thanks for joining our to our per click recap of your headlines the possible financial tsunami from the euro zone demands the attention of the top of the world's top decision makers as g eight leaders gather in the u.s. president barack obama will be balancing has a luncheon campaign while playing. u.s. congress takes a hard line on tap promise saying it must be prevented from even being capable of building nuclear weapons but the fears are that this will push america closer to war with iran. and the syrian regime says al-qaeda militants are behind

attacks in the country as damascus releases the names of knowing terrorists it claims are in custody while washington is a non as recent reports its coordinating arm celebrities troubles. up next dance and the debate over the future of the eurozone and its currency. please. please. please. please. please continue. to. follow and welcome to crossfire guide peter lavelle germany and the future of europe and the euro zone a currency regime conceived in hubris now is collapsing in ruins can germany maintain its leading

role in europe as one country after another experiences economic austerity and political turbulence and one of the cases for financial justice and democracy when berlin reserves the right to call the shots. came. to cross-talk year old turmoil i'm joined by early brooklier in berlin he is a member of the e.u. expert service team europe and a faculty member of the training unit of the german federal foreign office in london we go to george urban he is a professor will research associate at the university of london and in new york we have marshall are back he is a global portfolio strategist at madison street partners and a fellow at the economist for peace and security are gentlemen crosstalk roles in effect that means you can jump any jump in any time one if i can go to you in berlin it seems to me that angle americal is finding yourself more and more isolated and i don't have to remind you of the panel or our viewers what's going on

in europe right now particularly greece we're looking at spain there's a run on greece in a big way can anglo-american continue to take our hard line on our stared particularly when we have a new french president. i don't think it's a question of either or america is committed to what you represent and the chancellor of her directly elected government in germany and therefore she has to care for german taxpayers interests germany is a rule based economy and therefore everyone is committed to rules and that's what she tries to represent in the european union as well at the same time it's not a question about that everyone has just to implement austerity packages if you like interrupt you here i mean germany puts its foot down and says a lot of things about the eurozone it has for the last few years and because of its economic strength that usually gets its way it may not be very democratic but because of the way the european union i'm sorry the european currency is going i

mean is germany going to show a little bit more flexibility because i mean we have austerity creating so much turmoil right now and a lot of people will talk about austerity question of austerity can actually create growth but of course austerity cannot create carolled but if we just throw money at problems who die even people into recession ok marshall where do you come out on that ok because austerity doesn't seem to be working so far all it does has done is create an enormous amount of misery and pain. yeah i think that's right it's the old story of if you were. told to stop digging. i don't think the german government has has has got that message though i sympathize with what he said call does represent the interests of a democratically elected government but i think the core problem is that the germans continue to misdiagnose the problem it's not a problem a problem probably gets in fact if you look before the onset of the current crises

for example spain and ireland as an example had a pristine public finances they were actually better than the us of germany but you have a fundamental problem of the financial architecture you have a currency union minus a fiscal union it's not capable of dealing with the kinds of huge external shocks to demand but experience and see late two thousand and the because the diagnosis is wrong the patient keeps getting the wrong medicine and as for the cost to the german pound spare that there hasn't really been a cost germany is actually benefited substantially from the european monetary union it's effectively entrenched its position ok marsh you got to help me because that's exactly what i wanted to say to george maybe the german position is been very positive for the german economy and for the german people so i mean that's why they continue down this path but as everyone on this program knows everything is interconnected eventually even the sense of democracy in the european union i think the main thing to remember is we're facing elections in greece on the seventeenth

of june at the latest and the government may be returned. breaks with yourselves he package giving germany and the troika the excuse to cut off money if that happens when no longer talking about medium term austerity or growth or whatever we are talking about european meltdown now two things which i want to stress first of all that meltdown is actually starting to happen now. we're seeing a run on banks in greece that could easily spread before the seventeenth. i'm not saying it will and i'm saying the real possibility it will get a second vote. go ahead is that the potential costs to the euro zone a meltdown is far higher than the potential cost to the european central bank.

issue alarm me a bit later i'll come back to what i think the european central bank needs to do immediately ok i'm going to go back to you in berlin i mean what what is the way out here because we are seeing meltdown as we are speaking right now is there something the germans can do because we've all pointed on the program i'm sure you agree the eurozone has been good for germany but the way it's going down the path now it's slowly but surely everyone is losing confidence in this currency a currency that merkel seems to have complete confidence in to this day. one problem is that germany is not the leader of the european union this is a democratically elected system this is not so you're saying they don't really know what germany has to say about the euro zone is and probably the most important country. just one country it might be the most important country among twenty nine but it's certainly not the leader everyone has signed for fiscal pact and it's not about dominating the other it's the second you have

a lot of people would say there are a lot of people would say germany really just the other countries resign that a lot of people say that berlin bullied the other members decide that and a lot of people would also say that of course he lost the election just because of that kind of bullying. what we will see in the future is aside from a rule based strict project to reform the structures in the periphery countries and additional initiatives which now will be promoted by far along and all the left governments and the opposition parties germany that there will be an additional six and that will be part of the solution but if we will just let the finances goal then we will definitely go even deeper and any trouble ok marshall i got to you in new york we don't have a lot of time right now on our hands here that sounds like a very academic reaction to it i mean we're seeing the house being burnt down right in front of us. well worth seeing the house being burnt down and the germans keep

insisting that if we need to keep the building regulations order before we actually douse the flames with a with what the water supply which they control the point i would make about the fiscal compact is it's it's not like it's a nonsensical rule the budget described deficits are a non-discretionary variable my by that i mean that you can't control your tax receipts and when you slow down your tax receipts go down your social welfare expenditures go up the fact is it's another fraud being perpetrated on the borders of europe it won't solve anything we had a stability and growth pact introduced by tail beigel and nobody here to including the germans and it's it's nonsensical to think that you can control your expenditures by simply saying we're going to cut x. amount in the is going to be a budget deficit it doesn't work and you certainly can't introduce the supply side reforms that he is advocating in the absence of any kind of growth we have a problem of deficient aggregate demand right now and that can't be sorted by simply imposing austerity willy nilly and simply saying well these countries have

just got to reform their economies no and that's the way will sort out the problem it doesn't work that way ok george are we running out of time for all of these great ideas that we've been hearing about since two thousand and eight we were running out of time but i think we i think we are running out we can i need think the e.c.b. has to do two things almost immediately i'm talking about we not months or years in the next couple of weeks first of all the e.c.b. the financial the sooner the better the z.b. has to say that it will continue to. extend its weekly refinancing operations to the greek central bank. thus preventing a run on the greek private banking system. can i just remind you that one point two billion euros have been lost to date c.f. that's the financial times estimate so far the second thing the e.c.b.

can do. again in the next fortnight. is to really say to its long term refinancing operations at the l.t.r. as called from. facing the banking sector the european banking sector merely base wearing out the banks to actually buying euro bonds and if the e.c.b. you were to say we will buy any amount of euro bonds and we will buy as many euro bonds as necessary solvent sovereign euro bonds i mean as many as necessary to camp interest rates four percent or less than that would kill speculation and it would kill contagion very quickly ok george i mean george ok i see a lot of nodding heads will be done can it be done is that the political will to do

it surveys are can be done because the. long term refining sensing operations of the europeans i'm sure won't have seen drag a one point two trillion euros so far this year there's no reason why that sort of money couldn't be directed buying solvent directly instead of going into the deposits of private banks so of course it can be done ok do you think that's going to happen do you think i mean what i guess the whole program here is is the germans going to be shaken up enough i've seen the house being burned down but it just can't live in one big powerful room i mean there aren't you don't have the protection i mean if the eurozone goes melts down germany goes with it also obviously. it's certainly not in the interest to sit in a cozy room and see the rest of the european union following chairman who is one of the most committed countries in the european union to stabilize this there's no

such thing as sure of nationalism nor is there an intention to lecture anyone the only thing that we have to keep in mind is that there are serious structural problems that got us into trouble and that has a lot to do with public finances as well with the lack of competitiveness. you're going to wear shorts we're going to marshal after a short break after a short break we'll continue our discussion on the euro crisis. science technology innovation all the list i'm elements from around russia we've got the future covered.

and if you say.

welcome back across time you know all about your mind you were talking about the financial crisis in the euro zone. and you say it's. ok not to go back to marshall new york marshall one of the things that has been covering this crisis since it started here and one of the things i find very interesting is that you know we look at protecting sovereign countries looking at greece we're looking at the other pig countries here but i've always got the sense it's really about protecting banks ok because every traunch that goes into greece pays off some banks here and there is no benefit for the people of greece at least in the immediate term ok and this is one of the troublesome things about this whole crisis is that you have politicians looking after the interest of their banking friends but not of the people on the ground this is why we're having so much turbulence. yeah i think that's true and again i would go back to the earlier point they were only i don't think this has been a public problem a public prophecy you would have had major problems dealing with substantial build

ups of private debt and the german banks have played a major role in that they certainly were very active for example. and if you look at the condition of the landers bank in the they are in a highly problematic position as well so absolutely i mean we there has been no growth component you can even see this in the greek bailout packages there's a large portion which is being held in escrow to make payments to to bondholders and this whole idea you. pose haircuts on the the private sector it's affectively represents a bond tax here you need to get a growth component you need to get money into the hands of people that can spend but but that's a distinct problem i mean you've got a solvency issue and i think in regard to the solvency issue george is absolutely right you need to have the e.c.b. and while that is the only entity that can create new net financial year as which would deal with solvency problem and then after that point you can start to

introduce a growth component now i in the second part of course i would i would like to abolish or get rid of the whole universal banking model which i think it's been very highly destructive not only in europe but also in north america but it's clear that the european authorities have not been very honest and in acknowledging the fact that this is a clause that recapitalization of the banking system all of the banks of the of main street ok george if i go to you i mean i think as we see this meltdown going on i mean is it fair just to question the entire idea all together right now i mean we just keep talking about rich countries trying to bail out poor countries that were given easy credit ok and we go through this process of some people having to have to live in absolute despair to pay back those debts while those current rich countries and banks who gave the money in the first place can make more money i mean you know i guess for some people a small number of people it's a win situation but it seems like a growing number of people it's a lose lose situation i'm questioning the entire euro project.

oh you're absolutely right to put that question and let me agree with the previous speaker the serious falls on the architecture of the euro and let me disagree with what i understood our german colleague to have said which was the been does funk. of the germans had values responsibility in all of this they were not a major player corsair a major player in the whole economic architecture of the eurozone was determined in the must rate treaty asuncion a buyer economist from the bundesbank so let's be clear about this the bundesbank as and continues to run the show and dictate to the e.c.b. what you can and cannot do i must just add to that mr drug has gone considerably beyond what we expected of him and done some quite positive things nevertheless the

immediate problem is to bail out the banks the longer term problem is to barrel out the people this operation has to be about growth and about higher wages and about decent living conditions for all europeans and not just about bailing out banks but unless we bear large the banks we risk a total meltdown and possibly turn off fifteen years of depression which no one would benefit from lisa or the germans and can i just write my own final point here george go ahead of. the final point is quite simply the costs the potential costs to all the players in this game is very much higher than the cost of trying to resolve the problem now are by through these taking the sorts of steps which i described earlier on ok marshall you want to jump in there again

it seems to me the timing of all this i mean we we've been talking about so many great ideas and i've heard all these great ideas for years right now but we are with the finish line the end line the game over segment is approaching us. well let me just say i think george's diagnosis is one hundred percent correct i would refine it somewhat and say you have to deal with the solvency problem if you deal with the solvency problem through a widespread. purchases of all of national bonds and you can do that on the sector market it doesn't violate the master treaty then you effectively deal with the banking problem to a large extent because it's ultimately a solvency issue this is why people are taking their money out of spanish or greek or or portuguese banks because they're worried that they're going to revert to national currencies and it's going to be worth a lot less if you actually have the e.c.b. in a credible way dealing with the solvency problem you know start to see rates coming down credibly and if you start to see rates coming down the bond holdings of the banks will go up in value and the banks will be in

a less distressed position but what's happening right now is you've got this debt deflation cycle going bond yields are going up because people question the solvency of countries like greece portugal spain except for the banks are the largest holders of these bonds and this is in turn manifesting itself in terms of stress and in the banking system and you've got a banking run and on top of that the e.c.b. to morrow could step in as as george suggests and buy any limited quantities of euro bonds that they can create unlimited quantities of eros now the german response that typically is that's going to be highly inflationary that's going to buy and bring us by more but that's not the case what actually happens in those situations is that you are affected me replacing bonds in the. with with reserves in the banking system as we've seen in the united states just filling up the banking system with reserves there's not enough itself create inflationary conditions and the and that could be done to morrow so it is something that could be done immediately and i think that you need to get the patient out of the e.c.b.

then you can deal with the long term operation of reconstructive surgery which which will have a growth component if i come back to you in berlin i want to agree with something you said earlier the program about mmer market i mean she's a. legitimately elected leader and he has a strong political base and she's had to face elections and what not but nonetheless you know what point is germany have to think about the welfare of everyone else because everything that you said earlier about law based on treaties and things like that i completely agree with you but the interconnectedness of all of these things germany at some point in time has to think about everyone else not just itself. germany is not thinking about just itself because that is the main idea of the european integration project which your questions in the first place the whole idea when it started in the fifty's was about to become so interdependent and so dependent on each other in an economic project through. he did not see it

makes sense at all so if we go back to the maastricht treaty what has been said from london it's turning the whole thing upside down the question was how can we establish a monetary union which is price stability oriented without the legacy of a new currency so what they did was to copy the german model which was a model based on price stability and to borrow the reputation of the maggie thatcher even presented this as a victory over germany too and bad to germany you know way in which is no longer possible that germany could dominate anyone in germany didn't even want to germany is the biggest payer and sure many committed to the idea of solidarity one of the reasons why the periphery countries were doing so much better with regional funds and structural funds it's just the fact that there is something like a transfer union in place we only have to see how it could do in the future as a fiscal union and that is not just throwing money at problems ok well marshall it seems to me that you know i don't like conspiracy theories and all this but you know one of the outcomes for people that want political union in europe this is

really a windfall for them because they get their fiscal side and then you actually have a real union something akin to the united states but you would have the united states or some states are more powerful than others like new york and chick and california and in this is what we get in europe i mean it's smaller countries have fewer votes i mean that is what they want but i don't think people signed up for that project. well maybe maybe not but on the other hand you can't be halfway pregnant i mean you either go the full way towards the birth of the child or you i mean you can't stay the the four month or five month pregnancy period forever so i mean the it's there's an existential choice here you are the decide that you want to go the whole hog and have the united states of europe of one form or another or you go back to individual currencies the point is that yes there will always be net fiscal transfers but in the united states for example i'm sure a state like west virginia has been

a net recipient of federal dollars for almost its entire history but you don't hear people complain about it and by the same token if texas runs a current account surplus with the other forty nine states that's irrelevant because you have a fiscal union and ultimately it's not a consideration which creates huge instability so that's a logical world where you have to go i mean historically when you had monetary and without a strong fiscal counterpart as say you did in the united states confederacy during the civil war or you had during the articles of confederation before the u.s. constitution was introduced in seven hundred eighty nine they didn't work so the crisis has forced europeans to make this choice the germans say well we've got to actually introduce these reports before we can get to from from from a to b. and as you pointed out you don't have the time i think there are interim steps that have to be taken before you get to full fiscal union and i think the e.c.b. is the only entity that can take a central role of the e.c.b. says well we we don't we can't take this role on because we don't want to do fiscal

transfers but the reality is that's the way it's structured right now you have to take the institutional limitations you've got a nice easy only game in town that actually can solve put at least take the patient out of tree and get it to the on the road to recovery george i want to give you the last word on this program in a year's time will you be talking about the ongoing euro crisis or the aftermath of the euro crisis. i don't know i hope it's the former not the last one. on think that many things to do and i think the architecture they must treaty had the great fading out of the mousetrap treaty was that it created a pall from central bank on trade union but it creates about fiscal union everyone saying merry christmas you know george thank you very much tony thanks so my guess sitting in berlin london and in new york and thanks to our viewers for watching us here to see you next time and remember cross talk.

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