Stuart H. Loory: It’s no secret that the economic crisis has spread from the United States to the rest of the world. Europe has been hard-hit. Ireland faces an economic meltdown similar to that in Iceland and so does Hungary. Latvia is also in economic crisis and no help is in store for it. All this has raised fear that dissolution of the European Union could be in the offing. Countries not yet members of the EU but closely tied to it, such as Ukraine, are also in grave trouble. Ukraine has borrowed huge amounts of money from banks in the EU and if it defaults on its loans it could bring serious problems to banks in Austria and Sweden. The Western countries are refusing to accept guest workers from Bulgaria and Romania, both new members from Eastern Europe. How can this crisis be handled and what happens if it is not? How serious is this crisis for the EU? Is it really in danger of dissolution?
Steven Erlanger, Paris bureau chief, New York Times, Paris, France: It is not in danger of dissolution, but it is a very serious crisis. It is the first real economic strain since the euro began in 1999. Sixteen countries now use it. Their economies are diverse and are suffering differently from this crisis. But, these countries share a central bank, and don’t control all of their own economic policies. The new members of the EU who have embraced Western liberal capitalism are also hurting. Their markets in the West are collapsing, they are having trouble getting credit and their currencies are dropping against the euro. There is a sense that Europe is being pulled in different directions and some of the new countries feel adrift.
Loory: What has been the result of the refusal (on March 1) of the Hungarian premier’s plea for help from the EU?
Gyorgyi Kocsis, deputy editor-in-chief, HVG (World Weekly Business), Budapest, Hungary; First, Hungary did receive help from the EU last November, an international package of 25 billion euros, six billion from the EU and the rest from the IMF (International Monetary Fund) and World Bank. That package was important to finance the Hungarian budget, which is heavily indebted in foreign currency. Secondly, our prime minister launched a complex proposal in Brussels (March 1). One part was rejected, an ill-conceived bailout for Central and Eastern Europe from the EU and international financial institutions. He also proposed that the new member states, most of which are out of the eurozone, should have an accelerated route to the common currency.
Loory: He was asking for a lot of money — is that only for Hungary or for all of Eastern Europe?
Kocsis: He would have included the 10 new member states plus Croatia, which is an EU candidate, and Ukraine, which is not in the EU and does not have a candidate status.
Loory: Ukraine is very hard-hit. Is it in danger of defaulting and perhaps bringing the government down?
Veronika Movchan, academic director, Institute for Economic Research and Policy Consulting, Kiev, Ukraine: Although it is widely discussed in the world economic press, Ukraine is not approaching economic default. The numbers do not indicate a reason to expect this and Ukraine is not as extremely indebted as widely discussed. As for the corporations and banks, some of them might default on loans.
Loory: Is there some possibility that the Ukraine will default on its payments for natural gas from Russia?
Movchan: There were some talks, but so far, the Ukraine hasn’t defaulted and has money to pay for it. That is not exactly the fault of the country. It is not a state obligation; it is a commercial company.
Taras Kuzio, president, Kuzio Associates, Toronto, Canada: Countries default when they have an external debt to GDP ratio in the 50 to 60 percent range. Ukraine has about 12 percent external debt to GDP ratio. The external debt owed by corporations is far higher and inevitably some of those may default. Many of the private corporations’ external debts are owned by banks that are owned by Western European banks that are unlikely to permit their Ukrainian counterparts to default. This is highly speculative and not likely to take place. There are two reasons for this speculation. First, the acrimonious political squabbling between Ukraine’s elite leads to a kind of international and domestic image in Ukraine of instability, which has led to a downgrading of Ukraine’s ratings by Western rating agencies. Secondly, Ukraine is not a candidate member of the EU. The EU ignored the outcome of the Orange Revolution and didn’t extend a helping hand in terms of offering a membership relationship; Ukraine is the odd one out.
Loory: The EU is skittish not only about Ukraine, but also the Balkan non-member countries and Turkey. The Western European countries are not even allowing guest workers to come from Romania and Bulgaria, which are members of the EU. What is going on?
Erlanger: Economically, there are two circles of trouble and Ukraine is an important third circle. Inside the first circle is the eurozone, with countries like Italy, Greece and Spain, who have not been following the fiscal rules of the eurozone; their budget deficits have been high and their banks have engaged in American- and British-style bad loans and are in real trouble. The big question for countries like Germany, which has been sticking to the rules, is whether they will have to somehow bail these countries out to protect their economies and protect the larger euro. The second zone is new members that are part of the EU but not in the eurozone. The Czech Republic and Poland, for example, have run their economies perfectly well but they’re suffering from other people’s problems. The problem with guest workers is simply that people are shedding workers because Europe has gone into recession. The U.S. shrank more than six percent in the last quarter of the year and has a budget deficit of 12.5 percent of GDP, which is larger than even outliers in Europe.
Loory: What are the chances of the EU becoming a really unified organization similar perhaps to the U.S.?
Erlanger: It is an old argument that I don’t think will happen because most Europeans don’t want it to happen. The EU is the greatest experiment in shared sovereignty. The problem is balance. Tax policies are different from country to country. It doesn’t have an agreement on industrial policy. There isn’t one single decision about what industries to prop up or subsidize. These all become a matter of national competitions, protectionist instincts come to the fore in periods of difficulty. The nice thing is that, unlike Europe in the early part of last century, one can’t even imagine these tensions leading to warfare.
Loory: Some strong Western European countries – Spain, Ireland, Italy – are in pretty serious economic trouble. What is the EU doing to help them?
Erlanger: Ireland is particularly in trouble, partly because of their banking sector. Italy is always in some sort of trouble. Spain had a big housing bubble that burst. When the euro was introduced, the Germans said they were not going to bail out weaker, less responsible countries and economies. In the end, to protect themselves, it will have to figure out a way to provide certain kinds of credit guarantees.
Kocsis: In a certain way, the situation is worse in Central and Eastern Europe than it is in the West because these are mostly poor countries; some are governed better than others. Their government cannot afford to pump money into their economies. Germany, France, Britain and the U.S. pump billions of currency into their economy; our government cannot copy this because we simply do not have it.
Loory: What we have heard today is that the problems here in the U.S. are certainly much worse than in Europe.
Producers of Global Journalist are MU journalism graduate students Jared Gassen, Brian Jarvis, Sananda Sahoo, and Melissa Ulbricht. The transcriber is Pat Kelley.