What The Financial Crisis In Europe Could Mean To San Diego
February 14, 2012 1:22 p.m.
Manzur Rahman: Professor of Finance, with an emphasis on international Finance, and Associate Dean of the School of Business Administration at University of San Diego.
Related Story: What The Financial Crisis In Europe Could Mean To San Diego
CAVANAUGH: This is KPBS Midday Edition. I'm Maureen Cavanaugh. Riots tore through Greece last weekend. The action of the parliament should satisfy the European union and secure another bailout for the debt ridden Greek economy. We've been hearing about the financial crisis in the Euro zone for quite some time. But most San Diegans are busy enough dealing with America's struggling economy to pay much attention to Europe. But, the trouble is, what happens in Greece or Ireland or Spain may not stay there. Joining me to talk about the potential fallout from the European financial crisis is my guest, Manzur Rahman. Welcome to the program.
RAHMAN: Good afternoon, Maureen. Thank you for having me.
CAVANAUGH: Now, we saw terrible pictures from Greece. The riots and the buildings burning. Why have these protests escalated in violence?
RAHMAN: Maureen, I think you said -- I gather you're originally from queens New York
CAVANAUGH: Yes, I am.
RAHMAN: You may remember president Ford said to norm city, 1975, the daily news version to New York "Drop dead."
RAHMAN: Greece was sitting on that situation when the parliament had to go to vote on Sunday. This comes after -- from May 2010, essentially to put it in the context of our economy, and what we have gone through, imagine that Greece had lost its job in May, 2010, and one year later, 52 weeks of unemployment insurance ran out. Meanwhile they've cut all their expenses to the bone. Been as -- there's nothing left to cut. And they've just run through all their cash. And their credit line's been exhausted, and on March of this year, their creditors said we're going to put a margin call. Either you pay up or else. So that's the situation Greece was in. And Europe and the lenders in the European union told them last Wednesday that if you don't do this, we're not going to come up with a package, and then the rest happens.
CAVANAUGH: What kind of austerity measures are they facing now since the parliament has approved this?
RAHMAN: Just to put it in context. Greece's economy over the last few years has shrunk about 12%. Will so $100 is worth $88 for the whole country. Unemployment is 20%. Under 25, it's about 50%. In this setting, they're saying the minimum wage has to be cut down to 20% for the overall population. In addition the public sector has to cut 150 thousand jobs, as well as find another reduction in pension benefit, expenditures for health services, education, all of which have already been severely straightened the last couple years.
CAVANAUGH: So for the next who knows how many years, life is going to be pretty tough in Greece.
RAHMAN: Yes. And it's touch and go to see if they will actually agree to this. They have voted in parliament. A funny thing happened, are the European finance minister was supposed to vote on it last Wednesday, they suspended their voting and said, no, take it to parliament, show that you will vote for this, and then we'll reconsider it tomorrow. There's a vote tomorrow. So the Greek parliament had a discussion, it was very difficult, but in the end, it got 2/3 majority. What was interesting, the person who's most likely opinion polls suggest will be the leader after the elections in April, Antonioio Sammarace, he said we're at the edge of the cliff. If we don't vote for this now, we're going to fall off the cliff. So let's vote for it, and then let's go through the elections and after that, we will consider amendments. Because it's actually hard to imagine how they can actually undergo these austerity measures, and the people requesting this are requiring them to do this, probably know that they can't make it. So following that, the new line is that tomorrow, the European finance minister will vote on it. Apparently this is not a done deal now.
CAVANAUGH: As I said in the opening, Greece is a long way from San Diego, and in America we're mostly concerned about our own economic downturn. In your opinion, do we have trouble seeing our own economy, our own financial well being being influenced by Europe and international markets?
RAHMAN: In some ways, of course, we are still the biggest fish in the pond. We're 20% of the global economy. We're used to being all about us. The world economy being all about us. And we've been concerned very much what's been happening with our own recession. One of the deepest recessions in 70 years over the last three years. But Europe actually is a bigger percentage of the global economy than us. And we relied on primarily China and some of the developing countries like Brazil, India, and others like Australia to help drive the world economy in the last three years. But if Europe also goes into a severe recession, into a depression like Greece, then China in and of itself could no longer serve to be the engine. Therefore we have two of the major economic areas going down, it will be one additional element as we try to strive out of our own mini-depression that we have gone through.
CAVANAUGH: So professor, what are the chances that Europe is headed into a deep recession as you say?
RAHMAN: Actually, what is happening to Greece in some ways, what we've seen Europe do in the last six months, they've kind of created a firewall around Greece. Before the concern was if Greece may well default because these kind of austerity measures probably are not sustainable. The concern before was if Greece defaults, the financial markets will take fright, and the pressure on Portugal, Ireland, Spain and Italy, the next four groups of countries that are in the most endangered list are going to be hit by contagion and fall like dominos. By doing this, and the Europe ban bank providing financing to these countries, I think Europe probably can absorb a Greek default and separation from the Euro. So in some ways, I think it is the probability of a deeper recession in Europe probably is less likely than it was three months ago.
CAVANAUGH: What do you mean by firewall?
RAHMAN: In the sense that the Greek default would be an isolated case, so that means the fact that Greece falls off the Euro and default, and that's a pretty severe event, and traumatic for them as well. It's not going to be the end all for the Euro project as a whole.
CAVANAUGH: I was just going to say, I have heard that the Euro itself as a currency is at risk. Do you think that's the case?
RAHMAN: It's been at risk because of the way it was created, as I tell to my students, the fact that the Euro has lasted these 13 years is a miracle in itself am it was created, a monetary union, a single currency without first a political union, and that experiment we've never seen in the history of civilization. It has existed for a long time. I think there is deep commitment, and obviously a lot of benefits of having the Euro. If we try to think about if the currency was not dollar between California and Arizona, what problems that would bring. And the same kind of things are in play within Europe between Italy and Austria and Germany. So it makes a lot of sense. There's a lot of value in having the common currency. Of course it comes with -- like all good thing, some down sides. And the down sides are usually managed when you have the political union and you can have fiscal transfer from the federal government to the different states that Europe did not have in the past.
CAVANAUGH: If a San Diegan is doing business in Europe or even planning to visit Europe, how would this financial instability factor into that? In any way?
RAHMAN: Probably just over the last I guess six months, the value of the Europe has gone down against the dollar. So that gives us a little bit more of a purchasing power. But usually it seems like every summer when one plans to go to Europe, the Euro rises just in time. But in that sense, it's still a touchy moment in the global economy. It seems like through our very own serious recession, we're starting to see some signs of life in positive direction, two months in a row the jobs numbers were pretty good here. If we can come out and we are not a drag on the world economy, that would be also very helpful to Europe. We are a big market for the Euro area.
CAVANAUGH: Now, in your estimation, considering what's happened in Greece even if there is this firewall. There are other economies at risk in Europe. Is Europe facing a long period of financial instability?
RAHMAN: It can. Europe has to make some serious decisions on what the Euro project means. Are they going to be just -- try to keep it only on the currency side? Or are they going to have much more cooperation on the fiscal side? The most aren't Nobel Laureates from the US NYU, Thomas sergeant, compared this situation in Europe to what the United States was going through in the years in the continental Congress. When the war was over, and the current form of the federal government was done after that constitutional convention in 1989. And at that time, we had the same problem. The federal government did not have powers, the resources to pay for debt on itself. Of and the European union has no source of funding, and there is not any kind of centralized automatic what we would call stablers of having a centralized, fiscal system across Europe.
CAVANAUGH: Now, I'm wondering. You said that with the United States does emerge from its economic downturn, that it would help Europe. Can we come out of our economic downturn if Europe is still struggling?
RAHMAN: That's one reason why. Timothy Geithner has always kept one eye in Europe. And I think Geithner in the Clinton administration had the position of the assistant secretary for international affairs. The same person in that office, I think she visited Europe something like 30 times in the last three years. So we're definitely keeping an eye on Europe and encouraging them to come and solve their fiscal problems in as smooth and manageable fashion as possible. Because it's really important for us that the Europe area does well and does not fall into any deeper form of recession.
CAVANAUGH: What should we keep our eye on? I have to ask you to answer this quickly. In the developments in the fiscal crisis in Europe that might be of concern to the United States?
RAHMAN: Again, we don't know. If I were a betting man, which I'm not in this case, I would not bet too highly on Greece not going into default and going out of the Euro area. The question is, as I believe they have been able to create the firewall, that the markets and the banks and the organization will see that as a discrete, isolated event that can be carried and the fire can be put out without having it spread to the rest of the Euro area.
CAVANAUGH: Thank you so much. Thanks for coming in and speaking with us.
RAHMAN: It was a real pleasure. Thank you.