Europe hit by globalization of crisis
TEXT OF INTERVIEW
KAI RYSSDAL: The year’s almost done. But sadly, the financial crisis isn’t. The World Bank says most developed economies are going to find themselves in recession next year. That’d be the first time that’s happened since World War II. Then, as now, a lot of European countries are especially hard hit. Our man in London Stephen Beard’s with us.
Hi, Stephen.
STEPHEN BEARD: Hello, Kai.
RYSSDAL: For a dilemma that started here, Stephen, it seems to me that this entire crisis got very global, very quickly.
BEARD: Indeed. That’s globalization for you. We know what happened. I mean, banks in Europe like banks in the Far East, banks around the world, bought these packages of parceled up, you know, subprime loans, the mortgages went bad, and the banks that bought them became so terrified and uncertain about the scale of their losses and the losses of other banks that they stopped lending to each other. But it doesn’t by any means tell the whole story or explain the intensity of the impact of this crisis. In some countries here in Europe, Spain and Ireland for example, had hardly any exposure to U.S. subprime mortgages, and yet they look as if they’re going to suffer the worst recessions.
RYSSDAL: Well, what else is at work then? What accounts for that?
BEARD: Debt, it seems. Household debt and real estate. Those countries here in Europe, which have the biggest real estate and debt bubbles, are the ones that are going to suffer the worst it seems as those bubbles go pop. But, you know, there is an argument gaining ground here that globalization actually may have played a part in all this debt that has ballooned in recent years.
RYSSDAL: Well, then I suppose you could say we’re just victims of our own success in globalizing the whole economy.
BEARD: Yes, because — and this is how the argument runs — there is a downside to globalization and that is that you get Western companies outsourcing; they’re using cheap labor in poor, developing countries. That has kept the lid on wages back in the West. And so, in order to make sure that those Western workers keep buying, in order to boost their purchasing power, central banks and governments in the West have encouraged people to take on more debt to keep consuming. So that is a possible downside to globalization and free trade.
RYSSDAL: And the next thing, inevitably, that we will hear then, I’d imagine, is some kind of argument in favor of protectionism.
BEARD: Indeed. And, of course, that could be dangerous, as protectionism undoubtedly made matters a lot worse during the Great Depression. You’re seeing signs of it already. I mean, here in the U.K., following the multibillion-pound bailout of the banking industry, there’s been a lot of talk about propping up and subsidizing great chunks of manufacturing too. And the French president, Nicolas Sarkozy, has warned that Europe, in his terms, could turn into an industrial wasteland if it doesn’t prop up its manufacturers. So, you know, this is hardly a climate conducive to free trade, with increasing state help and pumping up subsidies and so on.
RYSSDAL: Well, how does the coming year then look, Stephen, from where you sit, in terms of the economic relationship between the United States and Europe.
BEARD: Europe has always regarded America and the American economy as a trusty locomotive to pull all of us out of trouble. And I think many European leaders are pinning their hopes on the Obama presidency, hoping that he’ll unleash a massive stimulus package that will get Americans consuming again and buying European goods again. There is, however, one must say, the excitement over the Obama presidency has been sort of tinged with a bit of anxiety. Some of his campaigns rhetoric did suggest that he’s much more concerned about protecting American jobs than promoting free trade. So there is a nagging concern in some quarters here that he could turn out to be a protectionist president.
RYSSDAL: Marketplace’s Stephen Beard in London for us. Thank you, Stephen.
BEARD: OK, Kai.
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