the world responded enthusiastically. At last glance, the Dow Jones Industrial Average is up about 350 points. But while EU leaders managed to stave off immediate disaster, many experts question whether they have the political will and the economic firepower to resolve the long-term crisis.

If you have questions about the deal and what it means on this side of the Atlantic, give us a call, 800-989-8255. Email us, talk@npr.org. You can also join the conversation on our website. That's at npr.org. Click on TALK OF THE NATION.

Later in the program, NPR's Richard Knox joins us to talk about the controversial HPV vaccine, now recommended for boys. But first, Steven Erlanger, Paris bureau chief for The New York Times, joins us again from his home there. And Steve, nice to have you back with us.

STEVEN ERLANGER: Thank you, nice to be there.

CONAN: And the big stumbling block, last night, was getting private banks to agree to write off 50 percent of the value of the Greek government bonds they hold. What persuaded them to go along?

ERLANGER: Well, it was an ultimatum, really, from Angela Merkel. There was a meeting somewhere after midnight, where she told the bankers' representative that it was take it or leave it - it was 50 percent - and if they didn't take it that she was willing to go ahead with a disorderly default, an involuntary default, and that's - the responsibility for the chaos that created would be on their heads.

And they went away, and two hours later, they came back, and there was a deal. Now, it was easier for them, partly because Greek debt is already selling at only 40 percent of its face value. So that's 10 percent less than what they were being offered. And there was a sweetener involved: The Europeans offered them another 30 billion euros in collateral to protect what's left of Greek bonds.

So, you know, that's what did it. In a way, it wasn't the biggest problem for the Europeans, but until this was out of the way, other things couldn't be dealt with.

CONAN: What was the biggest problem, then?

ERLANGER: Well, I still think the biggest problem is increasing the size of the bailout fund, leveraging it in such a way as to protect the much bigger economies and important economies of Italy and Spain, and doing that at the same time as they're pushing Italy to make reforms to increase its growth and get it out of its stagnation.

Italy runs a small budget deficit, but the size of its debt is so big, it's nearly two trillion euros, that if the price of rolling that debt over goes up and up and up, it'll blow a big hole, not only in Italy's budget, but in the eurozone itself. So they have to raise that bailout fund. They have to get Italy to reform better.

They did have a success in recapitalizing the banks. Some of the banks are vulnerable because of their ownership of sovereign debt. And they've pushed the banks to re-inject another 106 billion euros, or so, and to raise the value, the level of their capital, again, to make markets a little more content.

So it was not a failure. A failure would have been a disaster. It was a partial success. You know, I don't think Europe has - you know, there's any one magic bullet that solves the problem. It's a long process, but it was a long night, too.


ERLANGER: It was 10 hours, but they've got somewhere along the right road, put it that way.

CONAN: And does this mean that Chancellor Merkel of Germany will have to go back to the Bundestag and say we have to approve more funds for the bailout fund?

ERLANGER: No, because basically she's refused to do that, and the French don't want to do it, either. So there are two options that will probably run simultaneously. They're going to use the fund for leveraging. In other words, they will guarantee a portion of the potential losses of any new bondholders with the fund. That leverages the size of the fund.

And secondly, they're going to set up another kind of fund for outsiders to invest in. They have interest, at least in principal, from China, Russia, Japan and others who are interested in perhaps helping Europe for lots of reasons. But the details again of how that investment would work and what protections those investors would get remain to be worked out.

But China, for instance, is - you know, very much wants to keep a European market open for its own goods and is very interested in having the euro survive as a second reserve currency. It doesn't want to be too reliant only on the dollar.

CONAN: And does this agreement require the Greek government to go and say we're going to have to vote more austerity measures? The last time they did this, the country got shut down for a couple of days, and people were very unhappy.

ERLANGER: This does not, per se, but what caused it was last week the Europeans got a seriously depressing report about the state of the Greek economy from the IMF and its other experts. And that showed that there was a 252 billion euro hole in what they thought was going to be OK. And rather than fill it with the European money, Merkel, Sarkozy and others decided that the banks were going to have to cut it by taking this haircut.

CONAN: The haircut, the 50 percent loss on the bonds.


CONAN: And getting back to Italy just for a moment, that remains overhanging, and the government of Silvio Berlusconi there is barely hanging on. It's very weak at the moment, and he's reacted very testily to the idea that he ought to be approving austerity measure, too.

ERLANGER: Well, he has. I mean, nobody likes being lectured, and Italy considers itself part of core Europe. It's not an outlier. But the problem for Italy is, you know, it barely hangs together as a country. The government barely hangs together. Berlusconi has got lots of troubles for lots of reasons that we all know, and his government is supported by Umberto Bossi of the Northern League who's been very reluctant to agree to some of these reforms that the Europeans and the European Central Bank have demanded.

So Berlusconi is doing a negotiation inside his government and a negotiation outside his government, too. So it's very difficult. For example, Bossi threatened to bring down the government over a promise to raise the pension age from 65 to 67. They did a deal that that would only happen in 2026, you know, pretty far away.

And the Europeans sort of smiled and said, well, OK, these promises are fine. But then they said very sternly implementation is the point because Berlusconi has made promises before that he's been unable or unwilling to carry out.

The whole point of enlarging this bailout fund is to protect Italy. So the Europeans feel Italy has to do its part in order to get the protection everyone else is trying to offer it.

CONAN: And is it fair to say the bailout fund approved last night, if all those arrangements do come through, big enough to protect against problems with, oh, Greece, Portugal or Ireland? If you're talking Spain or Italy, not - no.

ERLANGER: Well, you're precisely right because it was set up for the second Greek bailout, which has been too small for Ireland and Portugal, with a little extra money. But the extra money is not nearly big enough - I mean, as I said, Italy's debt is like 1.9 trillion euros. If the Europeans are lucky, they'll get this fund leveraged up to 1 trillion euros, which is half of Italy's debt.

So it's important that it get larger. I mean, nobody believes Italy is going to go down the drain. But still for this protection, Italy has to reform, and no one likes being told what to do. But the whole process of this saving the euro has been a steady dilution of sovereignty. Greece has lost a lot of its sovereignty over its own budget. Rome feels it's losing some, too. And of course they're right.

CONAN: Joining us now from a studio at the offices of Time magazine in New York City is Rana Foroohar, assistant managing editor there, who oversees business and economics coverage. She just wrote a piece called "Why Care About the Euro?," which ran today at time.com. And nice to have you back with us, as well.

RANA FOROOHAR: Thank you, thank you very much.

CONAN: And as Steve Erlanger mentioned, some progress, clearly not a comprehensive solution, but cause for hats in the air on Wall Street. How far along does this get us?


FOROOHAR: Well, hats have been up on Wall Street at any number of points in the last 21 months that the euro crisis has been building. I would not take that as any indication as its resolution. I think what's happened this time around that's good news is that Merkel got serious, her own parliament got behind her, and there's an understanding now that this crisis is about both banks and sovereign debt, and those things are interlinked, and you've got to fix all of them and Greece on top of that.

So the sort of three prongs - fixing Greece, fixing the banks and getting together enough money to bail out potentially other states that run into trouble, countries that run into trouble, excuse me - that's happened, and that's good news.

But there's a lot of fine print in this deal. The Greek debt deal that was cut is voluntary, and even if you are able to reduce the Greek debt-to-GDP ratio to 120 percent by 2020, down from where it is now, over 300 percent, that's still extremely large. You probably don't have a viable economy, in my opinion.

The other thing that concerns me is that even though there was a deal on a plan to recapitalize banks, what the European authorities think they need and what the markets think they need is very different. So, you know, they're talking about $100 billion of free capitalization. A lot of outside experts think it might be doubled that.

The opacity of the global financial markets mean that we don't really understand what the contagion effect is going to be yet. That's potentially very problematic. And finally on the stability fund, this idea of leveraging a stability fund is pretty amazing to me.

I mean, essentially what they're talking about doing is turning the stability fund into a CDO. You know, you remember subprime?


FOROOHAR: That's problematic to me. So I don't think we're out of the woods yet. I agree with Steve that it's a long process. But at least we're seeing some movement on the political side, some cohesion within Europe, and that's a good sign.

CONAN: Again, Rana Foroohar's piece at time.com, "Why Care About the Euro?" Well, as she points out in her piece, among other reasons, the eurozone 20 percent of the world's economy. It also represents the United States' largest trading partner. So that's one reason the United States cares about the euro. Stay with us. More with Rana Foroohar of Time and Steven Erlanger of the New York Times. And we'll also be talking with the EU's ambassador to the United States about the situation of the great European experiment after World War II. So 800-989-8255. Email us, talk@npr.org. It's the TALK OF THE NATION from NPR News.


CONAN: This is TALK OF THE NATION from NPR News. I'm Neal Conan. European leaders struggled for months to come up with a plan to rescue Greece and avoid the likely contagion effect of a default. The deal they hammered out overnight in Brussels includes three main pieces: One, Greek debt is cut, though as mentioned it remains very, very high, roughly 120 percent of GDP by 2020.

Two, EU banks must increase their safety cushions of cash. One side effect of that may be that many banks reduce lending, which could slow economic recovery. And three, Europe's bailout fund gets more powerful, potentially to protect Italy if called on, though the actual value of the fund will not necessarily get any larger.

Details still need to be worked out, and markets around the world continue to watch for signs that any deal can be implemented and can address the fundamental economic problems in Europe.

If you have questions about the deal and what it means on this side of the Atlantic, give us a call, 800-989-8255. Email talk@npr.org. And you can also join the conversation at our website. Go to npr.org. Click on TALK OF THE NATION.

Our guests are Steven Erlanger, Paris bureau chief for The New York Times; and Rana Foroohar, assistant managing editor at Time who oversees business and economics coverage.

Here's an email question from Joe(ph) in Austin, Texas: I'd like to better understand how each country/culture perceives the crisis specifically. How do the Germans feel about bailing out the Greeks? And how do the Greeks feel about bankrupting the euro? Or how do the Greeks and Italians defend their profligacy? Steve Erlanger?

ERLANGER: That's a big question. I would say that the German position has been moving, and it's had to move. It began by attacking the laggardness of the Greeks. I mean, the Greeks were lying about their figures, first of all, and the Germans being Northern Protestants, most of them, have had kind of very odd religious kind of views about these free-living Mediterranean types. And a lot of Germans never thought Greece should join the euro in the first place.

So there was a kind of a lot of racial stereotypes, you know, why should we pay for these people to retire early, blah, blah, blah. Now, that has moved as the crisis has spread and deepened because it's gone way beyond Greece, to more of a, you know, isn't actually the euro good for us. It's certainly good for our businessmen. It keeps the price of our exports down. Don't we have some responsibility to the rest of Europe, to the European Union?

That is beginning to catch hold, particularly in the German opposition. So that's been changing. The Greeks, I think, are feeling a great deal of despair. I mean, this has never been fun for them. Ordinary Greeks were not living particularly high on the hog, and if you're offered cheap credit, why not take it?

But suddenly credit got, you know, not at all cheap, and paying the piper is no fun, particularly if nobody ever told you what the price was going to be.

CONAN: Rana Foroohar, I wanted to get back to a point that Steve brought up just before we introduced you: loss of sovereignty. Clearly Greece has lost a lot of sovereignty, and it's a question that is coming up - well, it's in part prompted the response from Prime Minister Berlusconi in Italy. He didn't like being lectured to or smirked at by his partners in Berlin and Bonn - Berlin and Paris, rather.

FOROOHAR: Yeah, I mean, Berlusconi, you know, it's hard to imagine a more distressed (unintelligible) than Silvio Berlusconi.


FOROOHAR: In terms of loss of sovereignty, I think the truth is Europe is going to have to come more towards political union if they're long-term going to solve the euro crisis. You know, as Steve has said, the crux of the matter is that you've got sort of broadly two different types of economies within the eurozone. You've got the stronger economies exemplified mainly by Germany, and you've got some of the weaker Mediterranean economies. And there are cultural differences there.

You know, I can understand from the perspective of the average sort of nose-to-the-grindstone, big-saving German person on the street why they don't want to be bailing out Greeks and Italians that don't look fundamentally like they're going to do anything different going forward. So that's a big cultural difference. It's a big economic difference.

The problem is, of course, that trying to unite these economies is going to be tricky. Germany's strength in some way undermines the other peripheral economies. It has - it's a big exporter. It has a large account balance differential with the rest of Europe. It's tough to bring all that together, but the bottom line is there's going to probably, I think, longer term have to be a common fiscal policy.

And let me just say an upside here. I think if Europe really did bite the bullet - I don't think this is going to happen necessarily - but if they could bite the bullet and move toward some definitive common fiscal policy, I think it would be a huge boost to global growth. I think that you could really see that being the change point here as we're hovering at a double-dip recession globally.

On the other - oh go ahead.

CONAN: I just wanted to get another caller in. This is Keith(ph), Keith with us from Gainesville in Florida.

KEITH: Hi. Were I Greek, why would I put up with what's being asked by those that want to bail Greece out instead of just defaulting? How much worse could it be? I'll listen off the air. Thank you.

CONAN: All right, Keith, thanks very much. Steve Erlanger, I'm sure that's a question being debated in Greece.

ERLANGER: Well, it is, and many Greeks will ask the question. I mean, Greeks who think a little harder will recognize two things: One, they're deeply embedded in the European system. I mean, to be a part of Europe is very important for Greece and its self-image. I mean, it's where democracy started, even though it wasn't necessarily these Greeks. And to be outside Europe I think would feel awful.

Secondly, everything now is denominated in euros, and the debt is denominated in euros, and should they climb out of the euro and, you know, start printing money, which is really what the caller is asking about, I think the debt would get unaffordable.

And frankly why don't they default? They are defaulting. They're in default. That's the whole point. I mean, they can't pay their bills. So they are subject to other people's charity, and that charity comes at a price. The Greeks don't like it, but I think most Greeks understand there isn't probably much of an alternative and that the people demanding the price actually could be demanding a much higher price than they are.

CONAN: Email question from Cassandra(ph) in Hialeah in Florida - I'm hoping that's her name and not her role - related to our experience here, what can we learn from this, what to do, what not to do? And Rana Foroohar, as we look at this crisis, this is not dissimilar to some of the things that we went through in a similarly disorderly manner in 2008.

FOROOHAR: There are definitely similarities, although I would say that the situation was handled much better in the U.S., in fact, in part because we had the ability to come in and do very quick bank bailouts. It's one country. There was an authority that could do that.

There's no Tim Geithner of Europe. There's - there was no Henry Paulson of Europe. And so that's a problem. And also the numbers are bigger. I mean, the European banking system holds about $55 trillion in assets. That's four times the amount held in the American banking system. So not only is the sovereign debt problem bigger, but the banking problem is particularly bigger.

One lesson we can learn, though, is that we still need more transparency in the financial system. One of the reason that we don't know how much fallout there's going to be on this side of the Atlantic - and that by some estimates could be anywhere from zero to $2 trillion - is because we don't understand what banks' counter-positions are, how they're hedging risk.

They're not required to report that. There's still a lot of opacity in the system. And that's why markets are, I think, even though they're up now, will probably continue to see jitters going forward in the next few weeks as all this is ironed out.

CONAN: And Steve Erlanger, we're just getting some copy on the announcement of the Greek prime minister, Papandreou, who says this decision gives us the courage to move forward, and this is an opportunity that we must seize. What is the next step? If this meeting in Brussels last night, as you wrote, if after all the buildup to that had they not come to a decision, it would have been a disaster. Where is the next nexus?

ERLANGER: Well, I don't think life changes very much for the Greeks. It's going to be pretty nasty and pretty difficult. And they still have got to fix their budget. They're still not running a primary surplus, which is they're not in balance even if they paid nothing on their debt. So they still have more to fix, and that's not going to be fun.

I think everybody's eyes really have turned to Italy now. Ireland has done pretty well. Portugal is too small and, you know, maybe they'll have to restructure Portugal. Spain is at least making progress and is about to have an election. So Italy is what has everybody nervous.

And the problem is if Berlusconi goes, there will be a period of confusion for new elections that may make things worse, too. So in a way, with Italy, you're caught between, you know, this very unpopular man being pushed to do what should have been done many years ago in Italy and the possibility of having no powerful government at all.

CONAN: Steve Erlanger, thanks again for your time. And we appreciate it. Good to talk to you.

ERLANGER: You, too.

CONAN: Steven Erlanger, Paris bureau chief for the New York Times. And our thanks also to Rana Foroohar, assistant managing editor of Time magazine, who joined us from a studio at Time's offices there. Appreciate it.

FOROOHAR: Thank you so much.

CONAN: Her piece, "Why Care About the Euro?" ran today on Time.com.

Joining us here in Studio 3A is Ambassador Joao Vale de Almeida. Excuse me for getting that in staccato there. He's the new European Union's ambassador to the United States. It's good to have you with us.


CONAN: EU leaders pushed through that deal overnight, but in this long process, protesters shut down Greece. The British Parliament actually voted on a referendum on continued membership in the EU. They voted against it, but it did come up for a vote. And in the run-up to yesterday's meeting in Brussels, Chancellor Merkel called this the biggest European crisis since the Second World War. Is the European experiment in danger?

ALMEIDA: I don't think so, and I think the decisions taken last night in Brussels at 4 o'clock in the morning, they proved that Europe is determined to continue even to deepen the levels of integration. What did you see last night are measures that go in the direction of moving into European integration even further than it is today. So we're coming out of this crisis not with less Europe but with more Europe. So I think it's the other way around. I think the crisis has proven that we need more Europe, that we need to deepen our levels of integration.

We need to move into what some call a fiscal union, although we are not yet there. We need, anyway, to complement and to revamp some of the mechanisms we have in the past. So I'm very happy, I must say. I'm slightly more optimistic than the commentators before me, which is not a surprise...



ALMEIDA: ...coming from me. But, anyway, I think we - people were asking for a comprehensive plan. You know, people were asking for us to deal with Greece, to prevent a contagion in fact. People were asking us to equip our mechanisms with the necessary firepower in order to address not only the existing situations but potential new situations. I think we did all that last night.

CONAN: You talk about a fiscal union. There is a financial union - the euro, 17 countries, not all the members of the EU but 17 members of the EU share the euro. There is no fiscal policy, no shared fiscal policy. This would require all of those countries to vote for one. Could you in this situation see places like Denmark and Finland and Slovakia voting to approve such a policy?

ALMEIDA: I mean, if you look back at the history of the union, you would never have thought in the '50s when we started that we will achieve what we have achieved today. So I'm not betting on the future of the union, but I would say that if I would bet, I would be very ambitious there so - because we have been able to achieve things that were not foreseeable in the past. Now, what we have today is, you know, oversimplifying a problem of having a monetary union, a single monetary policy, a single central bank, a single currency for 17 countries but having at the same time 17 budgetary policies, 17 fiscal policies.

We knew that we had to make, you know, we're revamping, redesigning of this. You know, most of the time, these kind of operations only happen when we have a crisis. And particularly, when we have so many countries, so many diverse countries whose agreement is required in order to move forward, you really need to have a situation like the one we're having today to allow for this moving forward. So my point is we are using this crisis in a positive way. We are not using this crisis to destroy. We are using this crisis to build and to move further the European integration. That's the sense, the political sense I will take out of the package of measures last night.

CONAN: Ambassador Joao Vale de Almeida, he's with us here in Studio 3A. You're listening to TALK OF THE NATION coming to you from NPR News. And as you look at the prospects of increased integration, one of the things Americans tend to forget is the European Union is not Maryland, Delaware and California.


CONAN: These are independent states. These all have to approve. Everything has to be - virtually everything has to be decided by consensus. There is, of course, a EU bureaucracy in Brussels, which gets tremendous criticism from all over the EU for imposing all sorts of measures that ruling that...

ALMEIDA: Like all bureaucracies, like all (unintelligible)...

CONAN: Well, this French cheese is not - it is not healthful for Danes and that the British sausage isn't in fact meat. So there are incredible tensions within this union, and the process has to be changed if it's going to function more smoothly like a government and have, for example, a foreign policy.

ALMEIDA: Absolutely. I mean, you can talk about the economy as much as foreign policy and all these areas. What we have done up to now is to move further and further towards a more integrated system of government. But let me be clear on one fundamental political point. I prefer to have our leaders discuss about the cheese regulation than taking weapons to attack the other side. You know, I prefer to have these kind of long discussions than to have two world wars starting in Europe. And this is the fundamental issue behind all this.

CONAN: And that is, as you say, the fundamental issue. Europe for 400 years, before the end of the Second World War, was in constant warfare or incipient warfare, and these were some of the bloodiest conflicts in human history.

ALMEIDA: Absolutely.

CONAN: And this entire process, some feel, is at risk right now. Angela Merkel, again, before the Bundestag yesterday: if the euro fails, Europe fails, this is the greatest crisis since World War II.

ALMEIDA: It's extremely important that the chancellor of Germany has said that because I heard in the last few weeks some questions about and some doubts about whether Germany is fully committed to the European project. I think Angela Merkel has proved and their party and the majority in the Bundestag, they have proven that, you know, Germany is fully behind this project because, in a way, Germany is one of the biggest beneficiaries of the European Union, of the euro area, of the single currency.

And I think, now, Germany, there are no doubts in Germany about this. But this is really for other countries. Otherwise, how would you explain that we have had so many countries joining the euro since its creation, that more countries are planning to join? And for the same reason, how would you justify that so many countries want to join the European Union as such? You know, we move from six to 27, and we have, you know...

CONAN: Other applicants, partly because of the political situation on the eastern part of the European Union.

ALMEIDA: That's because the union provides the basis for security, stability and prosperity. But as we enlarge, as we become more diverse, as you bring countries like Germany and Slovakia or countries like France and Cyprus, very different, in different geographic locations, different sizes of economy, different traditions. You know, it becomes more difficult to manage. But so far, so good.

CONAN: Mr. Ambassador, thanks very much for your time today.

ALMEIDA: Thank you.

CONAN: And we wish you the best of luck.

ALMEIDA: Thank you very much.

CONAN: Ambassador Joao Vale de Almeida, he's EU's ambassador to the U.S. and was kind enough to join us here in Studio 3A. Transcript provided by NPR, Copyright NPR.