An Imperfect Union: Europe's debt crisis

(CBS News) Ten European countries are in a recession. In order to avoid default, three have needed bailouts from the European Union and the International Monetary Fund, and more might be necessary. What's at stake? A lot, including the future of the currency, the euro, and the health of the United States' largest trading partner. Steve Kroft reports on the European debt crisis, including how the austerity measures being demanded of Greece are rekindling the ghosts and even enmity of World War II.

The following script is from "An Imperfect Union" which originally aired on April 8, 2012. Steve Kroft is the correspondent. Graham Messick and Coleman Cowan, producers.

There are only a few things that could derail the U.S. economic recovery that finally seems to be underway, and one of them is the debt crisis in Europe, along with the recession that is now sweeping across the continent.

It's similar in many ways to the financial crisis that leveled the U.S. economy in 2008. Except that in Europe, it's not just the banks that are in danger of going broke, it's entire countries. Greece has already defaulted on more than a hundred billion dollars of public debt. Ireland and Portugal have needed massive bailouts to stay solvent. Italy and Spain are just hanging on in what has turned out to be an imperfect economic union. At stake is the survival of the European currency, the euro, and the economic future of America's largest trading partner.

The European Union has all the accoutrements of nationhood: its own flag, its own anthem, its own parliament, its own huge bureaucracy, and its own currency, the euro, shared by 17 of its 27 members. It's a loose economic alliance of countries and faded empires -- with different languages, cultures and customs -- that have more or less been at war with each other for a thousand years. Until recently, their monetary union had brought stability and prosperity to the continent's social democracies, producing good wages, generous benefits, long vacations...but Louise Cooper, a top financial analyst in London, says the European holiday is over.

Louise Cooper: We're in a debt crisis. Eurozone countries have way too much debt. We have gorged on debt. We are living beyond our means. And after 10 years of booming economic times, it is now payback time. We are paying back our credit cards and that will prove very painful and costly.

It already has. Ten European countries are now in recession. In Spain, where the unemployment rate is 23 percent, there have been general strikes and civil unrest. In France, three of its largest financial institutions teetered on the edge of insolvency until the European Central Bank came to the rescue with more than a trillion dollars in easy credit to shore up the system. Seven European countries have changed leadership because of the crisis, and one, Greece, reneged on $133 billion in debts.

Louise Cooper: This is an extraordinary event. You know, a member of the euro club, the elite euro club, can't pay its bills. That is extraordinary. A Western, developed country has defaulted. We haven't seen that since 1940 when Italy did it in the Second World War when it refused to pay its enemies.

The financial markets worry that the same fate could befall Ireland, Portugal, Spain and Italy, which are already all in crisis, and losing the confidence of international investors who have bankrolled their debts.

Louise Cooper: The fear of Greece is it sets a precedent for other indebted countries. Then everybody who owns Portuguese debt or Irish debt, possibly even Spanish debt or Italian debt, you start to worry, "Will I ever get my money back?" That is the problem.

European finance ministers have spent most of the past year trying to find a way to save Greece and keep the Eurozone intact. But until recently, they have lacked the unity and the authority to impose a solution on 17 different countries, all of which have their own financial and political interests. Christine Lagarde, the managing director of the International Monetary Fund, has been part of the process.

Christine Lagarde: When you have a single currency and when you don't have a single or at least very closely coordinated fiscal policy then you run the risk of having part of the territory go into one direction and other part of the territory go into another direction. And that's exactly what happened.

Lagarde says the divide exists between Northern Europeans -- the Germans, the Dutch and the Finns -- who are industrious, prosperous and frugal, and the Southern Europeans -- the Greeks, the Portuguese and the Italians -- who are much more relaxed about work, money, and paying their taxes. Lagarde says it didn't matter much until 2008, when the global financial crisis rolled in, separating the savers from the spenders.

Christine Lagarde: You know, it's like when the tide goes away, you see those that do not have their swimming costume on. And that was the case in Europe.

The largest of the countries left totally naked was Greece. The nation of just 11 million people was a half a trillion dollars in debt and unable to pay its bills, leaving Europe with a Lehman Brothers-like dilemma: either bail the Greeks out or let them go broke, a risky proposition that could trigger another huge financial meltdown.

Louise Cooper: I think the problem is that nobody quite knows what a messy Greek default will do. And what a country coming out of the Eurozone will do. And if it's uncharted waters, then that makes a lot of people very nervous.

Steve Kroft: So, they'd rather fork over 130 billion euros to keep the game sort of alive--

Louise Cooper: Exactly.

Steve Kroft: Rather than risk the downside of a breakup?

Louise Cooper: Because we don't know what could happen, how messy, hideous, damaging it could be.

Steve Kroft: I mean, how powerful is Germany within the E.U?

Louise Cooper: Germany is the check writer.

With its huge industrial economy, its vast trade surpluses and balanced budgets, Germany is by far the most powerful country in Europe. And it reluctantly agreed to bailout what it considered to be its deadbeat relatives, but only up to a point, and only under certain conditions.

In return for going along with the bailout, Chancellor Angela Merkel insisted that all euro members roll back their debt, and that severe austerity measures be imposed on Greece -- requiring it to slash government spending, roll back pensions, lay off 150,000 public workers, reduce salaries by 20 percent, and raise taxes. All of this imposed on a country that had been in recession for the past five years.

Steve Kroft: Describe the situation in Greece to me right now. What's going on?

Yanis Varoufakis: Greece is in its Great Depression. Greece is in a coma and it is getting deeper into that coma as one company, one firm, one shop shuts after the next.

Yanis Varoufakis is an economist at the University of Athens who has advised the Greek government. He says the belt-tightening is stifling economies all over Europe and made the situation in Greece much worse. The Greek unemployment rate now stands at 21 percent, and the economy is shrinking at the rate of eight percent. There are bread lines in Athens, and in the central markets, more people are looking, than actually buying.

Steve Kroft: How's your business?

Fish Monger: Seventy percent down. Right now everything is very difficult and I don't think we've even started to see the beginning of the bad times. People don't have the money to buy anything. The situation is very bad.

There's a feeling of hopelessness, humiliation and anger in the country, as the economy continues to spiral downward.

Steve Kroft: Most people would say Greece got itself into this by borrowing way too much money, by being a fairly unproductive society, by not paying its taxes. All those things are true.

Yanis Varoufakis: All those things are precisely true, but have no capacity to explain the crisis that Greece finds itself in today. All these things have always been true, but we haven't had a crisis like this. We are now going through what the United States of America went between 1929 and 1932. Only, we are part of a currency union which was never designed to sustain such a crisis.

In the past, if Greece found its accounts overdrawn, the country simply printed more money or devalued its currency to accommodate the relaxed Greek lifestyle. That's no longer possible. With the drachma replaced by the euro, Greeks must now march to the tune of German bankers. And they have not shied away from expressing their displeasure.

On February 12th, the day the Greek parliament adopted the new austerity measures, 80,000 people took to the streets to protest. By nightfall, the demonstrations had turned violent, as rioters clashed with police and set fire to buildings causing tens of millions of dollars in damage. It was, in a crude way, an expression of Greek nationalism that reignited old resentments and grievances that had been carefully managed for the past 70 years...and much of it was directed at Berlin.

Louise Cooper: I mean, this is the trouble. When you get into debt, you don't control your own destiny, the creditors take over. And that's exactly what's happening in Greece.

Steve Kroft: Do the Greeks feel the Germans are trying to run the country?

Louise Cooper: Yes.

Steve Kroft: Are they?

Louise Cooper: And to a certain extent they are. The sad thing for the Greeks is they remember the Second World War. Some of the rhetoric harks back to what Germany did in Greece in the Second World War. I mean, that is really quite terrifying that senior politicians are talking about these things.

It was a long time ago and a different Germany. But 300,000 Greeks died of starvation during the Nazi occupation, and that kind of history is not easily forgotten. So it did not sit well when the German government proposed sending a kommissar to Athens to oversee Greek finances. The German finance minister, Wolfgang Schaeuble, even floated the idea of postponing Greek elections out of concern that a new government might overturn the austerity agreement.

Yanis Varoufakis: You cannot tell a people when they're going to hold elections. You cannot tell a sovereign parliament when it should be dissolving itself or not. You can express a wish, but you cannot issue, especially if you're speaking with a German accent, to a people that have suffered in a German occupation and an occupation that is still vivid in most people's memories, what to do.

The acrimony has been very public, with Greek newspapers depicting Chancellor Merkel and Finance Minister Schaeuble as Nazis. Schaeuble is the architect of the fiscal reforms in Greece.

Steve Kroft: There's some bad feelings towards Germany in Greece. As I'm sure you're aware. What's your reaction to that?

Wolfgang Schaeuble: Well, it's always like that, you know. When you have countries or people who have been living beyond their means, and now they have to apply some austerity, they have to make cuts, they have to reform their labor market. In such a situation, people tend to push the blame to others. They are looking for scapegoats. It's perfectly normal. But at the same time, the Greek people know that their prosperity is thanks to Greece being part of Europe.

Steve Kroft: I'm sure you've seen the cartoons. People talk about living under the German boot, they blame you. Not just Germany, but in many cases, you personally.

Wolfgang Schaeuble: Well, of course. That's part of politics. But it's my job as German finance minister to repeat over and over that we can't spend more than we have. But it doesn't mean that we want to dominate anybody. Germany tried to do so in the past, and it never worked, but it no longer wants to do so today.

The next hurdle for Europe to clear in this slow moving crisis is the upcoming Greek parliamentary elections, in which voters are threatening to roll back the economic reforms, an outcome that could result in a full blown bankruptcy for Greece, and a forced exit from the euro. European leaders say they are confident that the worst is over. And so far they have managed to avert disaster. But there is still general pessimism in the financial markets with the economic stagnation spreading to Spain.

Christine Lagarde: There's still medicine to be taken. And that's what's happening in most of these Southern Eurozone states at the moment, plus Ireland.

Steve Kroft: What about the situation in Greece?

Christine Lagarde: The situation in Greece is a close call, let's put it that way.

Louise Cooper: To me when I look at the euro, it's a battle between economics ripping it apart and politics desperately trying to hold it together. And my view is the economics will always win out eventually.

Steve Kroft: Do you think Greece is going to make it?

Louise Cooper: No.

Steve Kroft: Could it drive the rest of the world back into recession.

Louise Cooper: Oh, absolutely. The euro area is a very big part of the global economy.

Steve Kroft: What about the United States?

Louise Cooper: Well, the U.S is doing terribly well at the moment. However, clearly if the Eurozone has a really bad time of it this year, which it could well do, then America will not escape unscathed.