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And I'm Renee Montagne.
Leaders from the eurozone nations have failed again to agree on a unified plan to manage Europe's worsening economic situation. The lack of consensus at yesterday's summit meeting in Brussels came amid reports that European officials are preparing for the possibility that Greece will withdraw from the common currency, the euro. Greece has a relatively small economy, about the size of Massachusetts, yet its problems are not only a problem for Europe. They're threatening to disrupt the U.S. economy and its recovery.
To find out why, we turn, as we often do, to David Wessel. He's economics editor of The Wall Street Journal. Good morning.
DAVID WESSEL: Good morning, Renee.
MONTAGNE: You know, David, I for one am getting whiplash from the many times that we've talked about will it or won't it - Greece, that is, leave the eurozone. It looked like there was a deal that it could stay in. Now the markets are treating a Greek exit from the euro as increasingly likely. What happened?
WESSEL: Yeah, well, you're right. There was a deal. Greece agreed to some very tough conditions in order to get its debt reduced and to get the fresh money it sorely needs from the rest of Europe. But Greece is a democracy and there was voter resistance to the austerity prescribed, particularly by Germany, and that's increased the chances that they're going to have to leave the currency union.
And as you say, the European leaders, who seem to meet with great frequency, don't appear to have resolved much except to say that they expect Greece to keep its promises and stay in the euro club, while, as you say, they're quietly preparing for the alternative.
MONTAGNE: Greece, as I've just pointed out, is a small country, small economy. Why would its problems cause such a ripple effect in the U.S. economy?
WESSEL: That's a good question. Greece alone isn't the problem. If Europe could contain this crisis to tiny Greece, it'd have no significant impact on the rest of the world. But the much bigger economies of Spain and Italy are next in line for this disease of bank runs, skepticism from global investors, skyrocketing borrowing rates, even deeper recessions they're already suffering. And that would be a much bigger economic earthquake, and we'd feel the aftershocks all the way on the other side of the Atlantic.
MONTAGNE: But how does that work exactly? Clearly everything is connected economically these days. But precisely, how does it cross the Atlantic?
WESSEL: Well, Europe may be destined for a long-run decline as its population ages or whatever. But it's still big. It's still rich. It still buys a lot from the rest of the world. If it crashes, it's going to buy less stuff, so eurozone imports altogether amount to about five percent of all the output of all the goods and services around the world. And in much bigger percentage for some places like the U.K. or Eastern Europe, a little less for the U.S.
So you already have a recession there. If it gets worse, that'll hurt corporate profits all around the world, push down stock prices, and just generally make for less demand from Europe. Now, there'll be some offsetting effects. Commodity prices will probably fall if Europe goes into a deep recession. Interest rates in Germany, in the U.S., are very low because so many people are fleeing the euro to put money there. That will offset it, but not enough to prevent damage to our economy.
MONTAGNE: And any other financial aftershocks?
WESSEL: Yes. Well, that's the thing. Besides the goods and services, the financial connections are really intense and that's probably where the big problems are. The worse Europe gets, the more its banks will want to husband capital, the bigger the risk that one or another of them will fail. Already U.S. banks say they're seeing - they're taking business from European banks who are unwilling to extend loans in the U.S., 'cause we have a global banking system, so we wouldn't be immune.
And then certainly there are loans that U.S. banks have made to Europeans, not so much to Greece directly but to European banks and companies, that are vulnerable. And that's just the bank. Hedge funds, pension funds, mutual funds, somewhere someone has invested in something or lent money to someone in Europe who bet the wrong way on Greece and that's going to have aftereffects here.
MONTAGNE: So in a way, as you describe it, it sounds quite predictable. But nothing seems to have been totally predictable - even whether Greece finally does, you know, exit the eurozone.
WESSEL: Absolutely, and I think that's the most frightening thing. When Lehman Brothers and AIG went down in 2007, there were all sorts of unexpected consequences. The money market mutual funds, for instance, had a problem. And so we know that there's going to be some unwelcome surprise when Greece exits the euro and the markets test Europe's ability to protect Spain and Italy and the continent's bank.
So we know there'll be a surprise, but we don't know where it'll be, and that's what's really frightening people.
MONTAGNE: David, good talking to you again.
WESSEL: You're welcome.
MONTAGNE: David Wessel is economics editor of The Wall Street Journal. Transcript provided by NPR, Copyright NPR.