>> right now, the european union is in distress. what would a failed euro mean for the e.u. or for its largest trading partner, the u.s.? >> the '08/'09 financial panic/crash/great recession put tremendous economic financial pressure on the entire global economy, including europe. >> in the same way in which the collapse of lehman implied global shocks, a dissolve in the situation of the eurozone is going to impact the united states. >> while everyone is telling the germans, "bail these guys out now," the germans are saying, "if we're gonna bail them out, we wanna fix the political crisis." >> at the end of the day, europe and the eurozone face an existential question: can we become the united states of europe?

>> in a democracy, agreement is not essential, but participation is. >> never before in our history have we been so interconnected with the rest of the world. >> foreign policy is actually not foreign. >> america has faced great hardship before and each time we have risen to the challenge. >> the ultimate test is to move our society from where it is to where it has never been. >> join us as we explore today's most critical global issues. join us for great decisions. >> great decisions is produced by the foreign policy association, inspiring americans to learn more about the world. sponsorship of great decisions is provided by credit suisse, eni, the hurford foundation, and pricewaterhousecoopers llp. >> coming up next, imperfect union: the eurozone in crisis.

(instrumental music) >> why does the european union exist at all? the answer is simple, strength in numbers. >> an historic meeting takes place in rome's city hall. long a dream, the common european market takes its first step forward as representatives... >> i think there was a real desire in the aftermath of the devastation of world war ii to get the european continent back on its feet. realizing that pulling together economically might play to their benefit longer term, an economic union, if you will. >> the theory was that if you got them linked together economically, then they would have enough in common and enough common interests that they wouldn't want to go to war anymore. >> in 1957, that simple concept inspired the formation of a trading block called,

the european economic community. >> the idea was that if you brought these countries together using a currency union and the trading links, that eventually their economic cycles would synchronize. >> the idea worked and other european nations wanted in. so in 1993, they formed the european union. two years later, they introduced a common currency known as the "euro" with 17 of the 27 member states eventually adopting the new denomination. >> in the dutch city of maastricht, a treaty was signed that had huge significance for the future of europe. >> they share a currency and they share a central bank, the european central bank in frankfurt that makes the monetary policy for the whole euro area. >> unification made trade among member nations a breeze. as a result, the e.u. became the world's second-largest economy and america's top trading partner. >> real engines to growth in the european union have

to do with trade and opening up trade, and that's what the e.u. has done for the past 50 years. >> europe is the biggest economy in the world. the trading relationship between united states and europe is the biggest in the world. >> but even as the e.u. succeeded in bringing economic success to member nations, critics warned of crucial flaws in its complex structure. >> they threw together a whole lot of economies that are very different from each other, gave them a single interest rate policy, but didn't put in place any of the political institutions that would be necessary to help countries that feel the pain of an interest rate policy that's not appropriate to their own economic situation. >> in the united states, you have very different levels of productivity between new york and alabama, but you're within one system of governance. you have not only one currency, but you have one national budget and one fiscal deficit.

in europe that was never true. >> in the states, you know that you have your local government, you have your state government, and you have your federal government. you pretty much know the architecture of who governs, who legislates, and who runs the show. europe, it's a little more complicated. you start with the national governments and they have their own constituencies, their own electorates to represent. now add to that a layer of eurozone institutions, so organizations, institutions that were built to deal with europe and the eurozone. one of them is the european commission, which is based in brussels and they are essentially the administrators and the bureaucrats of the european project. but also crucially, in frankfurt, the european central bank, which is the central bank for all 17 eurozone countries and the closest thing that the euro has to a fed, only it doesn't perceive itself as powerful as the fed. >> many people knew there would be a crisis all along at some point, because it was only

when you had the crisis that you have the political impetus to actually put in place the political institutions that a single currency needs. (instrumental music) >> in 2009, the e.u. began to buckle under the pressure of the international credit crisis. >> the '08/'09 financial panic/crash/great recession put tremendous economic financial pressure on the entire global economy, including europe. europe suffered a worse economic downturn than the united states, a loss of gdp, employment. unemployment soared into the double digits. >> we started calling what's happening now the eurozone debt crisis, essentially in may, 2010, which is when greece received its first bailout funded by the international monetary fund and eurozone countries. and since then, the crisis has spread throughout the eurozone

to several other countries: ireland, then portugal, now spain and cyprus, and reaching italy, uh, and has mutated from a strictly sovereign-debt government crisis to a banking crisis and sort of sectoral crisis. >> the origins of the european debt crisis are multiple. the approximate cause was the fact that many countries recently have had a large increase in budget deficits and there's lots of public debt to levels that are unsustainable. in some countries this was due to bad fiscal behavior, too much spending, too little taxes like in greece, but in other parts of the eurozone, like spain or ireland, the problem was that there was a bubble in real estate and housing. when the bubble burst, the countries went into a recession. when there is a recession your deficit increase, then you have to bail out banks,

financial institutions, and the private losses get socialized. it happened in the u.s. and then you have a surge of public debt. >> these bubbles, either in government spending or in the banks or in the property sector, were essentially fueled by what tends to always drive crises in human history, which is hubris and excess. >> the crisis laid bare the fiscal health of e.u. member states and germany was one of the few nations who had been acting responsibly. >> they had a series of reforms in germany that held down wages very substantially relative to productivity and that made german goods cheaper, more competitive on the world markets. they were not doing that in greece and ireland and in portugal, and even in france and italy. >> 10 years ago, 12 years ago, the basket-case country of europe was germany. they went through reforms, they got back on their feet, their export machine was

revved up and here they are top of the heap. >> the consequence of that is that germany is now this hyper-competitive economy with its manufacturing sector being helped enormously by what, from a german perspective, is an under-valued euro. of course, that same currency from a greek perspective is an over-valued euro and that's a huge problem. >> over-valued since greece had accumulated a mountain of debt. in 2009 alone, greece borrowed $300 billion euros, more than its entire gdp. >> the biggest borrowers would be greece, italy, spain, ireland, portugal. these are the most troubled, what we call periphery european countries; they're the most indebted. greece is the weak link, but it's an incredibly small economy. you could fit it in, in rhode island, you know? so, and already two-thirds of their debt is

on european's balance sheet. >> greece, which has probably the economy that everyone likes to demonize. germans in particular like to think about greece being full of people who basically work about an hour a week, and get a huge pay rise from the government every time they ask for one, and they are terribly union-dominated in a very bad way, and very corrupt, and so forth. >> before the crisis, nations like greece took advantage of cheap rates afforded them by their status as an e.u. member, but they eventually borrowed more than they could pay back. >> you not only had these countries that were continuing to spend well beyond their capacity to pay back, and you had banks that were prepared to lend to them despite the fact that they couldn't pay back. what does that sound like? it sounds like all those american banks that were providing mortgages to people that clearly never had the capacity to buy that house or pay back those loans. >> before 2010, markets

just assumed that eurozone countries were pretty much similar in terms of risk. so you saw greece almost borrowing as cheaply, not as cheaply, but almost as cheaply as germany, which is the strongest and biggest european economy. after 2010, the markets started realizing that this was not at all the case and just started charging a lot more to lend to many eurozone countries. that in turn led to countries not being able to refinance their debt. >> in the case of the eurozone, you already have five or six countries, greece, ireland, portugal, now italy and spain that either have lost market access and they need an international bailout, or like italy and spain, are on the verge of needing such a bailout. >> that's when you start to get this phrase thrown around the pigs, uh, economy, the pigs economies, portugal, ireland, italy, greece, and spain. more and more there was this debate about, you know, can those governments avoid default? what would be the implications

of a eurozone government defaulting for the other members of the eurozone, and would it be necessary for the rich eurozone countries like germany and france to bail out the poor, deeply indebted ones like greece, ireland, spain and italy? >> funded largely by germany, the e.u. and the i.m.f. moved quickly to dole out 110 billion euros in cheap loans to keep greece's economy afloat. soon after came similar bailouts for portugal, ireland and spain. >> the european central bank has started to help. germany and other members of the core have provided through new institutions bailout money to the country distressed. in some cases, like greece, ireland, and portugal, the help has come not only within europe, but also from the international community, the international monetary fund. >> these countries, greece and portugal

and spain and italy and even ireland, uh, which for very different reasons no longer were able to manage their national economies without some form of european intervention. and that's where you have a problem, because unless you get the intervention, unless you get the bailout, you can't fix the problem. >> but the bailouts came with a heavy price. german chancellor angela merkel demanded the recipient nations adopt more fiscally responsible policies. >> it has to be, i think, internal to germany feeling that it has to do this in order to keep the european dream alive. >> in europe, they're actually trying not to waste the crisis, because frankly, the stakes are higher. there's much more urgency, there's less time. and so as a consequence, while everyone is telling the germans, "bail these guys out now," the germans are saying, "if we're gonna bail them out,

we want to fix the political crisis." and because a lot of the leaders, the political leaders in these peripheral states don't want to do that because it's painful, this crisis gets worse. >> the endgame here is a more tightly bound european economy where each nation cedes some authority over their policies, but what they get out of that is a much sounder european economy. so they've got a lot of work to do. >> but germany's requirements have proven difficult to meet and riots and political unrest are now the norm in many european capitols. >> the german population could say, "i'm outta here, i don't want to pay for this." they're, they're the strongest economy and they do have to pay for a lot of it. and the greeks, spanish could bail. i mean, we're seeing riots in the streets because unemployment's 25 percent and rising. and you know, if i'm a greek family and you know, i can't pay

for my z-pack for my sick kid, i'm gonna be pretty upset. so i'm outta here, i could be outta here, just like argentina did back ten years ago. so things could go badly wrong. >> i've personally experienced the change of mood in my hometown, which is athens. i was born and raised in greece. over the last two and a half years watching what was a warm and welcoming city, for me, turning angry, turning at times extremely violent, with moments feeling like it was a war zone. and that's not just been in athens. >> if you look at southern europe, if you look at greece, there are demonstrations almost every day. if you look at spain, now more recently in italy, also a lot of demonstrations on the street. so unfortunately, i mean, different countries, people in different countries react different ways. and when people demonstrate too much on the streets, certainly it complicates very, very significantly the job of the government to try to sort out the situation.

>> we've seen the same scenes in madrid. we've seen the same scenes in lisbon. essentially what you're seeing is just increasing anger because taxpayers know that they will have to foot the bill for this one. and also they feel that they've been continuously, chronically, criminally misrepresented by their governments. a feeling of frustration that i feel is global and citizens across the world can relate to. (instrumental music) >> describing it as "baptism by fire for a whole generation", today the head of the european commission warned that without greater unification, the e.u. would not be able to face the financial crisis. >> as the e.u. struggles to avoid complete collapse, some advocate a stronger union. >> right now, it's becoming increasingly obvious that unless the eurozone moves towards a greater union integration,

meaning a fiscal union with common spending, revenues, public debt that is shared, a banking union with a european-wide deposit insurance, an economic union where this recession is stopped and there is economic recovery. >> you need time to create a fiscal union. you need time to create a banking union. you need time to allow the european heads of state to get together and create a roadmap for what kind of regulatory and constitutional changes you will need to get to the point that you actually have greater integration of european economic governance. >> so the eurozone, the major issue at the moment is the so-called banking union and we've heard a lot on how they should be introduced, what are the key points that should be deciding and how it should progress.

another major issue is the so-called eurobond, thereby european union countries would issue joint and several liability bonds. now that would require certainly a new institutional framework, which guarantees, for example, it would be now the germans would pay for italy's debt. >> at the end of the day, europe and the eurozone face an existential question: can we become the united states of europe? can we have the more powerful members, like germany or the netherlands, essentially foot the bill, share risk? can we issue debts together? >> but standing in the way of unification is the reality that there are 17 different nations in the eurozone, each concerned about the welfare of its own people. >> there are very strong national political constraints. for example, in finland, which is one of the healthiest economies in the euro area, politicians simply don't understand why they have to pay,

for example, for spain or portugal countries, which behave not in a responsible way before the crisis. so even though politicians i think understand, there are so many national interests that it would be very difficult to find a good solution. >> what of the german and austrian and dutch citizen who have always paid their taxes, who live in a law abiding society where the state works and they can depend on it and are now seeing their hard earned income being transferred to what they view as profligate countries? in europe, that kind of animosity coming from the ground level up can actually be extremely toxic and dangerous. what we've seen is a return to a kind of second world war system of stereotypes and cliches and national hatred. whereas the european project was supposed to put that to rest once and for all and bring european peoples together as europeans, rather than as greeks

and germans or whatever. ♪ rule, britannia! ♪ britannia rule the waves... >> the eurozone crisis has done so much to undo the european project and perhaps that will be its saddest legacy. >> should these challenges to unification prove too great, what would a collapse of the euro mean? >> in the same way in which the collapse of lehman implied global shocks, a dissolve in the situation in the eurozone is going to impact the united states, china and many other parts of the world in a way that could be very severe and very extreme. >> you could break up in a neatly packaged way, very difficult, or you could break up messily, more likely. if the euro breaks up messily, that again is going to be a tremendous shock to the entire world financial system and we are still the biggest players in the world financial system. so we will not be immune to something like that,

if it happens. >> it will continue to have a drag until the uncertainty around the euro has been resolved. we need firm rules for who can be in the euro and who can be out of the euro and what conditions they have to meet to make those transitions. and we need some sort of fiscal architecture to protect the euro against these enormous issuances of unsustainable debt. >> unfortunately, since that feels quite far away from where we're standing right now, we must contemplate the worst case scenario, which would be one country leaving the euro followed by several others. a complete collapse of confidence in the european project and the eurozone project, losing several banks, people on the streets, riots. (singing)

(instrumental music) >> the u.s. treasury secretary tim geithner, concerned about the eurozone crisis, sought a meeting with the german finance minister wolfgang schauble on his holiday. in a statement, they said there was a need for global cooperation to resolve debt problems. >> as the european union's greatest ally and trading partner, what can the u.s. do to prevent a break up? >> well the eurozone is of course america's leading trade partner. and as a consequence, if the eurozone has very anemic growth, everyone that we want to export to in europe is going to buy less of our stuff. our ability to have our multi-nationals that have large manufacturing bases in europe, and there are many of them, are going to be producing less. they're going to be less profitable. they'll be laying people off. this is the danger. >> the united states' economy and the european union are

extremely closely tied together. they are the two biggest economies in the world. they're almost roughly equivalent in size, about $15 trillion in output for each of them. and together, they make up about half of the whole world economy. >> one of the questions that i asked each of them was, "what could we do in the united states that would help with this crisis?" and every person on the panel said the most important thing we can do in the united states is to get our own fiscal house in order. >> the united states certainly has some accounting to do with respect to a regulatory system that was inadequate. >> the united states has made it clear, as has china and many other countries, that we are not writing checks. there's nobody that supports a marshall plan for europe. there's nobody that supports the americans leading a bailout. what we're doing is providing the europeans with a lot of advice. >> what the united states can do is make very clear that we have supported the cause of european integration

for decades and that we see a strong and united europe as a very important ally for us and a very important anchor of stability in the world. and i think we need to be more vocal politically about our investment in the european union, in european integration. and the fact that we are, we're not just neutral bystanders hoping that everything doesn't collapse. >> for now, the eurozone's future remains uncertain. across europe and in washington, many are hoping for the best but bracing for the worst. >> there is hope that as these crises have spread, that there is more pressure on european leaders to come up with a, a grander solution to deal with the problems. just as here in the united states as we look at our challenges, the more we see the impact of those challenges,

the more pressure there is to get a resolution. >> this is the hotel california. once you come in, there's no going out. and once everyone recognizes the hotel california, it'll stick together. so, there cannot be any bending on that, you have to be steadfast in that resolve. and make sure that the, that this works out. >> so a best-case scenario, given, given where we're standing right now is that the euro survives as a project, but is fundamentally changed. it's essentially redesigned. it's like euro 2.0. >> as the eurozone economies struggle to right themselves, one thing is clear, minimizing the effects of this crisis on america's own economic recovery will require great decisions. (instrumental music) >> to join a discussion group in your area or order a dvd of this series, visit greatdecisions.org or call 1-800-477-5836.

great decisions is produced by the foreign policy association, inspiring americans to learn more about the world. sponsorship of great decisions is provided by credit suisse, eni, the hurford foundation, and pricewaterhousecoopers llp. >> next time on great decisions: iran's nuclear aspirations have furrowed brows from washington to tel aviv, but how can the u.s. stop tehran from building a bomb and at what cost? red line: iran, israel and the bomb, next time on great decisions. www.captionlink.com