© 2024 Milwaukee Public Media is a service of UW-Milwaukee's College of Letters & Science
Play Live Radio
Next Up:
0:00
0:00
0:00 0:00
Available On Air Stations

Why Europe's Economy Threatens Global Growth

RENEE MONTAGNE, HOST:

The U.S. economy is improving, finally. The European economy is not. Yesterday, the International Monetary Fund predicted that the U.S. economy will do better this year and next than it had previously forecast. It now expects Europe's economy to do worse. To take a closer look at Europe ahead of a pivotal meeting this week of the European Central Bank, we turn, as we often do, to David Wessel. He's director of the Hutchins Center at the Brookings Institution and a contributing correspondent to the Wall Street Journal. Good morning.

DAVID WESSEL, BYLINE: Good morning, Renee.

MONTAGNE: So, David, what is the problem in the eurozone?

WESSEL: Well, there are many of them - too much unemployment, too little economic growth, too much rigid regulation, too much debt and not enough inflation. And that's just for starters. You mention the IMF forecasts. The IMF expects the U.S. economy to grow 3.6 percent this year. But the 19 countries that share the currency called the euro are supposed to grow only 1.2 percent. Unemployment's over 11 percent. The eurozone is flirting with deflation, or falling prices. And that's particularly pernicious for economies with a lot of debt. Everyone in Europe agrees there's a big problem, but there's lots of disagreement about the right remedies and a real absence political leadership to find some kind of compromise that could get them out of this funk.

MONTAGNE: Why, though, isn't Europe doing what has what has proved helpful to the U.S. economy - some combination of cutting taxes, upping spending, lowering interest rates?

WESSEL: Well, on the tax and spending front, there are two kinds of countries in Europe. One group - Greece, Italy, Spain, Portugal, Ireland - has so much debt that borrowing more to cut taxes and increase spending is very hard, perhaps even impossible. Some of them can't even go to the market to borrow money. And those countries that have the capacity to borrow more, Germany in particular, simply refuse to do so. So they're kind of stuck.

MONTAGNE: OK. Then what about interest rates? And that gets us to the next move the European Central Bank.

WESSEL: Exactly. So the European Central Bank has already moved its interest rates to zero. In fact, the ECB and a couple of other European central banks are trying negative interest rates. That is, they charge banks a fee for depositing money at the central bank instead of paying them interest in an effort to prod them to lend more. That's really extraordinary, but it hasn't been sufficient. So on Thursday, the ECB is expected to launch what's called in the trade quantitative easing - printing money to buy a lot of government bonds, as the fed has done. But unfortunately, nothing is ever simple in Europe.

MONTAGNE: Which is true of a lot of countries. But how so in this case?

WESSEL: Well, when the fed wanted to buy government bonds to lower long-term interest rates like the ones mortgages and give the economy some juice, it could buy U.S. treasury bonds. And no one much worried whether it bought bonds from investors in New York or investors in California - all big, one country. But there is no one European government that issues bonds for the ECB to buy. It has to choose among the bonds of 19 sovereign governments which vary wildly in their financial and economic health. And that's created a huge political problem. The Germans feel they'll be on the hook if the ECB buys bonds from, say, Italy, and Italy doesn't pay back all the money. So Thursday's decision, I think, is going to be an intricate compromise. And that's one that could dilute the effectiveness of the ECB's quantitative easing because one of the ways quantitative easing works is by a big psychological shock that says, we'll do whatever it takes.

MONTAGNE: David, thanks very much as always.

WESSEL: You're welcome.

MONTAGNE: David Wessel is director of the Hutchins Center on Fiscal and Monetary Policy. Transcript provided by NPR, Copyright NPR.