‘Only resolution’ to euro crisis is political union: Alan Greenspan

What would happen if the euro collapses keeps Alan Greenspan up at night, he told Diane Francis.

For nearly 20 years Alan Greenspan was the most powerful banker in the world as chairman of the Federal Reserve Board until 2006. He is the keynote speaker at the International Economic Forum of the Americas/Conference of Montreal to be held June 11 to 14. This year’s theme is “A Global Economy in Transition.” Mr. Greenspan spoke with The Post’s Diane Francis on a range of issues. Here are highlights of his remarks.

Q. In light of this week’s elections in Europe, what do you think will happen to the euro?

A. It’s very difficult to see how it’s going to be held together. [In the late 1990s] they were trying to replicate the U.S. economy, which worked and had a single currency. There was an understanding that cultural differences were important, but markets believed that when all the European countries came together, it would work.

If you looked at the lira 10-year note, two or three years before beginning the eurozone, it was selling at 5% above the deutschemark bund. And as time became ever closer to the initiation of Jan. 1, 1999, when the euro locked in, that 500 basis-point spread had fallen to 20 basis points. In short, the markets presumed the Italians would behave like Germans. In reality, they did not.

That problem is pulling apart Europe. When you can no longer devalue [to reflect true productivity or lack of it] then what tends to happen is a country has to get the funding for its non-competitive costs somewhere else. We find throughout this period Northern European eurozone countries [and markets] are funding southern European countries. Until [government] deficits come down, there is no way of solving this problem.

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