STEVE INSKEEP, host:
Let's bring in another voice from London, to talk about this some more. Philip Coggan is a columnist and capital markets editor for the Economist magazine. Mr. Coggan, I'm sorry I can't offer you a cup of coffee, but welcome to the program.
Mr. PHILIP COGGAN (Economist Magazine): Thank you very much, Steve.
INSKEEP: We heard the bond trader say that all of these efforts, these bailouts, are not addressing the fundamental problems. That makes me wonder if this crisis is really not over.
Mr. COGGAN: It's definitely not over. In fact, you only have to look at the latest problem for Portugal, which has borrowed money for six months. A year ago it was paying less than one percent to borrow for that length of time. It's most recent cost of borrowing is 3.7 percent, so it's gone up six-fold in the course of a year.
INSKEEP: So the bond traders who do the calculations here are not happy about the risks and that's why they're charging higher interest rates. What's going wrong?
Mr. COGGAN: Well, a couple of fundamental problems. These economies still run trade deficits with the rest of the world. And in the old days they used to devalue their currencies to make their exports more competitive and solve the problem. But now they're a member of a single currency. They cannot devalue their currencies. So the only way to make the economies more competitive is to actually cut costs and wages within that economy. But that's a very, very painful process and bond investors worry that they won't go through with it, so the alternative, then, would be not to pay back their creditors.
INSKEEP: I don't want to get too abstract here, but as you talk, I am thinking about the period leading up to the Great Depression, when the world financial system was on what's called the gold standard and, basically, the financial system ceased to work. Is that the situation with the euro right now - the rules, basically, don't make sense anymore?
Mr. COGGAN: Well, it's a very good analogy, Steve. Just as in that period, countries had to choose between maintaining the value of money, sticking to the gold standard, or their domestic economy - jobs in the domestic economy. And many of them struggled for years and years to stick with gold and eventually gave up because the pain was just too great. And similarly, now, countries have to choose between paying back their creditors and a long period of suffering for their voters. And it's not surprising that the voters tend to opt to not taking that pain and make the creditors pay in the long run. And that's essentially what happened in the 1930s, by going off gold, countries were not paying you back in the same dollars, the same pounds, as when the debt was taken out.
INSKEEP: So what are the real alternatives here, then, for European nations facing severe debts?
Mr. COGGAN: Well, the first, which was mentioned in your report, is the idea of leaving the euro and that would allow them to devalue their currency as they had in the past. The problem with that option is that their debts are denominated in euros.
INSKEEP: Oh, even if you go away from the euro, someone is going to want to be paid back in euros. You've got a problem.
Mr. COGGAN: In euros, exactly. If you leave the euro, you will default. So the second option would be to default and stay within the euro. Now that's been staved off, for the moment, by these rescue packages that have been introduced for Greece and for Ireland. But the problem there is that these countries are still paying five, six percent on that debt, and that's more than they can afford to pay. If you're paying five or six percent, and your economy isn't growing five or six percent per year - which they certainly aren't in Ireland and Greece - then the debt burden just gets bigger and bigger and bigger. It's like trying to fill a bath in which the plug hole is bigger than the capacity of the taps. The money is running out faster than they're putting it in and that's the long-term problem that faces Greece, Ireland, and possibly Portugal, which is why markets are so skeptical.
INSKEEP: Philip Coggan is capital markets editor for the Economist magazine. Thanks very much.
Mr. COGGAN: Thank you.
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