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Stock markets have fallen back after shares across the world surged on Monday in the wake of a deal to tackle Europe’s debt crisis. In London, shares fell 1% after rising 5% on Monday, while in Paris, they lost 0.7% after soaring 9% the previous day. Analysts had expected shares to slip after such large gains. Stocks in the US and Germany saw small rises. Marco Werman talks to MIT economist Kristin Forbes about the European bailout and what it means for the global economy.

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MARCO WERMAN:  The other big news from Europe is, of course, the trillion dollar bail out for Greece and it seems the markets aren’t quite sure what to make of it.  Stock markets around the globe rallied when the bail out package was announced yesterday.  Today it was more of a mixed day for Wall Street and other stock exchanges.  The bail out’s goal is to provide Greece with cash to service its debt and reign in its budget.  It’s also supposed to shore up global confidence in the Euro.  Sounds a lot like our financial crisis here in the U.S. and our bail outs and that’s not a coincidence.  Kristin Forbes is a professor of International Economics at MIT’s Sloan School of Management.  She says the two crises are related.

KRISTIN FORBES:  This is the next chapter in the global recession, and unfortunately not the end of the book.  This all began with the housing collapse in the United States and then spread to financial institutions in the United States and then the financial crisis spread to Main Street around the world.  And then there was a period of hyperactive governments, where governments tried to stop this financial crisis by enacting huge spending packages to try to stabilize economies.  That worked for a period, but now this is the next chapter in that we are realizing we have to pay for all those steps that we took to stabilize the economy.  And Greece is the first country where people realized that the massive spending that went on to help get us out of this crisis has to be paid back and people are looking at the numbers and realizing Greece doesn’t have the money to pay things back under its current programs and its current path.  So this is the next chapter and unfortunately I think other countries in the next couple years are going to face similar challenges where people look at all the money that was spent to try to stabilize things after the crisis and raise concerns about whether governments will be able to repay that debt.

WERMAN: And now we’ve got another series of governments in the EU and the IMF bailing out Greece to the tune of one trillion dollars.  Does this bail out address any of those underlying problems that got Europe to this point in the first place or does it address preventing another Greece in Europe or somewhere around the world?

FORBES: I think the current package unfortunately will not solve the problem for Greece.  At this point Greece has simply borrowed too much.  It’s taken on too much debt and the package just announced is basically giving Greece more loans.  And we all know if an individual has borrowed too much, giving them more debt is not going to solve the problem.  So unfortunately I think in Greece’s situation it is too late.  Greece is going to have to take some tough medicine and this package isn’t going to be able to solve that problem.  But the good news is that I think that this package is aimed not just at Greece, a big aim of this package was to stabilize things in other countries, such as Ireland, Italy, Portugal and Spain. And those countries do have enough time.

WERMAN: Let me ask you briefly about the stabilization of the Euro, which is one of the two goals of this rescue package.  Are there many people in Europe who have long been skeptical of the concept of this common currency, the Euro, and what impact will the bail out have on deepening any mistrust of the Euro?

FORBES: That’s a great question.  Some countries, such as in Greece or some of the countries that are now going to have to make spending cuts and deal with higher taxes will probably be very critical of the Euro and blame the Euro for having to take these tough steps.  But they also will hopefully appreciate that it’s because of the bail out from the Eurozone that the situation will avoid being much worse.  But the countries that I worry about the most are countries such as Germany.  It’s the German tax payers who will be writing the checks to pay for this bail out and how long will tax payers in these countries be willing to continue to write these checks?  So I think this is going to raise some very fundamental questions for countries in Europe.

WERMAN: Ultimately do you think Europe’s problems are American’s problems?

FORBES: I think what is going on in Europe should be a wake up call for the U.S.  The U.S. is also running huge budget deficits and it’s on a completely unsustainable fiscal path and if we don’t reign in our deficit spending, we are going to be in a situation such as Greece in the not too distant future, in five to ten years.  So I think how this is resolved in Europe is very relevant to the United States.

WERMAN: You think the United States could be facing a situation like Greece in five years?

FORBES: Five to ten if we do not start to reduce our deficits.  When you look at, say the U.S. debt dynamics, for example, our total debt to GDP is close to 90% now.  Greece is at about 110%.  We will be on a path to have debt numbers similar to Greece’s in just a few years if we don’t cut down on our spending and reduce our deficits.  So I think that’s where there’s a very strong lesson for the United States.

WERMAN: Kristin Forbes, professor of Economics and MIT, thanks very much.

FORBES: Thank you.

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