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Economist Mark Weisbrot unpacks Europe’s panic over Italy's debt, and weighs in on the euro zone’s right-wing bias.
Weisbrot: It's terribly damaging. Look at Greece. Their economy shrank 4.5 percent last year. It's going to shrink something similar this year, they're going to lay off another 20 percent of the federal labor force. They're cutting wages and pensions. This is something that's really going to harm a whole generation, and cause permanent damage.
You mentioned labor market reform. What specifically do they want to do, and what will the impact be?
Weisbrot: They want to make it easier for employers to fire people. In most of Europe, it's more difficult to fire people than it is in the U.S. In the U.S., you don't have to show cause, or pay severance unless it's in a union contract, which is a very small percentage of the labor force here. In Europe, you have a lot of laws that protect workers. They want to eliminate those as much as they can, in order to make it easier to fire workers.
Don't laws that protect workers from being fired also make employers more reluctant to hire people? It's been easy in the U.S. to hire and fire people, and yet the U.S. has a more dynamic labor market and traditionally a higher level of employment than Europe.
Weisbrot: Well, it depends on what part of Europe you're looking at. Our unemployment rate right now in 9.2 percent, and you have economies in Europe with much lower unemployment than that. There's a lot of research on this. CEPR has actually done some of it. The OECD, which is a conservative institution as well, has also acknowledged that there's no evidence that these laws that protect workers in Europe actually reduce employment.
Do you agree with Germany, that Greece's creditors should share the pain of the bailout?
Weisbrot: Of course they should. Why should only the [taxpayers] have to suffer for the mistakes of their governments? Lenders know what the risks are. That's capitalism. Some loans turn out to be bad loans. Why should we create socialism for the creditors, and capitalism and markets for everyone else?
How would you score the IMF's role in the euro bailout?
Weisbrot: The IMF is playing its traditional role of applying the medieval medicine of bleeding the patient. They did in the Asian financial crisis, and in Argentina, Brazil, Russia, and all these other middle income countries in the late 90's and early 2000's, and that’s part of a much longer history of applying this policy.
The unusual thing here is that they're doing it to high income European countries. In fairness, it isn't really the IMF making these decisions, it's the European authorities, and the United States is going along with them. Together, Europe and the United States control the IMF, and they make these decisions.
On Thursday, July 14th, Italy will need to sell bonds to keep its government running and its creditors paid. What do you predict will happen?
Weisbrot: They'll sell them, and the interest rate — well, if I could predict that exactly right now, I'd be very rich. Obviously I can't tell you exactly what interest rate they're going to pay, but I don't anticipate that this is a turning point necessarily. It's not going to blow up that fast, and I don't think the markets are acting rationally right now with regard to Italy, because they're a long way from reaching the situation that Greece is in, where their debt becomes un-payable.
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