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State Of The Economy -

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Stephen Long assesses recent proposals to rescue Europe's economy.

Transcript

LEIGH SALES, PRESENTER: Another day, another plan to fix the European debt crisis and pull the
world back from the brink of recession. Over the weekend, world leaders devised a scheme to try to
deal with the problems. It involves a managed Greek default, bank rescues and more money for
bailouts. But it's all pretty vague and not without risk, as Stephen Long reports.

STEPHEN LONG, REPORTER: The Pope's visit to his birthplace, Germany, provided Europe with a welcome
distraction from the problems in the material realm: the $4 trillion wiped off share markets last
week; the fears and forecasts of financial Armageddon.

MARK FABER, GLOOMBOOMDOOM REPORTER (Sept. 22): The best is that we prepare because we're all
doomed! We're all doomed!

STEPHEN LONG: While investors prayed for a miracle, across the Atlantic in Washington, the world's
Finance ministers and central bank governors cooked up their latest new plan, though some think
it's far from divine.

OLIVER HARTWICH, CENTRE FOR INDEPENDENT STUDIES: What it risks is of course creating hyperinflation
because you can imagine what happens when you flood a economy, even if it's a big economy like the
eurozone, with potentially trillions of euros. They're just asking for hyperinflation.

STEPHEN LONG: US Treasury boss Tim Geithner was apparently the brainchild of the new plan to rescue
Europe from debt disaster and save the world from recession.

As the debt clock ticks down, the plan aims to rescue banks and reassure the world that big
countries like Italy and Spain won't go broke. It essentially involves throwing even more money at
the problem, up to two trillion euros, equivalent to 2.8 trillion Aussie dollars. But there's a bit
of smoke and mirrors involved. The existing bailout device is the European Financial Stability
Facility, the EFSF. It's only got maximum 700 billion euros, which isn't nearly enough. So world
leaders are planning to do what's known as leveraging the fund, a bit like buying shares with a
margin loan.

OLIVER HARTWICH: There are plans that the European Stability Facility will actually purchase
government bonds, deposit them straight with the European Central Bank, get fresh money from the
central bank and use that money to buy even more government bonds. And so they are creating a
perpetual motion machine whereby the European Stability Facility and the European Central Bank will
effectively just print money on an endless scale.

FARIBORZ MOSHIRIAN, UNSW: I think the European leaders have to distinguish between the role of
European Central Bank, which has got responsibility for interest rate and price of stability, not
acting as the Eurozone Treasury, as opposed to this new fund which is - eventually is going to act
as Eurozone Treasury.

STEPHEN LONG: Tens of billions of dollars are being set aside to recapitalise banks exposed to
government debt default and other losses. A managed default of Greece's national debt now appears
to be part of the plan.

ROBERT RENNIE, WESTPAC: We've get two choices here. Greece can default in an organised fashioned or
it can default in a disorganised, riot-style fashion.

STEPHEN LONG: But not a Greek exit from the euro.

OLIVER HARTWICH: Angela Merkel appeared on Germany's top-rating political talk show this morning
for a whole hour. She was asking questions about the Eurozone and the future of the euro. And what
Angela Merkel specifically ruled out was a return to the Deutschmark and she specifically also
ruled out a Greek exit from the eurozone.

FARIBORZ MOSHIRIAN: The problem we facing in Europe is no longer debt crisis, it is leadership
crisis, simply because we are looking at eurozone where we are at the mercy of national leaders to
act for the interests of Europe. And I think at this stage, unless national leaders act for the
interests of Europe as a whole, we are going to see constant volatility and uncertainty in the
market.

STEPHEN LONG: The Australian dollar's wild ride is one part of that volatility.

ROBERT RENNIE: If you look back over the last - well, all the way back to the float from 1983 to
2007, the average range that we would see in any given year would be about 11 points. So the range
that we've seen in the last three weeks is equivalent to what we would see in a normal year, at
least pre-GFC. So intense volatility, and importantly, it's being driven by non-Australian events.

STEPHEN LONG: For Australian exporters, the fall in the Aussie dollar to below parity might provide
some relief if it continues.

FARIBORZ MOSHIRIAN: Australia will be better off if we have a slower economic activities in China.
Around eight per cent economic growth in China will make sure that Australian dollar is not going
to go above parity and manufacturing sector will remain more competitive, our tourist industry will
operate more effectively.

STEPHEN LONG: But if China's export markets dry up as the Eurozone crisis spins out of control,
Australian businesses might yearn for the days when a high currency was the biggest worry.

LEIGH SALES: And tomorrow night I'll be talking to the US managing editor of the Financial Times
Gillian Tett about whether we can avoid a global recession or not.