Thursday night, Charles Dallara gave an exclusive interview to "The Kudlow Report," literally minutes after coming off the plane from Brussels. The Institute for International Finance managing director and former U.S. assistant Treasury secretary had spent the better part of the week negotiating the Greek bailout plan with France, Germany, the ECB and the IMF.
Just before the interview, Larry Kudlow and I were discussing the line of questioning, when the two of us agreed the first question would not be the usual recounting of the deal itself, but rather, Larry and I wanted to know more color.
Was Nicolas Sarkozy sweating, knowing France’s economy was four steps behind Greece in a potential fall? What was Angela Merkel’s disposition, knowing the fate of Europe rested in her hands?
LARRY: Let me ask you, in that meeting, can you tell us what actually happened? You've got Merkel, you got Sarkozy, you got Lagarde. Did Sarzoky, for example, actually threaten you with 100 percent haircut on the Greek bonds for your banks? Did he actually come in threatening, two guns out? What was the story there?
DALLARA: No, Larry, he was not threatening. We had a good, good discussion about the remaining issues that needed to be resolved in order to put this issue behind us there. We had spent the prior two and a half weeks negotiating and it came down to this final meeting between me, one of my colleagues ... and Chancellor Merkel and President Sarkozy. It was not a threatening meeting, it was a professional meeting where we exchanged views on the differences. And where it was very important for us to secure an increase in the amount of collateral that Europe would fund in order to underpin these new claims on Greek debt.
My imagination runs wild on the negotiations: whether coffee was being served on fine china, were there fancy leather portfolios with A4 paper, and whether they spoke English or French or German. However, having been in countless number of negotiations, I know it was probably filled with aides, spreadsheets, whiteboards, laptops with presentations. It had to have been tense in that room. Not since General Marshall had the fate of the Continent rested within four walls of a room.
While you can , many ask me why should Europe matter to the U.S. economy. It is rather simple. Instead of becoming a globally dominant economy, we are now a globally reliant economy. The switch accelerated after the end of the Cold War, as more European countries no longer faced the specter of nuclear war.
Having started a German GmBH* in the mid-1990s, and as executive producer of CNBC Europe in the early 2000s, I saw firsthand how Europe (before and after the Maastricht Treaty) had one goal in mind: become the powerhouse. European businesses invested in their economies, laid out investment and hired. And while European governments love regulations and codifying business, they kept at arm’s length.
*(GmBH: Gesellschaft mit beschränkter Haftung — a limited liability company.)
Here in the U.S., it has been quite the opposite. The government not only loves regulating and codifying, there are about 180,000 federal regulations on the book, costing businesses regulatory compliance costs upwards of $1.75 trillion. No wonder that has led American businesses to seek to do business in Europe, and hence become Europe-reliant.
There is, however, a risk. China says they will help buy some of the sovereign debt, but most likely the USA will be the bank of last resort. It always has been. It always will be. As Dallara pointed out in the interview, it is all contingent on the European governments adopting austerity plans.
DALLARA: Well, Larry, I think you're going to the heart of the matter there now. A lot of the adjustment plans that are being developed now for Greece, for Spain, for Portugal, Ireland and Italy, have a focus on budget discipline. There are, however, crucial elements of structural reform, liberalizing labor markets, bringing pension benefits back into reasonable proportions, reducing a wide range of structural rigidities in their economies, which inhibit efficient allocation of resources and inhibit growth.
If it does fall apart, and it might, Europe will be coming to us. It will start with the banks, which finance 80 percent to 90 percent of the global trade, and since most of the trade is dollar-denominated, it will continue to the US government. Congress’ inability to understand the meaning of austerity puts our economy doubly at risk.
The U.S. needs to be careful of what the Italians call the malochhio and what the Greeks call "mati"—the evil eye. While the market cheered the Dallara Deal with a 340 point climb, a deal is not a deal until the deal is done. Done done.
Questions? Comments, send your emails to: lkudlow@kudlow.com