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Political Crisis Behind The Faltering Eurozone

NEAL CONAN, HOST:

This is TALK OF THE NATION. I'm Neal Conan in Washington. World financial markets remain shaky today after steep drop-offs on Monday, and once again, Europe's financial problems are taking the blame. Worries focus this time on Spain, with Italy not far behind. But while European leaders prepare for another crisis summit, Walter Russell Mead argued in the Wall Street Journal recently that no matter what happens, Europe will be absorbed with this situation for years to come and that as Europe's political and economic influence wanes, Russia's and Turkey's will rise with costs to NATO, the United States and to European political ideals.

If you have questions about how Europe's crisis may change global politics, 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, Michele Flournoy, former undersecretary of defense for policy, on President Obama's new global posture.

But first the implications of the eurozone crisis. We'll talk with Professor Walter Russell Mead in just a moment. We begin, though, with New York Times Paris bureau chief Steven Erlanger, who joins us by smartphone from his home in Paris, and Steve, nice to have you back on the program again.

STEVEN ERLANGER: Thanks, Neal.

CONAN: And Italy's Prime Minister Mario Monti says we have one week to save the eurozone.

ERLANGER: Well, he said we had 10 days to save the eurozone about a month ago. So everybody keeps changing their calendar, and saving the eurozone seems to recede like every red line. I mean, it's going to be a hard summer, partly because the markets are slow, so anyone pushing the markets has a bigger impact.

But it's clear that there are investors who are testing the eurozone who don't believe that the European leaders and the European Central Bank mean what they say, though they've been saying it over and over again for three years, that they will do what they have to do to defend the euro.

CONAN: And their latest attempt is to prop up some banks in Spain with direct loans. They didn't want to add to the Spanish government's debt load. Nevertheless, Spain's ability to borrow is being, as you suggest, tested.

ERLANGER: Well, that's part of the problem because though they decided to give money directly to Spanish banks and do it with their bailout funds, the fact is legally they can't do it, and they won't probably be able to do it until the end of the year, if then. So in the meantime, all this extra debt is added to Spain's balance sheet, which is exactly where people didn't want it to go, which is one of the reasons why the markets are unconvinced about Spain.

Spain's problem is also that its regions, which it's very much a federal country after Franco, and a lot of regions have autonomy or near autonomy over how they spend money, and the Spanish central government has not done a very good job at policing its regions. It's a bit like the Italian problem. So you have regions that are in debt, which is pulling down the federal government, as well.

CONAN: And through all of this, is there any consensus gaining traction on fundamental economic fiscal and political reforms to make the European Union a little bit more agile?

ERLANGER: Well, there's talk about it. I mean, there's been a lot of talk about a lot of things. Basically, Germany has made it very clear that it is - it will not support a mutualized debt or collective responsibility for individual countries' debt until there's more collective sovereignty, too. They said that they're not just going to write a blank check, that they have to have a say, that there has to be democratic representation. And all this takes a great deal of time.

And the French, the Italians and the Spanish, the ones who are right now most vulnerable, let's leave Greece and Portugal aside, are pushing for things to move very, very quickly, and they want the European Central Bank to step in and buy sovereign debt directly also, which it is not allowed to do.

So it would require a charter change, a treaty change. All this takes a great deal of time. And in the meantime, I do expect the European Central Bank to do what it has to do. It has the right to buy sovereign debt of countries that are not in bailout programs, i.e., in this case Italy and Spain, but it has refused to do so on a long-term basis. It does so during crises.

So I think we're heading toward another crisis. I mean, people hoped that after the summit at the end of June that they'd get through the summer, and maybe they will. I mean, Spain and Italy can afford this kind of interest rates for a while but not forever.

CONAN: And as we look ahead, the time that you're talking about, this is going to drag out not for weeks or months but likely years.

ERLANGER: Well, I think so. I mean, what the markets are really looking for is, to me, I mean, markets have their own rationale, sometimes they're not even rational, but if the ECB and the eurozone leaders made it clear that they would do whatever they have to do in real terms to support Spain and Italy through this period, by buying as much debt as they have to, to put the markets back into order, then this might change.

But the problem is that the rules have been written, not just by the Germans but also by the charter that runs the European Central Bank, to make that kind of act very, very hard to do, and to change the treaty takes a long, long time. I mean, even setting up this permanent bailout fund - I don't want to get too technical here, but...

CONAN: Please.

ERLANGER: The so-called European stability mechanism, it's called, which was supposed to go into effect July 1, hasn't gone into effect yet. And why? Because the German constitutional court has questions about it, and it tends - it says it's not going to give a ruling until September 12th because it's a European summer, and they have to study. So everything is on hold making the ESM real until September.

And the ESM was to add 500 billion euros to the bailout fund that currently exists, which is temporary. So half the problem is the bailout funds don't exist as they should, and the ones that do exist are too small for Spain and Italy. That's really the problem.

CONAN: Well, let's bring another voice into the conversation: Walter Russell Mead, who joins us now from our bureau in New York, a professor of foreign affairs and humanities at Bard College, editor-at-large of The American Interest magazine. Nice to have you back on the program.

WALTER RUSSELL MEAD: Good to be here.

CONAN: And you argued in a recent piece in the Wall Street Journal that, well, the Europeans may well eventually resolve all these issues, but in the meantime, they are going to be so absorbed with their fiscal and economic and their internal political problems that their influence is likely to decline across the world.

MEAD: Well, I think that's right. You know, you find even - you know, let's not even talk about Asia, but you look at places like - you know, you look at Turkey's approach to the European Union, and Turkey is just much less interested in what Europe thinks than it was even five years ago. Some of that's due to changes in Turkey, but I think a lot of it is due to the Turkish sense that, you know, these Europeans, maybe they're not as smart as we thought they were.

CONAN: This is not the solution; this may be the problem.

MEAD: Exactly, and maybe we're lucky they didn't let us in.

CONAN: And also Russia, a country that has - obviously outside the eurozone and outside the European Union, in many senses still a rival, but you say Russia's influence is likely to increase, even though Europe's its most important buying partner.

MEAD: Well, that's right. I think in particular if we look at places like Greece and Cyprus, where there is - there's kind of a sense in Greece of real betrayal that, you know, the Europeans don't love us, they're not really paying attention, they're unfairly blaming us, we've suffered tremendously. That's obviously not the way it looks to Germany, but in Athens it looks the way it does.

And this plays into a lot of, you know, we're the Orthodox, we're the East, we - the West has never been trustworthy. And there's a lot of kind of sympathy for Russia. And we see that the president of Cyprus, who is fairly pro-Russian, the Cypriot government is trying to play Russia off with the European Union as a source of funding, Cyprus also needs a bailout. And sort of - there's a lot going on here.

CONAN: And indeed that Europe has been the glue that's holding together the fragile situation in the Balkans after the United States has largely departed from that part of the world, and this, you suggest, might come unstuck, as well.

MEAD: Well, that's right. Again, you've got the Serbs, who have, you know, always thought that maybe the Russians were a better friend but maybe not that helpful. Maybe, you know, the Serbs are now beginning to wonder also whether they shouldn't be thinking a little bit more about Moscow.

People have to be wondering, in places like Bosnia and Kosovo, how much attention does Europe have for us. But I'd also look in places like Bulgaria, Romania, even Hungary, where Bulgaria and Romania in particular have sort of not met a lot of the conditions about transparency, cleaning up corruption.

In Romania, there's been a kind of a slippage of some democratic ideas. The Hungarians have also been sort of more - not only sort of anti-Brussels, but the ruling party right now is bridling at a lot of so-called European norms about democracy and institutions.

CONAN: Steven Erlanger, let me just turn to you for a second. Are - as you follow events in Europe, is this absorption with the financial crisis - are people suggesting that some of these broader issues need to be discussed, as well?

ERLANGER: Well, people are turning inward. I think Mr. Mead's precisely right. I mean, I'm a little less concerned about Russia. I think Russia is on a downward trend, and everybody knows it, and its influence is not something the Europeans are terribly worried about.

They're dependent on Russia for oil and gas. If Russia could bail out Cyprus, I think everyone would be happy, and, you know, I think it's important not to confuse everything. I mean, I think the problems of the eurozone are real. They do undermine the European Union's effort to present itself as somehow the future, and I think Professor Mead is absolutely right about that.

But the decline of Russia is also real. Turkey has turned toward Islam, away from Europe, as has been going on for quite a long time. And a lot of it isn't really about the problems of the euro, it's a problem of the European Union perhaps itself, which enlarged very quickly, some think much too quickly, without enough thought and which has had a lot of trouble deepening its ties, particularly to the new neighbors.

And in places like Hungary, Bulgaria, Romania, I mean, there's still a very, very long way to go before they meet West European norms.

CONAN: We'll talk more about the political fallout from the eurozone crisis in a moment. Stay with us. If you have questions about some of these implications, give us a call, 800-989-8255. I'm Neal Conan, TALK OF THE NATION, NPR News.

(SOUNDBITE OF MUSIC)

CONAN: This is TALK OF THE NATION. I'm Neal Conan. Wall Street's headed toward a third day of triple-digit losses, down 165 points at last glance, and the eurozone again tiptoes toward the brink. We've heard this is more than just an economic crisis, we can also expect far-reaching political consequences.

In his recent op-ed on the likely fallout from the euro crisis, Walter Russell Mead wrote: Europe's influence on the global scene will diminish. Postcolonial societies around the world have long noted the poor economic performance of the former lords of the Earth.

Asians increasingly think of Europe as a kind of big Italy - a charming place with beautiful architecture, glorious cultural monuments, delicious food and some wonderful consumer products - but not as a serious factor in world politics.

Complicated, even dangerous situations may arise. All of this, he adds, bad news for the United States. If you have questions about how Europe's crisis may change global politics, give us a call, 800-989-8255. Email us, talk@npr.org. You can also join the conversation at our website. That's at npr.org.

Our guests are Walter Russell Mead, professor of foreign affairs in humanities at Bard College. We've posted a link to his Wall Street Journal op-ed, "The Euro's Global Security Fallout," at our website. Also with us, Steven Erlanger, Paris bureau chief for the New York Times.

Walter Russell Mead, I wanted to ask you, some of that - what Steven was just talking about, the way that Europe presents itself to the world, not just the euro as an alternative currency but the European idea.

MEAD: I think that's right, and again, I think the problem is not a great imperial Russia but a fraying of Europe's power of attraction, that the European ideal, there's a - you know, people talk about post-modern Europe, post-nationalist Europe, a culture - an international culture that rests firmly on the rule of law, this sort of thing. A lot of people were skeptical about it, but they looked at Europe, and for many years it looked like Europe was really working, really successful. Now there's a sense, you know, these people didn't understand it as well as they thought they did.

There is, I think, beyond that there's a certain kind of a - there are certain causes that Europe has been trying to export to the world. One of the leading ones would be, say, for a global carbon treaty. And one of the most fascinating things in world politics over the last three years has been pretty much the near total collapse of the effort to bring some kind of global carbon regime into being.

So issues that Europe has chosen to be its signature international issues are - tend to be falling down the international priority chain. There are a lot of consequences to this sense that Europe is not necessarily the powerful force that we thought and some of us hoped it would be.

CONAN: And Steve Erlanger, as we saw in Libya just a year ago, this was a project fronted by Britain and France, and in the end, they needed the United States to not only provide the can opener, if you will, to open Libyan airspace but in the end to provide the smart weapons they had run out of. There seems to be an exhaustion of NATO.

ERLANGER: Well, I think that's absolutely right, and they ran out of dumb weapons, too. I mean, they ran out of ammunition and bombs, and because the U.S. had all this forward-based supplies, they were willing (technical difficulties) at cost. But, you know, I don't - you know, Europe probably could have - France and Britain one hopes could have beaten Gadhafi's Libya, but it would have taken even longer, and Europeans simply don't have (technical difficulties)...

CONAN: And we're having difficulties with the smartphone connection with Steve Erlanger in Paris. We'll get that back up in just a minute. In the meantime, let's see if we can go to a caller, and let's go to Eric(ph), and Eric's on the line with us from Portland, Oregon.

ERIC: Hi, thanks for taking my call.

CONAN: Sure.

ERIC: Just a question for the guests: I'm wondering how this relates to the notion of decoupling that's been around for at least a decade. I think the past five years have shown that decoupling is much less possible now, perhaps, just the movement of capital and the ease with which things are truly international, if the fall of Europe would really be as - not painless but really as straightforward as one thinks, given how coupled everything is together.

CONAN: Fall seems a little severe, I think decline might be more...

ERIC: OK.

CONAN: ...might be more usable. And Walter Russell Mead, you wrote in your piece in the Wall Street Journal that in a sense, European decline has been, I think the phrase you used was baked into the cake of U.S. foreign policy, expectations over the next several years. It's just going a little faster than we thought.

MEAD: Right, and I think again that, you know, I think the question is sort of about economic linkages, and it's definitely true. We're looking at the stock market today. If Europe is having a bad day, we're going to have a bad day in the United States. I think worse, if Europe is going to have a bad two years, we are - it's going to affect the U.S. economic recovery.

It's also going to affect what goes on in Asia because again, if Europe slows us down, it's going to be hard for China to grow at nine percent when two of its key - its two biggest markets, the U.S. and the EU, are both in trouble.

So the - send not to know for whom the bells tolls here. The bell tolls for all of us.

CONAN: Eric, thanks very much for the call.

ERIC: Got it, thank you.

CONAN: And let's see if we can go next to - this is Tim(ph), Tim with us from Raleigh in North Carolina.

TIM: Hi, I was just wondering, does this lack of investment in the European Union, doesn't that kind of make it a self-fulfilling prophecy: The investors don't invest, so they don't have money, so they get weaker, so the investors don't invest even more? And is there anything specific that investors are looking for that could make them invest?

MEAD: Well, this is what a lot of the problem has been with the debt. So a country like Spain, you know, its debt's growing, and it's having a recession. People wonder how long it's going to be able to pay. So they want higher interest rates in order to buy Spanish debt.

But now that interest rates are higher, it's even harder for Spain to pay its debt and therefore even less likely that it will. So then you want even higher interest rates, and that can turn into a death spiral very fast.

What the Europeans have been trying to do about this is try to get the European Central Bank or the stabilization funds to sort of step in and provide that reassurance so that the panic cycle doesn't begin. But for all kinds of reasons, ranging from technical reasons to political reasons, that is the German taxpayers aren't sure how much they want to pay to bail out some other European country, it has not been - it hasn't been so straightforward.

And as a result, the panic, I think, is gradually - or the concern is gradually getting deeper, and it's getting harder to see a way through all this. So, you know, I think you're making a good point there.

TIM: All right, thanks.

CONAN: Thanks for the call, Tim. Steve Erlanger back with us from Paris, and I wanted to get to that point I was asking you about, NATO. As we see the performance of NATO forces, absent Germany which declined to participate, in Libya, Walter Russell Mead makes the argument obviously these defense budgets are going to be cut even further as the crisis continues.

ERLANGER: Well, this is really a big problem. This is a direct consequence of all these budgetary difficulties and cuts. Now, the French say they are going to freeze their defense spending. The British are cutting their defense spending. Really, it's only Britain and France that are serious military powers that are part of the European Union.

I mean, let's leave Turkey aside because it's an important NATO player, but that's really quite different. And I do think it's a big problem for the United States because the United States has a lot of chips in NATO, and if it really has to do all the heavy lifting, which even Secretary Gates when he was defense secretary was moaning about quite rightly in the early days of this crisis, it is only going to get worse.

I mean, NATO talks about buying weapons jointly, it talks about lots of things, but the fact is it is not, on the European side, the power that it could be and I think many Europeans think it should be. And it is another way in which Europe is losing its own voice in world affairs.

CONAN: And Walter Russell Mead, this clearly has implications, as Steve just mentioned, for the United States.

MEAD: Well, exactly. You know, for all the various kinds of disputes and family arguments we've had with European countries over the years, we have worked out a pretty good defense relationship, security relationship with the European countries, and there are an awful lot of values that we share: democracy, markets, rule of law, a whole range of things.

And the U.S. has global interests and a global foreign policy. That's something that we can't ignore. But if, you know, if we lose Europe as a key partner, or Europe becomes progressively less and less helpful as a key partner, then the U.S. has to turn, you know, you've seen under President Obama, Secretary Clinton, the U.S. building - trying to strengthen relations with Turkey, with India, with Brazil, with Indonesia, with a range of countries around the world to sort of think almost a post-Europe, post-NATO kind of global foreign policy. And that is something new for us, and it's something new for the world.

CONAN: Let's go next to Ben, and Ben is on the line with us from Eau Claire in Wisconsin.

BEN: Hi. I guess I've got a question and a point. My question is, what sort of strings are attached - what sort of strings have there been attached to the money that, you know, Germany or the central bank have - has given to these countries? And then the, I guess, wouldn't it make sense, you know, Angela Merkel and Germany has been hesitant to give actually funding to the European nations, but wouldn't it make sense for them to want to do that because in the long run, they end up making money through the interest that they get?

CONAN: Steven Erlanger, the conditions that have been imposed on places like Ireland and Greece and Portugal, onerous cuts?

ERLANGER: Well, that's right, and it's important to distinguish between those three countries which are in the middle of bailout programs, which means they are getting loans to keep - to protect them from the markets, in fact. They're getting cheaper loans from the European Union, from the European Central Bank and from the International Monetary Fund, and that's the so-called troika. But in return, they're supposed to get their economies in shape, and one can argue about whether the troika has had the right prescription for some of these countries.

It's working better in some countries than others. In Greece, I think, you know, Greece is in a debt spiral, and I don't - I think they're simply going to have to adjust this program because the Greeks are not going to get out of it. It's a very difficult moment, and it's also coming up against political anger in these countries when the cuts get too severe. And that's where Spain and Italy come in because they are not in bailout programs, but the risk is that they will need them, particularly Spain.

And Spain is the fourth largest economy in the eurozone. It's not Portugal. It's not Greece. It's huge, and it's going to take a lot of money to bail out Spain if Spain requires a bailout. So the whole game right now is to try to get it going so that Spain can continue to use the markets without the protection of a bailout that, frankly, the European Union at the moment can't really afford. And if Spain goes, Italy can go, and people are beginning to worry about France as well. So this is why it's a crisis. We're up against the big countries, the core countries, and this is why the euro is really at stake right now.

CONAN: We're talking with Steve Erlanger, the Paris bureau chief of The New York Times. Also with us, Walter Russell Mead, professor of foreign affairs and the humanities at Bard College, editor at large of The American Interest magazine. You're listening to TALK OF THE NATION from NPR News. And Tom(ph) is on the line from Baltimore.

TOM: Hi. Thanks for taking my call. My question is about Russia and their predominance in the energy sector, providing energy for Europe, and whether at some point in the future, if Europe can - if many of these European countries continue to only focus on their own problems and financial matters and don't invest in, like, new energy technologies. I know Germany decided not to - or scrapped a bunch of nuclear programs, nuclear facilities in the wake of Fukishima. A, can there not be some influence there if Russia decides to play chicken like they did with Ukraine and turn off the taps in the wintertime?

CONAN: Walter Russell Mead, is Europe reduced to Ukraine?

MEAD: Well, one of the differences between, say, Germany and Ukraine is that Germany can pay for the gas. Ukraine is having trouble paying its gas bill so - and in that sense, any Russian government needs the money from Europe as much as Europe needs the gas from Russia. And there's also, I think, you know, after some of those cutbacks, there really have been some European efforts to make sure they're getting some alternative supplies. So Russia does need to be, you know, present itself as a reasonably reliable supplier.

And also complicating this a little bit is that some of these very, very large discoveries of natural gas and possibly oil in the eastern Mediterranean may in the not-too-distant future start reducing Russia's sort of power in this respect. There really is the potential that Greece, Cyprus, Turkey, Israel and Lebanon, if those countries can ever agree on a division, can really produce an awful lot of gas, in particular for export to Europe. So, you know, these things are up in the air.

There is a lot of potential for natural gas in Europe itself. It would require fracking, which is controversial, but I wouldn't be surprised at some point to see, say, the Poles going through with this. The energy picture is changing. I think Russia has a tendency to overplay its hand. And when you do that, you end up losing points.

CONAN: And, Steve Erlanger, before we let you go, we're in the run-up to another crisis meeting, and can we expect another Band-Aid, a financial Band-Aid for Spain?

ERLANGER: Well, I think that's all they can do right now, but I mean, that may be enough. I mean, the point is to push the markets down, and, you know, Spain can't pay 7 percent interest rate on a debt, and Italy certainly can't. And unless they find a way to change market expectations, I think it's going to be a very, very difficult summer.

CONAN: Steve Erlanger, as always, thanks very much for your time.

ERLANGER: Thank you.

CONAN: Steven Erlanger, Paris bureau chief for The New York Times, and our thanks as well to Walter Russell Mead, editor-at-large of The American Interest Magazine. Again, we were talking about his piece, "The Euro's Global Security Fallout," which ran last month in The Wall Street Journal. He joined us from our bureau in New York. Thanks very much.

MEAD: Thank you.

CONAN: Coming up, former undersecretary of defense Michele Flournoy argues that the best way to keep the piece is with a strong military that's engaged and positioned overseas. She'll join us next. We'd also like to hear from those of you who served in the military in places like Europe and Japan and South Korea. What influence, what good did you do over there? Give us a call: 800-989-8255. Email us: talk@npr.org. I'm Neal Conan. Stay with us. It's the TALK OF THE NATION from NPR News. Transcript provided by NPR, Copyright NPR.