0:00:02 > 0:00:07For more than two years, Europe's economies have been on the edge
0:00:07 > 0:00:10of a financial and economic precipice.
0:00:10 > 0:00:13The dream was that you'd bring people together.
0:00:13 > 0:00:17The reality is that, in order to save the euro,
0:00:17 > 0:00:20the euro elite are destroying the dream.
0:00:20 > 0:00:23The crisis has battered Britain too,
0:00:23 > 0:00:27and if it isn't sorted out, it could drag us into a devastating slump.
0:00:27 > 0:00:30It's a big problem for our economy in general.
0:00:30 > 0:00:34We simply cannot cut ourselves off from problems that occur in the eurozone.
0:00:35 > 0:00:38This is the story of how some European countries amassed
0:00:38 > 0:00:45unsustainable mountains of debt and hid much of it till it was too late.
0:00:45 > 0:00:49Greece by now has received 500 billion euros.
0:00:49 > 0:00:53It is a huge amount and obviously a bottomless pit.
0:00:53 > 0:00:56And it's about how Europe's banks came within days
0:00:56 > 0:01:00of an almighty crash that would have been more catastrophic
0:01:00 > 0:01:03than the global crisis of 2008.
0:01:03 > 0:01:08The banks were dying on their feet, many of them insolvent and illiquid.
0:01:08 > 0:01:12This mess has its roots in perhaps the riskiest economic experiment
0:01:12 > 0:01:16ever carried out - the creation of a single currency
0:01:16 > 0:01:19for 17 very different European countries.
0:01:19 > 0:01:24Whether the euro is held together or not, Europe is facing
0:01:24 > 0:01:27a lost decade or more.
0:01:38 > 0:01:41BAGPIPES PLAY
0:01:50 > 0:01:53THEY CHANT: We're not paying the household tax!
0:01:53 > 0:01:55We're not paying the household tax...!
0:01:55 > 0:01:58Life is very difficult for most people.
0:01:58 > 0:02:03The austerity measures that have been implemented,
0:02:03 > 0:02:07at the behest of the Europeans, is very draconian.
0:02:09 > 0:02:11Ireland is a country in shock.
0:02:11 > 0:02:12Until five years ago,
0:02:12 > 0:02:16it was seen as one of Europe's greatest economic successes.
0:02:16 > 0:02:20Then its economy collapsed, crushing living standards
0:02:20 > 0:02:23and forcing the government to slash public spending.
0:02:24 > 0:02:28These are a conservative people. They do not protest easily.
0:02:28 > 0:02:31We don't turn the cars over.
0:02:31 > 0:02:34In France and Italy, in Greece, if they're unhappy,
0:02:34 > 0:02:38they go to the streets, they make their feelings felt.
0:02:38 > 0:02:40We haven't done that here.
0:02:40 > 0:02:42This is a new thing.
0:02:45 > 0:02:50Mick Wallace is an independent member of the Irish Parliament.
0:02:50 > 0:02:55Today, he's leading a march against the latest austerity measure -
0:02:55 > 0:02:57a tax of 100 euros on every Irish household.
0:02:57 > 0:03:02It's hard to credit that five out of six people in Ireland
0:03:02 > 0:03:05have defied the government and refused to pay.
0:03:07 > 0:03:09CHEERING
0:03:11 > 0:03:15Politicians do not represent your interests.
0:03:16 > 0:03:18They represent big business
0:03:18 > 0:03:22and, right now, they're representing the financial institutions.
0:03:22 > 0:03:23CHEERING AND APPLAUSE
0:03:26 > 0:03:29And I don't think these people should be encouraged.
0:03:29 > 0:03:31CROWD: No!
0:03:31 > 0:03:34In the small village of Gorey, the anger is palpable and raw,
0:03:34 > 0:03:36people at the end of their tether.
0:03:36 > 0:03:39We can't live. We're in negative equity,
0:03:39 > 0:03:43we're struggling day by day, we've cut back on everything.
0:03:43 > 0:03:48I feel betrayed by my country, betrayed by my politicians.
0:03:48 > 0:03:50I voted for people who told me lies
0:03:50 > 0:03:54and this is how they've driven a knife into the soul of Ireland.
0:03:59 > 0:04:02Across Greece, Italy, Portugal, Spain, as well as Ireland,
0:04:02 > 0:04:06Europe's citizens have taken to the streets.
0:04:09 > 0:04:12Rising unemployment, vast cuts in public spending,
0:04:12 > 0:04:18it's the greatest squeeze on their living standards since the 1930s.
0:04:21 > 0:04:24There's no great barrier protecting the United Kingdom
0:04:24 > 0:04:27from the tumultuous events across the Channel.
0:04:27 > 0:04:30The eurozone is our biggest export market,
0:04:30 > 0:04:33taking 40% of everything we sell abroad,
0:04:33 > 0:04:37and our banks are big creditors of eurozone banks
0:04:37 > 0:04:41and also big lenders in Spain and in Italy.
0:04:41 > 0:04:42The recession in the eurozone
0:04:42 > 0:04:46is one reason why the UK is back in recession,
0:04:46 > 0:04:50and if there were financial Armageddon in the eurozone,
0:04:50 > 0:04:54well, our banks would be back in intensive care
0:04:54 > 0:04:58and our economy would be facing meltdown too.
0:05:02 > 0:05:07It's perfectly clear that we're better off not being inside the eurozone.
0:05:07 > 0:05:10Can we protect ourselves completely from events there?
0:05:10 > 0:05:12Of course not, no. I mean, the British banks
0:05:12 > 0:05:13are very international.
0:05:13 > 0:05:17The British banking system is a very large portion of our economy,
0:05:17 > 0:05:18much larger than other economies,
0:05:18 > 0:05:23and if the guarantees that the Government's given for those British banks were called,
0:05:23 > 0:05:26which they could be, in the event the eurozone goes down,
0:05:26 > 0:05:29we are without doubt the most indebted country in the world.
0:05:31 > 0:05:35So how and why did Europe get itself into this appalling predicament?
0:05:40 > 0:05:43Its roots go all the way back to the end of the Second World War.
0:05:46 > 0:05:51Three times, great conflicts had erupted from French and German soil,
0:05:51 > 0:05:53and the idea was after the war,
0:05:53 > 0:05:55that this should never happen again.
0:05:55 > 0:05:57And money, as well as trade,
0:05:57 > 0:06:00and political rapprochement, were all keys to that particular door.
0:06:02 > 0:06:06Winston Churchill was clearly very keen that France and Germany
0:06:06 > 0:06:10should come together and no longer cause a problem for everybody else.
0:06:10 > 0:06:14It is not a movement of parties, but a movement of people.
0:06:14 > 0:06:20Europe can only be united by the heartfelt wish
0:06:20 > 0:06:25and vehement expression of the great majority
0:06:25 > 0:06:28of all the people in all the parties,
0:06:28 > 0:06:31in all the freedom-loving countries,
0:06:31 > 0:06:34no matter where they dwell, or how they vote.
0:06:37 > 0:06:40Churchill was a promoter of a United States of Europe,
0:06:40 > 0:06:42though with Britain on the outside.
0:06:46 > 0:06:50The UK wasn't one of the European pioneers
0:06:50 > 0:06:53which signed the Treaty of Rome in 1957.
0:06:53 > 0:06:56At the heart of the new European community
0:06:56 > 0:07:00stood the historic enemies, West Germany and France,
0:07:00 > 0:07:04together with Italy, the Netherlands, Belgium and Luxembourg.
0:07:04 > 0:07:07As these countries removed barriers to trade,
0:07:07 > 0:07:12the idea of a single European currency was always in the background,
0:07:12 > 0:07:15but made explicit in the late 1960s.
0:07:28 > 0:07:32In 1970, on the instructions of governments,
0:07:32 > 0:07:34Pierre Werner, Luxembourg's Premier,
0:07:34 > 0:07:37presented a plan to merge Europe's currencies.
0:07:50 > 0:07:53But the target date of 1980 was unrealistic
0:07:53 > 0:07:56and the plan faded away, for a while.
0:08:02 > 0:08:06In the meantime, the European Community continued to grow.
0:08:06 > 0:08:09In 1973, Britain joined, although some would say
0:08:09 > 0:08:12the UK has always been a semi-detached and noisy member.
0:08:12 > 0:08:15'At least the newest members of the European Community
0:08:15 > 0:08:17'made their presence known in a proper manner,
0:08:17 > 0:08:20'in one of the most British places in Brussels -
0:08:20 > 0:08:24'the Queen Victoria pub opposite the Common Market headquarters.
0:08:24 > 0:08:27'Raising the flag was almost an afterthought
0:08:27 > 0:08:30'and it was left to the community's concierge to do it,
0:08:30 > 0:08:33'for the benefit of a few reporters who bothered to turn up.'
0:08:33 > 0:08:38Britain signed up for the wealth that would come from increased trade with Europe.
0:08:41 > 0:08:43But bolder constitutional aspirations
0:08:43 > 0:08:46were still being nurtured in Germany and France.
0:08:49 > 0:08:54In 1981, Francois Mitterrand was elected President of France.
0:08:55 > 0:08:58- TRANSLATION:- During the war he had been a prisoner in Germany
0:08:58 > 0:09:01and he escaped three times.
0:09:01 > 0:09:03Each time, he met Germans who helped him.
0:09:06 > 0:09:08Afterwards, he became obsessed with the idea that
0:09:08 > 0:09:13there should never be another war and that Europe should unite.
0:09:13 > 0:09:17A year later, Helmut Kohl became Chancellor of West Germany.
0:09:21 > 0:09:26- TRANSLATION:- Kohl grew up only a few kilometres from the French border.
0:09:26 > 0:09:30As a youth, he lived through the Second World War.
0:09:30 > 0:09:33He lost a brother during that time.
0:09:33 > 0:09:39He believed that there should never again be a war amongst the peoples of Europe.
0:09:39 > 0:09:42Kohl, because of the history of Germany,
0:09:42 > 0:09:46wanted to anchor Germany into Europe to make war impossible,
0:09:46 > 0:09:49and Mitterrand had the same objective.
0:09:49 > 0:09:51And that is what the euro,
0:09:51 > 0:09:54and the European Union to some extent, are all about.
0:09:58 > 0:10:03In 1984, they met at Verdun where, for the first time,
0:10:03 > 0:10:06these two nations paid tribute collectively to the soldiers
0:10:06 > 0:10:09whose lives had been taken in two world wars.
0:10:14 > 0:10:18Kohl always put emphasis on symbolism in his politics.
0:10:18 > 0:10:22For him, meeting with Mitterrand at Verdun
0:10:22 > 0:10:25was a way of marking an end of Franco-German enmity.
0:10:28 > 0:10:31The Verdun meeting symbolised the determination
0:10:31 > 0:10:35of these towering European figures to forge a more united Europe.
0:10:37 > 0:10:41The common vision was to have a single currency,
0:10:41 > 0:10:45from the Atlantic, maybe to the Urals,
0:10:45 > 0:10:48that in some magical way would do everything.
0:10:48 > 0:10:53The scale of their ambition was magnificent, or perhaps foolhardy.
0:10:53 > 0:10:56Europe was a place of diverse cultures and economies.
0:10:56 > 0:11:00Even its two leaders came from very different backgrounds.
0:11:00 > 0:11:03You can hardly imagine two more unlikely people.
0:11:03 > 0:11:05Firstly, they had no common language.
0:11:05 > 0:11:08They could only converse through interpreters.
0:11:08 > 0:11:10Also, they understood nothing of economics.
0:11:10 > 0:11:13They were totally disdainful of economists
0:11:13 > 0:11:15and they called those people technicians.
0:11:18 > 0:11:21The economies of Europe were as divergent as their cultures.
0:11:27 > 0:11:30In 1973, when Ireland joined the Common Market,
0:11:30 > 0:11:32it was a farming economy,
0:11:32 > 0:11:36whose income per head was 40% below the average for Europe.
0:11:39 > 0:11:42'Dublin, as the capital city of a sovereign state,
0:11:42 > 0:11:44'has always had a cosmopolitan feel.
0:11:44 > 0:11:46'Now that the country has entered Europe,
0:11:46 > 0:11:50'the international character is even more pronounced.'
0:11:51 > 0:11:54Obviously a much more backward place than it is now.
0:11:55 > 0:11:58There was less money, how much work was around varied.
0:11:58 > 0:12:01I mean, things went up and down.
0:12:01 > 0:12:05The European market opened us up to the greater world,
0:12:05 > 0:12:09so we started looking a little bit beyond ourselves
0:12:09 > 0:12:11and the English markets.
0:12:11 > 0:12:14It was sort of the beginning of the Irish opening up.
0:12:15 > 0:12:18The great diversity of Europe includes differing attitudes
0:12:18 > 0:12:20to how wealth should be created.
0:12:22 > 0:12:24We're kind of gamblers at heart.
0:12:24 > 0:12:26We like to gamble, right?
0:12:26 > 0:12:31That's reflected in the huge interest in horse racing here.
0:12:33 > 0:12:35But even though we're conservative in many ways,
0:12:35 > 0:12:38we don't mind taking a risk, you know.
0:12:38 > 0:12:42And when the opportunity came along, and the cheap money arrived,
0:12:42 > 0:12:44let's have it.
0:12:44 > 0:12:47We said, I suppose, "We'll take a chance with it."
0:12:49 > 0:12:53Other poorer parts of Europe - Portugal, Greece, Spain -
0:12:53 > 0:12:55joined in the great experiment.
0:12:57 > 0:13:01And right from the very beginning, it was always volatile Italy,
0:13:01 > 0:13:05with its rich north, poor south and love of the "dolce vita".
0:13:11 > 0:13:16'If you want to find out what's going on, ask a taxi driver.
0:13:16 > 0:13:17'In Rome, I met Roberto Masulo.'
0:13:17 > 0:13:21- Nice to see you. - Hi. I'm Roberto.- I'm Robert.
0:13:23 > 0:13:27Roberto, why did you become a taxi driver?
0:13:29 > 0:13:32TRANSLATION: It's a job I've always loved,
0:13:32 > 0:13:34handed down from father to son.
0:13:34 > 0:13:38My grandfather was a taxi driver and I'm the son of a taxi driver.
0:13:43 > 0:13:47Italy is notorious for a massive black economy,
0:13:47 > 0:13:52business nepotism and restrictive working practices
0:13:52 > 0:13:54that limit access to many trades and professions.
0:13:59 > 0:14:04In Italy, some people have been used to living beyond their means.
0:14:06 > 0:14:10Sometimes we are a little bit too good at bending the rules.
0:14:15 > 0:14:18We also feel that in some countries in Europe,
0:14:18 > 0:14:22there's more rigour in the payment of taxes, respecting the rules.
0:14:29 > 0:14:32Perhaps in Italy in the last few years,
0:14:32 > 0:14:36we haven't always been so good at playing by the rules.
0:14:36 > 0:14:40'The problem with the good life, Italian style,
0:14:40 > 0:14:42'is that it wasn't being earned properly.
0:14:42 > 0:14:45'Italy's private sector grew too slowly
0:14:45 > 0:14:49'and the public sector was weighed down by massive debts.'
0:14:51 > 0:14:53It's all been so different in Germany.
0:14:53 > 0:14:55After the war in democratic West Germany,
0:14:55 > 0:14:59there was a national mission to rebuild its industrial might
0:14:59 > 0:15:01on the values of thrift and hard work,
0:15:01 > 0:15:03through manufacturing and exports.
0:15:06 > 0:15:10Nowhere is this story of recovery and prosperity more true
0:15:10 > 0:15:12than in Swabia in southwest Germany,
0:15:12 > 0:15:16home to Mercedes, Porsche, Bosch and Karcher.
0:15:22 > 0:15:25Karcher is a world leader in cleaning systems
0:15:25 > 0:15:28where Horst Schuler, a shift supervisor,
0:15:28 > 0:15:30keeps it all running like clockwork.
0:15:33 > 0:15:37- TRANSLATION:- I've been working for Karcher since 1978
0:15:37 > 0:15:40and I love it today as much as the day I began.
0:15:40 > 0:15:44Like so many German companies, Karcher's success
0:15:44 > 0:15:48is built on long-term investment and financial prudence.
0:15:48 > 0:15:50It's family driven. This means family owned.
0:15:50 > 0:15:54A lot of companies are family owned in this area here.
0:15:54 > 0:15:56This, of course, has a very stable shareholder base.
0:15:56 > 0:15:57These are all ours usually
0:15:57 > 0:15:59because most of the shareholders are very modest.
0:15:59 > 0:16:01They reinvest most of the money in the company.
0:16:01 > 0:16:03And this, of course, is a base for the future.
0:16:03 > 0:16:07They're not paying out dividends and taking out money of the company.
0:16:11 > 0:16:13And what works for Swabian businesses
0:16:13 > 0:16:16works for Swabian households too.
0:16:22 > 0:16:26- TRANSLATION:- The Swabian hausfrau makes sure that she doesn't spend
0:16:26 > 0:16:29more money than is in the pot, just like Karcher does.
0:16:36 > 0:16:41The Swabians, and I am one of them, begin by saving their money.
0:16:41 > 0:16:45Only when they think they can afford something do they actually buy it.
0:16:45 > 0:16:48I'll give you an example - a car.
0:16:48 > 0:16:51I've never bought a car that had to be financed.
0:16:51 > 0:16:55If I couldn't afford it, I bought a smaller car or a second-hand one.
0:17:00 > 0:17:03I've done things like that all my life.
0:17:03 > 0:17:06Just don't live above your means.
0:17:06 > 0:17:09You don't need the big Mercedes to be happy.
0:17:09 > 0:17:11You can be content and happy with less.
0:17:18 > 0:17:21Agricultural Ireland, black economy Italy, industrial Germany -
0:17:21 > 0:17:23monetary union would harness together
0:17:23 > 0:17:26wildly different cultures and economies.
0:17:28 > 0:17:31It needed a great shock to persuade them
0:17:31 > 0:17:34to abandon their national currencies.
0:17:38 > 0:17:41The end of communism brought down the Berlin Wall
0:17:41 > 0:17:44and the face of Europe was about to change for ever.
0:17:47 > 0:17:52But a unified Germany would be an even stronger Germany.
0:17:52 > 0:17:56When it became clear that the momentum towards German unification was unstoppable,
0:17:56 > 0:17:59the French President, Francois Mitterrand,
0:17:59 > 0:18:02needed a way of constraining German power.
0:18:02 > 0:18:04Mitterrand knew that the Germans were going to unify.
0:18:04 > 0:18:08He knew there wasn't anything in this world that would stop
0:18:08 > 0:18:10the Germans from unifying.
0:18:10 > 0:18:13The deal that was done was that the Germans, once unified,
0:18:13 > 0:18:17would then do everything they could to embark towards a single currency.
0:18:19 > 0:18:22For the French, monetary union was as much about politics,
0:18:22 > 0:18:26about the balance of power within Europe, as about economics.
0:18:26 > 0:18:30The idea was to strengthen the institutions of the European Union,
0:18:30 > 0:18:32relative to member countries,
0:18:32 > 0:18:36so that the growing power of Germany could be held in check.
0:18:39 > 0:18:42The train towards monetary union was rolling.
0:18:44 > 0:18:47Europe's leaders assembled in a small Dutch town
0:18:47 > 0:18:51to agree a treaty that would shape and shake the continent.
0:18:52 > 0:18:54And the point about monetary union
0:18:54 > 0:18:59is that it was about much more than money.
0:19:00 > 0:19:03I was Britain's negotiator at Maastricht
0:19:03 > 0:19:07for the opt-out from the euro.
0:19:07 > 0:19:12And I remember the very first time I met Pierre Beregovoy,
0:19:12 > 0:19:16the French finance minister, who was later the prime minister of France.
0:19:16 > 0:19:22And I remember the shock I felt when he said to me,
0:19:22 > 0:19:27"My children will live in a politically united Europe
0:19:27 > 0:19:29"and I think that is a great thing."
0:19:29 > 0:19:35And what I saw very clearly was the force of the political will
0:19:35 > 0:19:40to create a monetary union and a political union.
0:19:40 > 0:19:45Mitterrand believed that it was the first step towards political union.
0:19:45 > 0:19:47It was both the key to economic union
0:19:47 > 0:19:51as well as the first step towards political union.
0:19:53 > 0:19:56Monetary union was a political project in economic clothing.
0:19:56 > 0:19:59And at its heart was a terrible contradiction.
0:19:59 > 0:20:02It was designed by Mitterrand and Kohl to speed up
0:20:02 > 0:20:06the creation of a European Federation, a super-state.
0:20:06 > 0:20:08But pushing for monetary union
0:20:08 > 0:20:13before the political union was in place carried enormous risks.
0:20:13 > 0:20:20You cannot have a monetary union that works, without a fiscal union.
0:20:20 > 0:20:23You cannot have a fiscal union without, in effect,
0:20:23 > 0:20:24a single finance minister,
0:20:24 > 0:20:27which means you have to have a full political union.
0:20:27 > 0:20:29You can only have a full political union
0:20:29 > 0:20:31if the people are prepared to go along with it,
0:20:31 > 0:20:33and the people quite clearly are not.
0:20:33 > 0:20:36It was an impossible dream that you could build
0:20:36 > 0:20:39a single European currency without a single European state.
0:20:39 > 0:20:41Everybody knew that it was a risk.
0:20:41 > 0:20:44Everybody knew that you were putting the cart before the horse.
0:20:44 > 0:20:47It was arrogant because they thought that that way
0:20:47 > 0:20:51they could override the democratic veto.
0:20:51 > 0:20:54And it was irresponsible because they didn't say,
0:20:54 > 0:20:56"Well, this is a high-risk project."
0:20:56 > 0:20:58And I think that was a gamble, if you like,
0:20:58 > 0:20:59which should never have been taken.
0:21:02 > 0:21:07Maastricht is the beginning of a process of irreversibility,
0:21:07 > 0:21:11the creation of economic and monetary union.
0:21:13 > 0:21:17But the monetary union would be without one of the biggest economies - Britain.
0:21:17 > 0:21:20You know, the attitude was slightly condescending,
0:21:20 > 0:21:23"Oh, Norman, you say you don't agree with this,
0:21:23 > 0:21:26"but when the time comes, you will join."
0:21:26 > 0:21:29That was what many people said.
0:21:29 > 0:21:32I remember one prominent figure, in the dead of night,
0:21:32 > 0:21:36about two in the morning, over whisky, saying to me,
0:21:36 > 0:21:40"Well, everything you say is right, but it's going to happen."
0:21:43 > 0:21:45There was a precursor to full monetary union,
0:21:45 > 0:21:49introduced before Maastricht, called the Exchange Rate Mechanism.
0:21:49 > 0:21:52Britain was involved and it prevented the pound
0:21:52 > 0:21:56and other member currencies from rising or fall
0:21:56 > 0:21:59more than a set amount relative to Germany's Deutschmark.
0:22:01 > 0:22:05Britain joined the ERM because it had tried many mechanisms
0:22:05 > 0:22:08to get inflation rate down, all sorts of monetary devices.
0:22:10 > 0:22:13John Major saw the strong, successful D-mark,
0:22:13 > 0:22:16and he was fascinated by the Bundesbank.
0:22:16 > 0:22:18So he said, "We'll have a little bit of that."
0:22:18 > 0:22:2351, 51, 51.5, 51.5, 69% turn-up.
0:22:23 > 0:22:27The fate of Britain in the ERM shows the dangers
0:22:27 > 0:22:30of linking currencies when economies and governments aren't unified,
0:22:30 > 0:22:33foreshadowing today's euro crisis.
0:22:36 > 0:22:39Under the scheme, the interest rates for the UK were, in effect,
0:22:39 > 0:22:42set by Germany, but the right interest rate for Germany
0:22:42 > 0:22:45turned out to be ruinous for Britain
0:22:45 > 0:22:48and the UK was forced into a humiliating exit from the ERM
0:22:48 > 0:22:50on Black Wednesday, 1992.
0:22:52 > 0:22:56Today has been an extremely difficult and turbulent day.
0:22:56 > 0:23:00The Government has concluded that Britain's best interests are served
0:23:00 > 0:23:04by suspending our membership of the Exchange Rate Mechanism.
0:23:08 > 0:23:11The ERM debacle should perhaps have served as a warning about
0:23:11 > 0:23:15the dangers of linking currencies of very different economies.
0:23:15 > 0:23:19But, instead, it was full steam ahead to a single currency,
0:23:19 > 0:23:23but with new rules that were supposed to minimise economic tensions,
0:23:23 > 0:23:26including a new ceiling on government debts.
0:23:27 > 0:23:30Initially one had said,
0:23:30 > 0:23:32"Anyone who has a debt
0:23:32 > 0:23:36"above 60% of GDP cannot participate."
0:23:36 > 0:23:39That would have kept the euro small.
0:23:39 > 0:23:42The southern countries, over-indebted countries,
0:23:42 > 0:23:45would not have been able to participate
0:23:45 > 0:23:49and, had they not participated, we would not have today's problems.
0:23:49 > 0:23:54Italy in particular had huge debts and the government debt criterion
0:23:54 > 0:23:57would have kept Italy outside the euro.
0:23:59 > 0:24:02TRANSLATION: You cannot have a common currency in Europe
0:24:02 > 0:24:05in the EU without Italy.
0:24:07 > 0:24:10When it comes to the ratio of debt to GDP,
0:24:10 > 0:24:13Italy has always broken the criteria.
0:24:13 > 0:24:16But Italy, as a founding member state of the EU,
0:24:16 > 0:24:18was too important to be excluded.
0:24:20 > 0:24:23The French insisted at the time
0:24:23 > 0:24:27that the southern periphery of Europe participate
0:24:27 > 0:24:31and so they argued that the 60% criterion,
0:24:31 > 0:24:35which was a firm entry criterion of the Maastricht Treaty, was waived.
0:24:37 > 0:24:41The requirement that debt should be 60% or less of GDP was dropped.
0:24:41 > 0:24:44Instead, a country simply had to show
0:24:44 > 0:24:47it was reducing debt towards that ratio,
0:24:47 > 0:24:49which Italy could do.
0:24:54 > 0:24:59Of the major European economies, only Britain stayed out of the euro
0:24:59 > 0:25:01when it was launched in 1998.
0:25:01 > 0:25:05The risks associated with it became clearer
0:25:05 > 0:25:10and, you know, the phrase for... the Tony Blair phrase from 1997,
0:25:10 > 0:25:13he "would only join if the case is clear and unambiguous".
0:25:13 > 0:25:16Well, we didn't have a clear and unambiguous case.
0:25:17 > 0:25:21The currency was born at a seemingly auspicious time.
0:25:21 > 0:25:23..zero.
0:25:26 > 0:25:30For the Western world, it was a time of sustained growth, cheap debt
0:25:30 > 0:25:31and a consumer boom,
0:25:31 > 0:25:34which would last for the best part of another decade.
0:25:37 > 0:25:40Even in such benign conditions, some countries only just met
0:25:40 > 0:25:43all the euro membership tests.
0:25:43 > 0:25:44How did they squeak in?
0:25:49 > 0:25:53In the late '90s, an Italian economics professor, Gustavo Piga,
0:25:53 > 0:25:56was researching the way that governments borrow.
0:25:56 > 0:25:59I was working on public debt management at the time.
0:25:59 > 0:26:01I knew that there was this new trend.
0:26:01 > 0:26:05I started saying, "Well, let's go around Europe to learn more."
0:26:05 > 0:26:08One tricky hurdle for joining the euro club
0:26:08 > 0:26:10was that a government's deficit,
0:26:10 > 0:26:13the gap between what it spends and tax revenues,
0:26:13 > 0:26:16had to be 3% or less of GDP.
0:26:16 > 0:26:21Piga became suspicious that banks had been helping governments
0:26:21 > 0:26:24to understate their true deficits.
0:26:24 > 0:26:27I got a sense that, in that period,
0:26:27 > 0:26:32some governments were using derivative transactions
0:26:32 > 0:26:35to reduce their public deficit,
0:26:35 > 0:26:39so as to ensure that the level of the threshold of 3%,
0:26:39 > 0:26:43required to enter into the euro area, was respected.
0:26:45 > 0:26:50These complex financial derivative deals, arranged by banks,
0:26:50 > 0:26:53helped governments hide what they were borrowing.
0:26:57 > 0:27:01One day, I was interviewing one of these public debt managers
0:27:01 > 0:27:03and this person gave me a contract.
0:27:03 > 0:27:07She thought that I knew little of derivatives and she said,
0:27:07 > 0:27:11"Oh, Professor, if you want, I can show you an example,"
0:27:11 > 0:27:13and she gave me a photocopy.
0:27:13 > 0:27:18I started looking at it and I saw that it was a peculiar contract.
0:27:18 > 0:27:22And then I started getting excited and I said, "What is this?"
0:27:22 > 0:27:26And I understood that these contracts
0:27:26 > 0:27:31were meant exactly to reduce public deficit today,
0:27:31 > 0:27:34to enlarge it 10 to 15 years later,
0:27:34 > 0:27:38in a way that an accountant would have said, "This is not proper."
0:27:40 > 0:27:41A late entrant to the euro
0:27:41 > 0:27:45turned this kind of creative accounting into an art form.
0:27:45 > 0:27:48Well, clearly a number of countries
0:27:48 > 0:27:50fiddled the criteria,
0:27:50 > 0:27:54most countries did, but Greece in a heroic way.
0:27:57 > 0:28:02The Greeks, with the assistance of Goldman Sachs,
0:28:02 > 0:28:04cooked the books totally.
0:28:07 > 0:28:10Even the Germans could only just about fulfil that 3% criteria.
0:28:10 > 0:28:14They were willing to turn a blind eye to the other countries.
0:28:17 > 0:28:20If we'd known that Greece's figures were wrong
0:28:20 > 0:28:23then we'd have made a different decision.
0:28:23 > 0:28:24But decisions were made
0:28:24 > 0:28:28on statistics provided by the European Commission.
0:28:28 > 0:28:31We had no reason to be suspicious of those figures.
0:28:37 > 0:28:40There was also an attempt to prevent members of the euro
0:28:40 > 0:28:45from borrowing too much after the euro was launched.
0:28:45 > 0:28:47A stability and growth pact said
0:28:47 > 0:28:50annual deficits should never exceed 3% of GDP.
0:28:50 > 0:28:55But, in an extraordinary move, in 2003,
0:28:55 > 0:28:58Europe's two most powerful members killed that rule.
0:29:03 > 0:29:11Can I just ask what your emotional reaction was when France and Germany
0:29:11 > 0:29:18asked for the rules of the stability and growth pact to be weakened?
0:29:18 > 0:29:21Well, we were, I would say, shocked, of course.
0:29:21 > 0:29:26We had ourselves expressed a major, major concern.
0:29:26 > 0:29:30Very grave concerns, I said.
0:29:30 > 0:29:35Major countries in the euro area had decided that it was not for them
0:29:35 > 0:29:40and, of course, they had the view that this pact should be destroyed.
0:29:40 > 0:29:45I myself explained tirelessly in my own country
0:29:45 > 0:29:47that you need a framework,
0:29:47 > 0:29:50you need rules to be respected
0:29:50 > 0:29:54and you need surveillance to be sure that the rules are respected.
0:29:54 > 0:29:57Was it a big moment, I mean, in terms of the mess we're in now?
0:29:57 > 0:30:02I think it was a big moment. It was a big moment.
0:30:02 > 0:30:06Had the major countries continued to say it is essential,
0:30:06 > 0:30:11we would probably have been in, I would say,
0:30:11 > 0:30:15a much stronger position when the crisis came.
0:30:18 > 0:30:20There was now little to rein in
0:30:20 > 0:30:23eurozone public spending and borrowing.
0:30:28 > 0:30:31It was part of a climate of fiscal permissiveness
0:30:31 > 0:30:35that allowed advanced economies and their sovereigns
0:30:35 > 0:30:38to build up unprecedented peacetime public debt burdens,
0:30:38 > 0:30:40and that, we now know, is dangerous.
0:30:43 > 0:30:47This was an era of cheap debt for households, businesses
0:30:47 > 0:30:49and governments all over the Western world.
0:30:52 > 0:30:56Debts soared outside the eurozone too, in Britain and America.
0:30:56 > 0:31:00But for the likes of Greece, Spain, Ireland, Portugal and Italy,
0:31:00 > 0:31:05the cost of borrowing was made even cheaper by joining the euro.
0:31:05 > 0:31:10Pre the euro, each euro member state borrowed at different interest rates,
0:31:10 > 0:31:12because their credit risk,
0:31:12 > 0:31:15their risk of being able to pay it back or not, was different.
0:31:15 > 0:31:18Germany - you know they're going to pay you back.
0:31:18 > 0:31:19Greece - probably less so.
0:31:19 > 0:31:23Then the euro was created and suddenly everyone said,
0:31:23 > 0:31:27"Well, does that mean that Greece's borrowing costs should be the same as Germany's?"
0:31:27 > 0:31:30Well, it's one currency. And that's exactly what happened.
0:31:30 > 0:31:34So, the idea of credit risk for each individual sovereign state
0:31:34 > 0:31:37went out the window and every euro sovereign nation
0:31:37 > 0:31:40could effectively borrow at the same rate as Germany.
0:31:46 > 0:31:48What that did for some of these periphery countries
0:31:48 > 0:31:53is give them VERY cheap debt and they all went slightly wild
0:31:53 > 0:31:57on that very cheap debt, and they had a fabulously cheap debt party.
0:31:59 > 0:32:03All this easy money fuelled a frenzied property boom,
0:32:03 > 0:32:05especially in Spain and Ireland.
0:32:08 > 0:32:12A small street in Dublin is one example of this lethal bubble.
0:32:12 > 0:32:15Ten years ago, Mick Wallace wasn't a member of the Dail,
0:32:15 > 0:32:17Ireland's Parliament.
0:32:17 > 0:32:18He was a property developer,
0:32:18 > 0:32:22looking to join the growing list of Ireland's multimillionaires
0:32:22 > 0:32:24by building a little Italy by the Liffey.
0:32:26 > 0:32:28It was originally just a rundown area.
0:32:28 > 0:32:31There was a couple of old antique shops on the site.
0:32:31 > 0:32:34People thought I was mad at the time,
0:32:34 > 0:32:37building something like this on the north side of the river.
0:32:37 > 0:32:40Mick bought the site for half a million euros
0:32:40 > 0:32:44and turned derelict wasteland into apartments, cafes and shops.
0:32:44 > 0:32:46At the peak of the market,
0:32:46 > 0:32:50the 36 apartments on their own were worth 24 million euros.
0:32:50 > 0:32:52And across Ireland,
0:32:52 > 0:32:58house prices more than trebled between 1995 and 2007.
0:32:58 > 0:33:01At the height of the boom, more houses were being built in Ireland
0:33:01 > 0:33:06than in England, with its population 13 times as great.
0:33:06 > 0:33:12Dublin property prices even outpaced those of inflated London.
0:33:15 > 0:33:18The prices were rising by a couple of thousand every week
0:33:18 > 0:33:20on apartments and houses.
0:33:20 > 0:33:22It was frightening.
0:33:22 > 0:33:26People were queuing to buy apartments and houses,
0:33:26 > 0:33:28and the price was rising as they were queuing.
0:33:28 > 0:33:31The people at the front of the queue got them cheaper
0:33:31 > 0:33:32than people at the back.
0:33:34 > 0:33:35It wasn't just Ireland.
0:33:35 > 0:33:41In Spain, five million new homes were built between 1997 and 2007,
0:33:41 > 0:33:44increasing the number of homes in Spain by a quarter.
0:33:44 > 0:33:50But the increase in Spanish households was just 2.5 million.
0:33:50 > 0:33:53This building boom was financed by cheap loans
0:33:53 > 0:33:54from banks on a lending spree.
0:33:56 > 0:33:58NEWS REPORTS MERGE
0:34:03 > 0:34:07From boom to bust - the first sign it was all going horribly wrong
0:34:07 > 0:34:10appeared in the US and spread to Britain.
0:34:13 > 0:34:15The collapse of huge banks
0:34:15 > 0:34:19such as Lehman Brothers and Royal Bank of Scotland
0:34:19 > 0:34:21rocked the global economy.
0:34:21 > 0:34:24European leaders saw it as an Anglo-American mess,
0:34:24 > 0:34:28caused by the recklessness of Wall Street and the City of London.
0:34:34 > 0:34:37Germany's Chancellor Merkel made a pointed contrast
0:34:37 > 0:34:41with the thriftiness of the Swabian hausfrau.
0:34:53 > 0:34:56And while Britain and America were mending their banks,
0:34:56 > 0:35:00the eurozone did too little to strengthen its banks.
0:35:00 > 0:35:05In the summer of 2009, Europe experienced its own earthquake.
0:35:05 > 0:35:09As the global slowdown began to bite,
0:35:09 > 0:35:12a new Greek Government revealed massive hidden debts.
0:35:14 > 0:35:17Greece essentially lied about its debt position.
0:35:17 > 0:35:21The political class in Greece manipulated the numbers for years.
0:35:21 > 0:35:24They manipulated the numbers to get into the eurozone
0:35:24 > 0:35:25and once they were in the eurozone,
0:35:25 > 0:35:28they manipulated them for a good few years afterwards.
0:35:28 > 0:35:33Greece disclosed that government debts were 300 billion euros,
0:35:33 > 0:35:39129% of its GDP, and the debts were to become bigger and bigger,
0:35:39 > 0:35:43because the global recession led to a slump in the payment of taxes.
0:35:43 > 0:35:45Growth hides debt.
0:35:45 > 0:35:47Once the economic growth disappears
0:35:47 > 0:35:50then you suddenly realise a lot of the growth was fuelled by debt
0:35:50 > 0:35:54and in fact, the country's debt position deteriorates rapidly.
0:35:55 > 0:35:58The Greek Government slashed public spending
0:35:58 > 0:36:01and raised taxes, causing riots.
0:36:01 > 0:36:06Lenders to Greece began to fear they wouldn't get their money back and stopped lending.
0:36:06 > 0:36:11So, Greece had no choice but to ask for a bailout from the EU and the IMF,
0:36:11 > 0:36:15even though the Maastricht rules had prohibited bailouts.
0:36:17 > 0:36:19The rules can always be bent.
0:36:19 > 0:36:24The most blatant example of that was the first bailout of Greece,
0:36:24 > 0:36:27which was done under an article of the treaties,
0:36:27 > 0:36:30which was actually meant to deal with
0:36:30 > 0:36:34natural disasters like floods and earthquakes.
0:36:36 > 0:36:39With a bailout of 110 billion euros for Greece,
0:36:39 > 0:36:42the centre of the financial and economic storm shifted
0:36:42 > 0:36:45from Wall Street and London to the eurozone,
0:36:45 > 0:36:47as the Chairman of the US Federal Reserve
0:36:47 > 0:36:51ruefully pointed out to his European counterpart.
0:36:52 > 0:36:57Ben Bernanke was only telling me approximately at that time,
0:36:57 > 0:37:01"Jean-Claude, now it's your turn."
0:37:01 > 0:37:05It was clearly the illustration of the fact
0:37:05 > 0:37:10that we were in the epicentre of a crisis.
0:37:13 > 0:37:16Other hugely indebted eurozone countries
0:37:16 > 0:37:19also found themselves boycotted by investors.
0:37:19 > 0:37:22Ireland and Portugal were next to be bailed out,
0:37:22 > 0:37:26at the price of having to implement brutal cuts to balance their books.
0:37:26 > 0:37:31In Italy, the condition for restoring calm to markets
0:37:31 > 0:37:35was the ejection from office of the Prime Minister, Silvio Berlusconi.
0:37:47 > 0:37:51The Irish economy, especially its property market, was ruined.
0:37:53 > 0:37:57I remember coming back. I came home and I sat down with the accountant
0:37:57 > 0:37:59and he said, "We're in trouble."
0:37:59 > 0:38:04The banks changed their mood dramatically.
0:38:04 > 0:38:10People who used to come to us to have talks said,
0:38:10 > 0:38:12"Now you come to us."
0:38:12 > 0:38:18People who were our friends treated us like we were rubbish.
0:38:19 > 0:38:21Before the crash,
0:38:21 > 0:38:25I would have been conservatively valued at about 70 million.
0:38:25 > 0:38:28Now, the banks are moving in on the assets,
0:38:28 > 0:38:31they're selling them for peanuts.
0:38:33 > 0:38:37They would probably realise about ten million for them.
0:38:39 > 0:38:43So what was worth 70 is now valued at 10.
0:38:45 > 0:38:49Mick still owes the banks 40 million euros, which he hasn't got.
0:38:52 > 0:38:57Hundreds of Irish property developers were in the same parlous state,
0:38:57 > 0:39:01and if they were bust, so too were the banks that lent to them.
0:39:02 > 0:39:07So, the Irish Government nationalised almost the entire Irish banking system
0:39:07 > 0:39:09and promised to honour their debts
0:39:09 > 0:39:12at crippling cost to Irish taxpayers.
0:39:14 > 0:39:20The European banks, ACB, EU, in Germany in particular,
0:39:20 > 0:39:23did not want our banks to collapse,
0:39:23 > 0:39:27because it meant that their banks wouldn't have got their money back.
0:39:29 > 0:39:33And the notion that the taxpayers should actually
0:39:33 > 0:39:38be taking care of the problems of badly run, failed, useless banks
0:39:38 > 0:39:41has been a bitter pill.
0:39:44 > 0:39:47By December 2011, European leaders gathered,
0:39:47 > 0:39:50with the euro perilously close to collapse.
0:39:50 > 0:39:54There were growing fears that the Italian and Spanish Governments
0:39:54 > 0:39:57wouldn't be able to repay their massive debts.
0:39:57 > 0:40:01Europe's leaders tried to restore calm by reviving and toughening
0:40:01 > 0:40:04the constraints on borrowing by governments
0:40:04 > 0:40:07that had been abandoned just six years before.
0:40:10 > 0:40:13In Britain, the headlines were all about how David Cameron
0:40:13 > 0:40:17made it harder for eurozone leaders to reform the currency union.
0:40:19 > 0:40:22It's important that we get the things that Britain needs
0:40:22 > 0:40:24and so I decided not to sign that treaty.
0:40:28 > 0:40:31But while eyes were on bickering European leaders,
0:40:31 > 0:40:35something much more important and more dangerous
0:40:35 > 0:40:38was taking place in the ether of financial markets.
0:40:40 > 0:40:43In the autumn of 2011, the eurozone's banks
0:40:43 > 0:40:46were finding it increasingly hard to borrow.
0:40:46 > 0:40:49They were being boycotted by giant US money market funds
0:40:49 > 0:40:52who were refusing to lend them even a dollar.
0:40:52 > 0:40:55Big European banks, like these here in Frankfurt,
0:40:55 > 0:40:58were increasingly wary of lending to each other.
0:40:58 > 0:41:03Now, when banks can't borrow, they can't lend and, in a worst-case,
0:41:03 > 0:41:06they find it hard to repay their debts and they go bust.
0:41:06 > 0:41:08The eurozone was facing
0:41:08 > 0:41:13a full-scale, potentially devastating, banking crisis.
0:41:17 > 0:41:21'At the Frankfurt headquarters of the European Central Bank,
0:41:21 > 0:41:23'it was red alert.'
0:41:23 > 0:41:26How dangerous were the conditions in the eurozone banking market
0:41:26 > 0:41:28in the autumn and running up to December?
0:41:28 > 0:41:32In the autumn of 2011, the conditions were very dangerous.
0:41:32 > 0:41:35European banks were facing very severe difficulties
0:41:35 > 0:41:40to fund themselves, to access finance, and we were very close from
0:41:40 > 0:41:44having a collapse in the banking system in the euro area
0:41:44 > 0:41:48which, in itself, would have also led to a collapse in the economy
0:41:48 > 0:41:52and to deflation, and this is something the ECB could not accept.
0:41:53 > 0:41:56- Good morning, Mr Draghi. - Good morning.
0:41:56 > 0:41:59A new boss of the European Central Bank, Mario Draghi,
0:41:59 > 0:42:02made a dramatic and unexpected intervention.
0:42:04 > 0:42:07The Governing Council decided the following.
0:42:09 > 0:42:14First, to conduct two longer-term refinancing operations,
0:42:14 > 0:42:19otherwise called LTROs, with a maturity of 36 months.
0:42:22 > 0:42:25This was a banking rescue unlike anything the world had ever seen.
0:42:27 > 0:42:32The ECB provided more than a trillion euros of emergency three-year loans
0:42:32 > 0:42:36at a miniscule interest rate to hundreds of banks.
0:42:36 > 0:42:39Was it to prop up the banking system?
0:42:39 > 0:42:43Was that the main reason that you offered these three-year loans?
0:42:43 > 0:42:48No, the main reason the ECB decided to offer these three-year loans
0:42:48 > 0:42:52is that liquidity in the banking sector
0:42:52 > 0:42:55is vital for the economy to function.
0:42:55 > 0:42:58So, the role of the ECB is not to prop up the banking sector per se.
0:42:58 > 0:43:00We're not working for banks.
0:43:00 > 0:43:03We're working for the economy of the euro area as a whole.
0:43:03 > 0:43:07So, was it, in a sense, a beneficial side effect
0:43:07 > 0:43:09of the decision to provide these loans
0:43:09 > 0:43:14that it also, frankly, saved the banking system?
0:43:14 > 0:43:16It may have saved the European banking system,
0:43:16 > 0:43:20but this was for a purpose, which was to support Europe and the economy.
0:43:25 > 0:43:29But little of the trillion euros has found its way into the real economy.
0:43:29 > 0:43:31It's gone somewhere else.
0:43:33 > 0:43:36LTRO was a cash-for-trash scheme
0:43:36 > 0:43:39so that the European banks
0:43:39 > 0:43:44are not forced to pay for their own reckless decisions.
0:43:45 > 0:43:48The ECB is giving them cash at 1% for three years.
0:43:48 > 0:43:52With that cash, they are investing in government bonds.
0:43:52 > 0:43:58So, bust banks are propping up bust governments with free money
0:43:58 > 0:44:01on dodgy collateral and calling it success.
0:44:02 > 0:44:04Is the money trickling out into the economy?
0:44:04 > 0:44:06No, on the contrary.
0:44:06 > 0:44:09The money's getting stuck in the balance sheet of the banks.
0:44:09 > 0:44:12We've seen the statistics, your statistics, which show that
0:44:12 > 0:44:15they used quite a lot of the new money
0:44:15 > 0:44:17to lend to the Italian and Spanish Governments.
0:44:17 > 0:44:19The paradox is this -
0:44:19 > 0:44:22part of the reason why creditors of the banking system
0:44:22 > 0:44:24thought that the banks were weak
0:44:24 > 0:44:28is because they felt that they were too exposed to these governments,
0:44:28 > 0:44:33and yet these banks are now doubling up on their exposure.
0:44:33 > 0:44:34Does this make sense?
0:44:36 > 0:44:39Well, they're not doubling up their exposure.
0:44:39 > 0:44:42They are kind of compensating part of the...
0:44:42 > 0:44:45of the exposure that they had lost or that they had to...
0:44:45 > 0:44:49they had to cut, due to the financial crisis.
0:44:49 > 0:44:53And so the... the decision of banks to buy,
0:44:53 > 0:44:56say, government bonds, it's a business decision.
0:44:56 > 0:45:01The banks were dying on their feet, many of them insolvent and illiquid,
0:45:01 > 0:45:05and this LTRO has turned them instead
0:45:05 > 0:45:09into still insolvent, but at least highly liquid banks.
0:45:09 > 0:45:13In addition, of course, the LTRO has been used to buy up
0:45:13 > 0:45:17significant amounts of sovereign debt that would not have been bought otherwise,
0:45:17 > 0:45:21so it has been useful in keeping the sovereign show on the road as well,
0:45:21 > 0:45:23but the hard work is still to be done.
0:45:23 > 0:45:28By injecting a trillion euros into failing European banks,
0:45:28 > 0:45:31the ECB was putting an enormous sticking plaster
0:45:31 > 0:45:33on the haemorrhaging eurozone.
0:45:33 > 0:45:35But even the ECB admits
0:45:35 > 0:45:40that the loans do no more than buy time for a proper cure to be found.
0:45:40 > 0:45:43It is a painkiller, but a very powerful one.
0:45:43 > 0:45:49Now, this period of calm has to be used properly by governments
0:45:49 > 0:45:51to fix the underlying issues,
0:45:51 > 0:45:54the fiscal issues and the competitiveness issues,
0:45:54 > 0:45:56that European countries are facing.
0:46:00 > 0:46:04For two years, there's been crisis after crisis in the eurozone,
0:46:04 > 0:46:08affecting Greece, Portugal, Ireland, Spain, Italy,
0:46:08 > 0:46:11and many of the region's biggest banks.
0:46:11 > 0:46:14These crises have been met with fire-fighting
0:46:14 > 0:46:17which, for a period, have put out the flames.
0:46:17 > 0:46:20The big question now is whether the currency union
0:46:20 > 0:46:24is up for the kind of fundamental reform that's necessary
0:46:24 > 0:46:26to ensure its long-term survival.
0:46:30 > 0:46:33So, what's necessary for the euro to survive?
0:46:33 > 0:46:36Well, its member countries each have to be competitive,
0:46:36 > 0:46:37otherwise the weaker economies
0:46:37 > 0:46:40are unable to pay their own way in the world.
0:46:40 > 0:46:43They consume more than they sell abroad
0:46:43 > 0:46:46and become more and more indebted.
0:46:46 > 0:46:50The remedy available to other uncompetitive countries of devaluing
0:46:50 > 0:46:55to make their exports cheaper isn't available inside the eurozone.
0:46:55 > 0:46:58We are pretending that we have a currency. We don't have a currency.
0:46:58 > 0:47:00If you have a currency, like Britain has,
0:47:00 > 0:47:02you can print it when you're in problems,
0:47:02 > 0:47:04which is what you're doing.
0:47:04 > 0:47:06You can devalue it, which is what you're doing.
0:47:06 > 0:47:09That's the essence of a currency. We don't have a currency.
0:47:09 > 0:47:11Our elite say, "Our currency, the euro."
0:47:11 > 0:47:12It's got nothing to do with us.
0:47:12 > 0:47:14If you can't devalue your currency
0:47:14 > 0:47:16because you're locked into a monetary union,
0:47:16 > 0:47:21the only answer is to become more competitive by reducing costs.
0:47:21 > 0:47:27That means slashing public services, cutting wages, making people poorer.
0:47:30 > 0:47:31The bitter truth is that
0:47:31 > 0:47:34some European countries have become too expensive
0:47:34 > 0:47:38and they have to devalue within the euro, becoming cheaper.
0:47:38 > 0:47:43This is a very painful process, but there's no way out.
0:47:43 > 0:47:46If they don't become cheaper,
0:47:46 > 0:47:49their current account deficits will persist for ever.
0:47:50 > 0:47:54It's a lesson that was learnt in Germany more than a decade ago.
0:47:54 > 0:47:57The Germans understood the competitive pressures
0:47:57 > 0:48:01that were coming from China and India and the rest of the world.
0:48:01 > 0:48:04They sat down with the unions in the late '90s.
0:48:04 > 0:48:09They decided to have wage moderation, changes in the ways work works,
0:48:09 > 0:48:12changes in productivity. They did their job right.
0:48:12 > 0:48:17We adopted a really severe programme and saw it through
0:48:17 > 0:48:19despite some serious difficulties.
0:48:19 > 0:48:23In the end, it cost me my job. This was the price we had to pay.
0:48:23 > 0:48:25But today, Germany is doing far better
0:48:25 > 0:48:28than most other countries in the EU.
0:48:33 > 0:48:35Here's what's pulling the eurozone apart.
0:48:35 > 0:48:41Since 2000, the costs of employing workers in Italy, Spain, Ireland
0:48:41 > 0:48:46and Portugal has risen between 30% and 40% more than in Germany,
0:48:46 > 0:48:49which makes their businesses very uncompetitive.
0:48:49 > 0:48:55It means that in order for Spain, Italy and the rest to stop living on credit,
0:48:55 > 0:49:00living standards for their people may have to drop by a third.
0:49:02 > 0:49:06Some European countries would have to reduce their prices,
0:49:06 > 0:49:09the prices for their own goods, by 30%.
0:49:09 > 0:49:10How can you do that?
0:49:10 > 0:49:13It's easy to talk about it, but it's very difficult to do that.
0:49:13 > 0:49:18You have to change millions of prices, millions of wage contracts.
0:49:18 > 0:49:20The unions will be in the street.
0:49:23 > 0:49:29Enabling a country like Spain or Italy to compete with Germany is going to be hard.
0:49:29 > 0:49:32Italy's new Prime Minister, Mario Monte, an unelected technocrat,
0:49:32 > 0:49:34is slashing public expenditure.
0:49:34 > 0:49:38He's also trying to reduce the costs of public sector and private sector
0:49:38 > 0:49:43by reforming the rights and privileges of workers.
0:49:45 > 0:49:48The good life, Italian style, is under threat.
0:49:48 > 0:49:51Italy has endured years of low growth.
0:49:51 > 0:49:53It's a malaise that must be cured.
0:49:53 > 0:49:59The problem is, the medicine's turning out to be extraordinarily painful, to put it mildly.
0:50:04 > 0:50:07Look around you.
0:50:07 > 0:50:10The taxis aren't moving. The economy's sick.
0:50:10 > 0:50:12The business is gone.
0:50:17 > 0:50:22We're living on a knife edge here. Our livelihood is very precarious.
0:50:23 > 0:50:27In Italy, taxi driving has traditionally been a closed shop.
0:50:27 > 0:50:32It's one of the first trades that Mario Monte wants to open up to competition.
0:50:34 > 0:50:39Do you understand why the government of Mario Monte
0:50:39 > 0:50:41is trying to shake up your industry,
0:50:41 > 0:50:46is trying to abolish lots of the rules that control the taxi trade?
0:50:46 > 0:50:52If they want to create some jobs without spending any money
0:50:52 > 0:50:55by letting anyone drive a taxi, and not like we had to,
0:50:55 > 0:50:59waiting our turn, buying a licence which we had to pay for up front,
0:50:59 > 0:51:01it's going to turn nasty.
0:51:07 > 0:51:10The dismantling of restrictive employment practices
0:51:10 > 0:51:12has already led to national protest.
0:51:12 > 0:51:17Transport workers, pharmacists, lawyers and many in the public sector,
0:51:17 > 0:51:20as well as taxi drivers, have all been on strike.
0:51:20 > 0:51:23The future for many looks challenging.
0:51:25 > 0:51:2915 years ago, I would have been happy for my son
0:51:29 > 0:51:32to carry on the family tradition of taxi driving.
0:51:32 > 0:51:36Today, I hope the future will be more rosy for him
0:51:36 > 0:51:39and that he'll find a better job.
0:51:44 > 0:51:47Since the crisis, living standards in Ireland
0:51:47 > 0:51:50have been squeezed by around a fifth.
0:51:50 > 0:51:51That's a great strike.
0:51:54 > 0:51:57When we joined the euro, we became part of a bigger currency.
0:51:57 > 0:52:02I thought it would be to our benefit and it probably was for a while.
0:52:02 > 0:52:05Now, of course, we realise
0:52:05 > 0:52:08we all weren't playing on the same level playing pitch.
0:52:08 > 0:52:09Good strike there.
0:52:09 > 0:52:12The Wexford Youths, our football club,
0:52:12 > 0:52:16we're not good enough to play with Bayern Munich.
0:52:16 > 0:52:19And that's what we're trying to do in economic terms.
0:52:19 > 0:52:20Come on.
0:52:29 > 0:52:34At the moment, we're working in three shifts because of the current high sales volume.
0:52:34 > 0:52:39We had to start working a third shift because two shifts couldn't cope with the high demand.
0:52:44 > 0:52:45Hour for hour, worker for worker,
0:52:45 > 0:52:48Germans like Horst are far more productive
0:52:48 > 0:52:52than their Italian and southern European competitors.
0:52:52 > 0:52:54Where Italy and Ireland are massively indebted,
0:52:54 > 0:52:59German efficiency has created the largest surpluses in Europe.
0:52:59 > 0:53:03There's no doubt that the euro is a success for Karcher.
0:53:03 > 0:53:05Our sales abroad is 85%.
0:53:05 > 0:53:09The total sales of the group is 1.7 billion euro.
0:53:11 > 0:53:14We doubled our business the last 10, 11 years,
0:53:14 > 0:53:17so our growth rate is double-digit every year.
0:53:17 > 0:53:18That is our target also.
0:53:21 > 0:53:24But Horst and other German taxpayers fear they'll end up with
0:53:24 > 0:53:27a huge bill for bailing out the weaker economies.
0:53:29 > 0:53:32It was a good decision to have the euro in Germany,
0:53:32 > 0:53:35but at the same time, I don't think it's fair
0:53:35 > 0:53:37that we are getting a bit punished
0:53:37 > 0:53:40when it hasn't been such a success in other European countries.
0:53:43 > 0:53:48Germany, which is paying for the rescues of the troubled economies,
0:53:48 > 0:53:52is insisting that bailed-out countries live within their means.
0:53:52 > 0:53:55Not everyone likes taking the supposed medicine.
0:53:57 > 0:54:00Listen, I never voted for Nicolas Sarkozy.
0:54:00 > 0:54:01I never vote for Angela Merkel.
0:54:01 > 0:54:04So, I didn't vote for them to tell me what to do.
0:54:06 > 0:54:10Some would say Europe is now being run by the government with the deepest pockets, Germany,
0:54:10 > 0:54:14precisely the opposite of what President Mitterrand hoped monetary union would achieve.
0:54:14 > 0:54:19That may be because the political union he thought would follow
0:54:19 > 0:54:22monetary union is yet to happen.
0:54:23 > 0:54:28The crisis at least makes one thing obvious. We need more of Europe.
0:54:28 > 0:54:33Political union is the only way to save the stability of the euro.
0:54:33 > 0:54:40It seems to me that Europe could go for a federation.
0:54:40 > 0:54:43This is the citizen who speaks there, the citizen of Europe.
0:54:43 > 0:54:48I'm not speaking as former governor of the ECB, but as a citizen.
0:54:48 > 0:54:51Of course, it's a decision which has to be taken by the people of Europe.
0:54:51 > 0:54:55The creation of a fully fledged United States of Europe,
0:54:55 > 0:54:59a federal super-state, with taxing, spending and borrowing
0:54:59 > 0:55:01all decided centrally,
0:55:01 > 0:55:04may be how to save the euro and restrain German power.
0:55:04 > 0:55:10But recent elections in France and Greece show voters rejecting austerity.
0:55:10 > 0:55:14The eurozone is becoming less united, politically and economically.
0:55:14 > 0:55:19The underlying forces are still driving the countries apart.
0:55:19 > 0:55:23The divergence is getting wider
0:55:23 > 0:55:28and the perspectives of the various countries
0:55:28 > 0:55:30are more and more at loggerheads.
0:55:30 > 0:55:34Spain, buckling under the weight of huge debts,
0:55:34 > 0:55:36is causing particular concern.
0:55:36 > 0:55:40Spanish banks remain weak and need to be strengthened
0:55:40 > 0:55:44with a big injection of capital to absorb potential losses.
0:55:44 > 0:55:46The Spanish banks are very vulnerable.
0:55:46 > 0:55:50They've clearly got a very large local banking sector
0:55:50 > 0:55:52which is controlled by local authorities,
0:55:52 > 0:55:56and if you want to look for sort of crony capitalism, corruption
0:55:56 > 0:56:00and, as a result, very large loan losses, look for that sort of thing.
0:56:00 > 0:56:04And if you can combine that with a construction boom, you're really off to the races.
0:56:04 > 0:56:06And Spain now has more unsold housing units
0:56:06 > 0:56:10than United States of America, which is a pretty startling statistic.
0:56:10 > 0:56:15Spain manifests all the eurozone's flaws - a bloated property market,
0:56:15 > 0:56:19huge debts burdening businesses and households,
0:56:19 > 0:56:24ailing banks, a government unable to balance its books.
0:56:24 > 0:56:29But with a quarter of the workforce unemployed,
0:56:29 > 0:56:33will Spain be the next to turn against the cuts?
0:56:33 > 0:56:41To impose fiscal austerity forces reduction in public employment,
0:56:41 > 0:56:47so you already have 48% of the Spanish young people out of jobs.
0:56:47 > 0:56:52So, the danger of social unrest is getting bigger and bigger.
0:56:55 > 0:57:00Whatever happens, millions of Europeans in the highly indebted countries are becoming poorer,
0:57:00 > 0:57:03year after grinding year.
0:57:07 > 0:57:11Having voted against austerity, the Greeks have been told to grin and bear it
0:57:11 > 0:57:13or get out of the eurozone.
0:57:13 > 0:57:16But a Greek exit could kill the euro,
0:57:16 > 0:57:21and that could lead to a chain reaction of collapsing banks,
0:57:21 > 0:57:26which would pose terrible dangers for Britain.
0:57:27 > 0:57:30Our banking sector is very international
0:57:30 > 0:57:33and we simply cannot cut ourselves off
0:57:33 > 0:57:35from problems that occur in the eurozone.
0:57:35 > 0:57:38We've actually got a financial services sector
0:57:38 > 0:57:40that's probably of the order of six times bigger
0:57:40 > 0:57:41than our underlying economy,
0:57:41 > 0:57:44if you gauge it against places like North America.
0:57:44 > 0:57:46And so, it's both a big problem for our banks,
0:57:46 > 0:57:49and a big problem for our economy in general, if that occurs.
0:57:49 > 0:57:53The choice confronting the eurozone looks profoundly unappealing.
0:57:53 > 0:57:56If it survives, millions of Europeans
0:57:56 > 0:57:58face years of squeezed living standards.
0:57:58 > 0:58:01But if it were to fall apart,
0:58:01 > 0:58:05well, households, businesses, banks, governments
0:58:05 > 0:58:07would face the risk of going bust.
0:58:07 > 0:58:11And that would have a devastating impact on Britain,
0:58:11 > 0:58:14on our banks, on our living standards.
0:58:14 > 0:58:19So, although the cost of saving the euro may seem high,
0:58:19 > 0:58:22the price of letting it collapse,
0:58:22 > 0:58:23well, that could lead to
0:58:23 > 0:58:27the kind of economic depression and financial mayhem
0:58:27 > 0:58:30we haven't seen since the 1930s.
0:58:54 > 0:58:57Subtitles by Red Bee Media Ltd