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>> and now bbc world news. >> there is nervousness, even panic in the market. this quick, we consider how it could happen and what will be the consequences. if other big eurozone economy's fall apart, will the face of europe be forever changed? >> that would be euro-geddon. >> we hear from the former greek finance minister. >> leading the euro would lead the economy back to the 1950's and 19 -- leaving the euro will lead the economy back to the 1950's and 1960's.

>> the world's biggest company in shoring goods exporters says they are no longer covering anyone who wants to send stuff to greece. greece is clearly a country with two minds about the future. those for and against the bailout are level in the opinion polls. there is no money to pay for energy supplies. greece exit the single european currency. >> if greece led to the euro, the reaction would be frantic. every government, every central bank and all financial markets would be faced with the immediate choices. the first 48 hours of a greek exit would depend on precisely

why the exit happened. politically, it is impossible to expelled breeze from the eurozone. neither of the parties likely to win the election want to leave. driven by economics, driven by capital flight, bank loans and the breakdown of cross border payment mechanisms. correct -- >> you are going to get less money back. there is also a significant likelihood that banks would go under in greece. the last number of companies would be bankrupt as well. there are straightforward forms of default. >> with the far left writing -- riding high in the election, a collapse would spell trouble. and there is already trouble. >> we have total polarization

and an economic program the greeks did not voted 4. we have violence in the street and near not seize in parliament. -- near nazis in parliament. it is going to be awful, but it is awful now. >> other financial centers would be deeply concerned over the $3 -- 3 trillion euros sitting in italy and spain that might leave. in the first 48 hours after a greek exit, everything would depend on preventing the financial collapse of spain. right now, spain is quibbling over the terms of accepting a deal. as for greece, it would face not only banking and monetary chaos, would double in cost. that is bad. >> there is a lot of fear. people are worried about this.

it feels like falling off of the edge of a cliff. there is fear about property, about hunger, about political chaos. >> as the greeks slept, the credibility of the euro as a permanent currency would be shattered. >> we are speaking with the former greek minister and the nobel prize-winning economist paul krugman. >> i think it was a mistake. it is different to say it should have never been done. i would like to save the your row. i do not think greece and the euro are a reasonable proposition. >> why is leaving the euro a bad idea from the greek perspective?

>> leading the euro would lead to a reduction of gdp. it would double today's extremely high unemployment to over 30%. it would lead to widespread poverty. today's suggestion is difficult and very bad. leading the euro would lead the economy back to the -- leaving the euro would lead the economy back to the 1950's and 1960's. >> under the euro, there is nothing on the horizon to suggest any recovery effort. we are looking at extremely high unemployment. being shut out of the capital market as far as the eye can see. you can see how a recovery could happen afterward. i understand nobody wants to buy to the bullet, nobody wants to

take the decision-- bite the bullet, nobody wants to take the decision. if anybody can give me any story where greece returns to prosperity while staying in the euro, i would be happy to consider. but i have not seen that story? >> do you imagine such a story? >> i do and i differ here with paul. we are close to running a primary sub list. the economy is not growing. it was not growing before the bailout. it was in recession since 2008 before we started the austerity package. the austerity package has made things much worse. we need growth. growth needs to come with our european partners.

investment has to flow back in. for all of this to work, we have to have a stabilized situation. at the moment, europe is not giving the right signals. there has been some progress in improving the institution architecture, but not enough. the big moves have not been made yet. i am hopeful that there is a wind of change of we the french election which will change the -- with the french election which will change the emphasis and balance it with growth. at the moment, you have demanded not been there because wages and salaries have been cut, and also a system that is not functioning and does not provide working capital. >> how close are things to unmanageable there?

>> we had a fragmented election results. we are going into an election where the result is hanging in the air. the polls give the conservatives and the left pretty much equal results. it is touch and go. it is clear that the parties are too bid for one party to shoulder. we tried it for two years. >> my sense is that the coalition in greece was doing its best, doing all the things it was asked to do. that was not producing growth. nothing currently on the horizon will produce growth. even if the sternness of austerity demands were reduced to a little bit. greece is still highly uncompetitive on costs. if you can close that gap in a

reasonable time frame -- some of us cut our teeth on the argentine oil crisis more than a decade ago. it was somewhat easier because they had their own currency. there was no plausible move back to an acceptable situation. that is the case here. we do not see how this is going to be resolved otherwise. >> the entrance the spanish government has to pay to raise money reached record levels this week. -- the rate the spanish government has to pay to raise money reached record levels this week. >> imagine it is six months on from the greek exit. there has been no euro crash. on the housing estates of peripheral europe, things are bleak.

>> six months after a greek exit, we would still be in a period of economic and financial uncertainty and weakness. our expectation is that -- is that the gdp would drop 5%. >> if all that looks bleak, it is possibly the best you can hope for if gree exitc. e-- -- greece exits. the spanish economy is shrinking. its sovereign debt is already verging on un manageable. -- unmanagabel. le./

>> one has to fear that the disruption of economic and financial -- the actual exit procs -- would affect the euro. until now, german assistance -- insistence on a greek austerity agreement has been just talk. many see that as changing the debate over austerity versus growth. >> the approach of the washington consensus and david cameron is simply wrong. greece is the country with nothing to lose. they say, no, we are not accepting this. it could be quite titanic for how the whole all-star to project is seen. >> economists find it hard to

model. at least they are thinking about it. the problem is, for the centrist politicians who run europe, they do not want to think about it. if you look at what is happening in the grease on the streets, you can see why. >> there is still -- people have a sense of the political history of the country. your grandfather killed my grandfather. it has already come back. >> the political goals --hauntid that failed. >> to consider the global implication of eurozone instability, paul group -- paul krugman was joined by a harvard

economics professor. what is the problem here? is it one of the man or debt? or-- is it one of demand debt? >> there has to be a plan to bring this gets down. growth is a -- there has to be a plan to bring this debt down. they need a plan for restoring competitiveness on the periphery. >> the way i think about spain is that for 10 years, they were seen as the golden boy of europe. money flooded in. a lot of it was german. lending to spanish cahas fuel the housing bubble. then the bubble bursts.

how do they get back to being competitive again. their current strategy is that they should cut their wages and do enough austerity to pay the debt. it is impossible. the demands placed on spain are impossible. in greece exits, money starts flooding out of spain. >> what is the choice? >> credit has to be made available. it is going to be to the european central bank. that is temporary, we hope. you also have to have some inflation in europe. instead of spain having to cut its wages -- it is not through cuts in spanish wages.

we will have a rise in german wages. all of this means a tremendous change in the german vision of what their policy will look like. instead of having price stability, they have to have something that is much more liberal. they have to have a party. >> inflation and more debt. is that a solution? >> i do not believe about the debt. i believe in writing down debt. i do not think there is a way to go forward without having some kind of political union. this is not just about germany being stingy. it is about not wanting to have an open wallet for the rest of europe in perpetuity. i am not saying what they are proposing is the end of things. i really think that the only way this is going to end is either

europe starts to look like a real country -- and i mean france and germany part of the same country with a central government -- or it splits up. unless they start moving that way enthusiastically, i do not think anything is going to stabilize the situation. >> i hope he is wrong about that. if that is the case, it is over. i have done some numbers. i have done ireland versus nevada. because of the way the u.s. fiscal system works, nevada is receiving what amounts to day facto - aid -- aid. sopranos germany were to accept -- suppose germany were to

accept five% of gdp going to another country. some debt write-downs might make it manageable over a five-year period and we can get an adjustment. that is a hope. that is not a certainty. it will not be good. the united states of europe is not -- is much to be desired. >> i think that is going to be a problem. they need to lay out a vision. right now, it is a moving 40 or 50 year. they need to lay out a vision where it is going forward and not backward. the french election was a rejection of having more interdependent. >> what should western governments to be doing.

>> there is a huge overhang of debt. that gradually needs to be deflated out of the system, some of it through growth. there are few historical experiences where that has been successful, except in cases like canada and sweden where the governments were large and they were able to shrink them and make the economies more efficient. >> something impossible is going to happen. why is that the euro will be allowed to collapse. the other is that the germans will except debt relief plus inflation. one of those two impossible things is going to happen. it is an awesome choice. it is not something -- they will not have years to dither over this.

>> the current financial chaos began with an obscure three latter akron them -- cd -- a three letter acronym -- cdo's. now defeat three letter word is -- 3 letter word is eft. >> they have grown tenfold in the last decade, attracting investments of $1.20 trillion. roughly half the size of the

british economy. what are they and why have they become so popular? with the explosion of find -- fancy financial insurance is a new phenomenon. investors are increasingly desperate for a return on their investment. like cdo's before them, exchange traded funds hold out hope that you might actually grow your money. it looks simple enough. your money goes into a fund that tracks an index. if the index goes up, your money goes up. if it holds -- it folds your money goes up,. dwon. -- down.

>> they provide investors the ability to buy or sell the product in the same day. you can call up your broker and sell your etf right then and there. >> with them being looked into by authorities from the international financial stability board, etf's have become so complicated it is hard to keep track of the risk. >> the vast majority of investors think they are buying an index fund. on the whole, they are not. >> it is the credit crunch that is haunting the city's regulators. your capital went toward a mortgage with a subprime borrower play -- paying interest.

were so popular that banks indented synthetic cdo's where your money when into complex projections for derivatives. banks discovered they did not really need to buy real assets. instead, they could trim costs and massively boost profits by s.denting synthetic cdo' >> if you look back at the credit crunch, products that were supposed to be triple-a- rated were not.

the bank writing them could fail. it might be lehman brothers. >> they also allow you to do things you cannot do with the plain vanilla a version -- vanilla version. he took unauthorized -- unauthorized best. -- bets. the banks specialize in trading etf's. he knew that he could take a and make it look like he had hedged to that that -- that bet.

the back office would not pick up on the fact that the etf's were not real. the back office was meant to confirm trades after they go through, when they are settled. sometimes, the numbers would not be revised until after the agreement was through. >> what happens with a settlement system, a collateral system? all of these arcane issues, are absolutely crucial to how the system works. if the plumbing breaks out in the house, it causes a tremendous problem in finance. >> you can see what was -- what is in an atf in ways you could not see with cdo. >> every time you go out and buy something it is because you are

relying on other people or rely on it because everybody is doing its fashionable. >> countries -- companies insist ets are transparent. >> whether it is from debt or not you have a service provider, . about whotransparent these services are. if you buy my product, you know there are a couple of financial institutions for whom -- with whom you do business. the independent banking commission has been saying is banks have been taking risks, it is wrong for taxpayers to be underwriting them. what is different about etf compared to c is that thedo are

warning's about them before and after a disaster takes place. >> that is all fraud -- for this week. from all of us, good night. bbc news night was presented by los angelesk. cet what can we do for you? >> what can we do for you?