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Fareed Zakaria GPS

Soros: Economic Crisis Means End of Reagan Economic Philosophy; Greek Crisis Threatens European Monetary Union

Aired February 28, 2010 - 10:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

FAREED ZAKARIA, CNN ANCHOR: This is GPS, the Global Public Square. Welcome to all of our viewers in the United States and around the world. I'm Fareed Zakaria.

This week, as concerns about the American economy persist, Congress tries once more to salvage some kind of health care reform and Europe faces a life threatening crisis. I speak with George Soros, one of the world's most successful investors, and a man who has devoted much of his life to understanding financial markets and funding political change across the world, including in the United States of America.

First, a few of my own thoughts. I am struck by just how gloomy everybody is about the fortunes of the United States. I do it myself sometimes. So let me offer a small corrective this week. The United States remains the world's most dynamic and productive economy by many measures. It still dominates the world of science and technology, with the world's greatest universities, the best research, the most Nobel Prizes, the largest strove of patents.

It has a dynamic economy, but also a dynamic society. America is the world's only enlarged advanced industrial nation that will grow substantially in population over the next 40 to 50 years. Thanks to immigration, America will stay young, restless and hard working.

Now, we have big problems, but the biggest one, by far, the one to worry about is the growing national debt. It's worth reminding ourselves, however, this is not a fact of life that we simply have to accept. There are many simple economic measures that would correct the budgetary fix easily.

Let me give you just one, a value-added tax. This is a tax that 130 countries have. It's a tax on consumption, a national sales tax, if you will. Most countries have one that ranges from 5 to 25 percent. We have none.

Were we to adopt the tax in the 10 to 14 percent range, it would allow us to eliminate the income tax from anyone earning 100,000 dollars, which is 90 percent of American households. If we went to the highest rate, which is used in Scandinavian countries, many of which have grown faster than United States over the past two decades, we could eliminate the income tax for the majority of people, balance the federal budget, fund health care for all Americans, and slash the top income tax rate to 25 percent. So the solutions are out there. We just need leadership in Washington to implement some of them, stabilize the budget, and thus revive the fortunes of this country. Is there anyone in Washington willing to show that courage?

After George Soros, we have a lively conversation with two of my favorite Brits, the editor of "The Financial Times," Lionel Barber and the Super Don, Simon Schama of Columbia University. Let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: And now joining me, the billionaire investor, financier, speculator, philanthropist, and thinker, George Soros.

Thank you for joining me, George.

GEORGE SOROS, FINANCIER: My pleasure.

ZAKARIA: You were a great supporter of Barack Obama. You helped raised money, you gave a good bit of money yourself. Are you satisfied with the job Barack Obama has done?

SOROS: No, I'm not satisfied. But, you see, what really is the case that the problem is bigger than he is. He was -- he has not -- he hasn't been fully equal to dealing with the problem. And the solution that he found to the financial crisis, which was to effectively bail out the banks and allow them to earn their way out of the hole, was, in my opinion, not the right solution.

He should have compulsorily replaced the capital that was lost. And if the private capital was not available, he should have injected state capital effectively at the equity level.

ZAKARIA: Which in effect would have been nationalizing the banks.

SOROS: This is what they call nationalizing the banks. And he made the political decision that that is un-American, will not be accepted.

ZAKARIA: What about the broader issue of Obama's leadership, not just the bank bailout, but on the -- dealing with the auto companies, dealing with the housing market, dealing with the economy, the stimulus? I mean, on all of those issues, I think you can look at any one by itself, but I think he has done pretty well, and I think hasn't in some ways gotten the credit for it because the crisis was averted.

And so now the Republicans can say, what -- there was no problem, we didn't need to spend all of this money.

SOROS: That's -- that's exactly right. He is paying a very heavy price for actually saving the country from going into a very deep recession or a depression, because people don't -- haven't experienced it. And he wanted to be the great uniter and he wanted to carry the -- the country, sort of bring it together. But the other side has absolutely no incentive to do it. So it takes two to tango. So that approach has failed. And -- and I think he in -- in Massachusetts, he got the message. And I hope that, actually, now, he's taking the health care to -- back to Congress and overcoming the filibuster. The 60 percent vote is a crime.

And -- and I think that's the right reaction. So he's sort of taking a tough stance. And that may be the -- the turning point. It depends on how he follows it up. But this could be -- we may have had, let's say, last week, the -- the deepest point of -- of the -- of his --

You know, Roosevelt, in his first year, was also sort of tentative and didn't take a really tough stance. And he wasn't that popular, either. Then he really got tough. He was threatening to increase the number of judges on the Supreme Court to overcome that obstacle. And eventually he succeeded and that made him popular.

ZAKARIA: Well, he failed at the court packing, but he succeeded politically --

SOROS: Yes.

ZAKARIA: -- is what you mean.

SOROS: Yes. Yes.

ZAKARIA: So one of the proposals, because banks have been making these unexpected and, many think, undeserved profits, has been to, in various ways, claw back some of the money. The British and the French are trying a tax on bonuses. Obama is talking about a tax on bank size. There is a -- another proposal out there to have a tax on financial transactions for the future.

SOROS: Yes. Yes.

ZAKARIA: What do you think of all these proposals?

SOROS: Why shouldn't those transactions provide an avenue to make up the loss? I think it's a natural source of revenue.

ZAKARIA: One more tax to ask you about; the tax on carried interest, which is at the heart of hedge funds like yours, has tended to be at the level of capital gains.

Should it be at the level of income taxes?

SOROS: I think that the -- the earnings of the hedge fund managers should be capital gains. Oh, sorry. That's earnings. That should be treated as earned income.

ZAKARIA: As earned income?

SOROS: Yes.

ZAKARIA: It would substantially cut into your own income. SOROS: Yes.

ZAKARIA: Do you think that there's some measure on financial reform that he needs to do that is not currently being -- being proposed?

SOROS: Look, I think that the financial reform is not an urgent thing. It's more important to do it right than to do it right away, because right now, there's no danger of an -- another credit boom. It's quite the opposite.

Look, you want to keep regulation to a minimum, because financial markets are inherently unstable. But regulators are also imperfect. And, actually, they are worse than markets, because, A, they are bureaucratic and therefore they are always behind the curve. And, secondly, they are subject to political pressures.

So you want to keep regulation to a minimum. But you must accept responsibility that, for instance, Alan Greenspan explicitly rejected, which was to -- to prevent asset bubbles from growing too big.

ZAKARIA: Bubbles like in technology stocks or in housing?

SOROS: Right.

ZAKARIA: Greenspan said that's not the job of the Fed, because if the market can't detect the bubble, how can I, as a regulator, detect it?

SOROS: And he's right. However, knowing that he -- that he is bound to be wrong, he, nevertheless, knowing that markets will not prevent excesses, has to move against it and has to take some steps, which is either too little or too -- too much.

But the market provides him with feedback. And then he can see whether it's too much or too little...

ZAKARIA: And, in fact...

SOROS: -- and do more.

ZAKARIA: And there's a certain commonsensical aspect to this, which is if you look at the Canadians, when growth start -- started growing very strongly, they started raising the capital requirements for banks, insisting on lower levels of leverage...

SOROS: Yes.

ZAKARIA: Precisely on the theory that, look, this is getting a little out of hand and...

SOROS: Right.

ZAKARIA: -- Greenspan seemed not to want to do anything like that. SOROS: That's because of this false belief in -- in -- in this market fundamentalist belief that markets correct their own excesses. They don't. When I see a bubble, I buy that bubble, because that's how I make money.

So you can't trust the market to correct it, you see?

So that's the lesson we have to learn. And, actually, the Chinese -- you know, they increased the minimum capital requirements that banks have to hold 17 times when the market was getting overheated. And then, when the crash came, then they really let it -- let it rip.

(END VIDEOTAPE)

ZAKARIA: And we will be back with George Soros after this.

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: And we are back with billionaire investor George Soros.

What does it tell us that when looking at this last four or five years, China basically handled its economic policy much more successfully, much more wisely, than we did?

SOROS: Yes.

ZAKARIA: And it's not just China. Even the Indians and the Brazilians and the -- you know, the Indonesians -- I mean they all look fairly sensible. And it was really Britain and the United States -- it was the advanced capitalist countries that turned out to be running very weak policies.

SOROS: Yes. I mean, it is effectively a bankruptcy of -- of the -- of this market fundamentalist belief, which really came in with Reagan and Thatcher. Now, Reagan is still in the panoply of -- of saints in -- in this country. And -- and we -- we just have to recognize that we -- something went very wrong and we need to reformulate our view of what -- how financial markets work

ZAKARIA: The real challenge now is that there has been a breakdown of the -- of free market capitalist model because it is now so prone to crises...

SOROS: Yes.

ZAKARIA: -- and the solving of the crises has been so expensive...

SOROS: Yes.

ZAKARIA: -- states have taken on all this debt.

But the -- the one that seems to be succeeding better is the Chinese model, which some people call it state capitalism.

SOROS: Yes.

ZAKARIA: Do you think that that's a viable model, China -- Chinese capitalism -- for the future?

SOROS: I think that they will have to actually -- if they want to keep on going, they will have to modify the model. So far, they've done extremely well in adjusting it to the changing circumstances. But they are now the emerging power. And they must accept responsibility for the global financial system. They have to form a -- enter into a partnership with the rest of the world. Nobody can dictate to the world. President Bush tried to do it and it cost us very dearly. So you can't impose -- however powerful you are -- you can't impose your will. You have to find common ground.

But China has to buy into and we have to bring China in.

ZAKARIA: some people say that the greatest distortion currently in the global marketplace is the -- is China's currency, which the government is keeping artificially low. The Peterson Institute says that the Chinese currency is undervalued by 40 percent. And the argument is they're keeping it low so that their exports are cheap and everybody buys them.

SOROS: Yes.

ZAKARIA: Do you -- do you believe that the China -- China's currency is artificially low?

SOROS: Yes, there's no question about it. And moreover, since China is now overheating, for domestic purposes, raising the -- the -- or they're allowing the exchange rate to appreciate would be a very good way to bring the inflationary pressures under control. And...

ZAKARIA: Because it would allow the Chinese to import cheap goods for the rest of the world?

SOROS: they need to increase their imports. We need to increase our exports. And adjusting the exchange rate would be the right way to go.

ZAKARIA: But in order to do that, you need really close cooperation between China and the United States.

SOROS: That's right.

ZAKARIA: And right now, these two countries do not seem to be working as well together as they might.

SOROS: Yes. And this is -- I find this the most distributing thing in the present picture, because in the last few months -- and this has come on rather suddenly and I think it's based on the lack of -- a set of mutual misunderstandings that neither side fully knows what's in the mind of the other side. And things have started going wrong when President Obama went to China and basically said to them, you are now very successful. We offer you a partnership in working out the problems of the world. And the Chinese said no, no, we are a developing country. We have got plenty of problems here. You know, we -- our people are very, very poor. We can't take on that additional responsibility.

And then there was a terrible situation in Copenhagen, where both sides -- where a lot of good people were working on trying to make it -- make -- bring an agreement. And instead of that, you had disagreement. And then you -- you had the visit of the Dalai Lama to Pres -- to President Obama.

and unless we arrest it, you have a snowball effect. And, as you know, the further it goes, the bigger it gets.

ZAKARIA: But what...

SOROS: So unless we stop it in the next few months, I -- I think that we could yet fall back into a situation that prevailed in the 1930s, where each country for itself, beggar (ph) their neighbor, financial protectionism, trade protectionism and a breakdown of the global economy.

ZAKARIA: So this is the thing that worries you more than anything else?

SOROS: That's right.

ZAKARIA: In your last book, you were worried about the state -- status of the dollar. But now, when one looks around at the world, you -- what you're struck by is actually the terrible weakness of the euro.

SOROS: Yes.

ZAKARIA: Do you think the euro can survive as a currency?

SOROS: Well, the euro is now also being very severely tested because in its construction, it -- it's flawed, because you have a -- a set -- a common central bank, but you don't have a common treasury, right?

Now, you know, the exchange rate is fixed. If a country gets into difficulty, it can't depreciate its currency, which would be a normal way. And it's not getting the kind of transfer payments that American states get if they happen to be doing worse than other states.

ZAKARIA: And unemployment insurance and...

SOROS: Yes.

(CROSSTALK)

ZAKARIA: Yes.

SOROS: And, of course, tax collections are lower, but -- but the federal remittances are bigger. So that helps to keep the common market together.

If you have a common market, you do need a common currency. But if you have a common currency, you need a -- a common treasury, as well.

ZAKARIA: But that's the way Europe is.

So my question is can the euro survive?

SOROS: Well, this is now the -- the real question. I think that Greece will survive, for various reasons. But it still leaves Spain and the other countries. And so either Europe now takes the institutional measures that are needed to make up for the deficiency or, in fact, it -- it may not survive.

ZAKARIA: Your funds are up to managing $27 billion now?

SOROS: Yes.

ZAKARIA: Most of it your own?

SOROS: Well, not -- but there's sort of a large fund.

ZAKARIA: A lot of people wonder what is it like to -- to have that -- that kind of money?

Does it make you feel that you have special obligations?

Does it make you feel...

SOROS: Yes, actually, it -- it does. I -- I feel that it puts me in a very privileged position and therefore I have to use it -- it makes me more independent than most people are. So it allows me to call a spade a spade. And -- and -- and, also, I mean I -- most of the money I devote to the -- my money to the foundation.

ZAKARIA: You're given away, still, over $500 million a year?

SOROS: Yes. And -- and I am actually increasing it.

ZAKARIA: And what -- what do you want to accomplish with, you know, when you -- when you give this money, what is your thought?

SOROS: Well, I think we are now in a position to consider the -- let's say, the -- the issues confronting humanity, like, for instance, climate change. Taking care of -- of the vulnerable populations, because you really have not just bubbles, but you also have deep holes that people fall into. And they really can't get out of those holes without outside assistance.

So helping those who are in those self-reinforcing deep holes is really, I think, the function of -- of the foundation or the objective of the foundation.

ZAKARIA: George Soros, thank you very much.

SOROS: Pleasure.

(END VIDEOTAPE)

ZAKARIA: And we will be right back.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: Sponging off populist fury is so not his style. When he has it, he probably goes and picks up a round of pick- up hoop.

UNIDENTIFIED MALE: He's what was described to me recently as an NPR liberal. That means "All Things Considered."

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: Every once in a while, I like to have on a couple of smart people to talk about whatever is happening in the world and whatever is on their minds. This is one of those occasions. Simon Schama is a professor of history and art history at Columbia University. His previous stops in academia including Oxford, Cambridge and the other Cambridge, also known as Harvard University. Lionel Barber is the editor of "The Financial Times" of London. Before landing that top job, he covered Europe and the United States for the paper.

Now, both of my guests happen to be Brits. I don't want you think I consider them smart just because of the accent. Lionel Barber, you spent many years here. You now watch the United States from across the pond. What is your sense of the Obama presidency one year in?

LIONEL BARBER, "THE FINANCIAL TIMES": I think, first of all, he has to realize that he took probably too many people from the campaign into the White House, that he's reliant on those people. He needs to have some people who are, if you like, more experienced in government, as opposed to campaigning. Secondly, he probably needs to outsource less to Congress. He's been too deferential to Congress. He needs to spill a little blood, flex a bit of muscle, get angry a bit.

I'm sure he believes -- and he is a formidable articulate person. He believes too much in the power of rational persuasion. Occasionally, the irrational helps.

SIMON SCHAMA, COLUMBIA UNIVERSITY: He's at a crossroads in his political fortunes with the midterms coming up. Does he say, oh, I've been too confrontational; my only chance is to have so sort of notional centrism? Or do I need to let the country feel a sense of a presidential authority? Lionel and I agree. I think if he doesn't really go for that possibly tougher gamble, he's finished.

ZAKARIA: But, in a way, you're saying it's about style, not about the fact that he veered too far left? BARBER: No. I think it's a matter of substance here, too. I think it was a mistake to push health care reform first in the middle of the most severe recession form 60 years. I think he should have been focused on the economy, on jobs. Health care does not command -- reform does not command majority support in the population. People are deeply skeptical of his claims that he can save money with it. People really feel that it contradicts a fundamental tenet of the American individualism: we look after ourselves.

Of course, there is a minority in this country that believes that health care reform is necessary because there are 40 million people with no health insurance. But I suspect there are a lot -- you saw that with the Massachusetts result, that people there said, you know, why should we pay for those slackers, say, in Arkansas, or the immigrants coming in?

SCHAMA: The irony is that Massachusetts has universal health care.

BARBER: Scott brown voted for it.

SCHAMA: Because we've got it. And we don't see why it should be extended.

One thing you can say about this particular political moment, the Democrats, at least I really hope so, will never run such an appalling campaign as the known campaign in Massachusetts. It was simply a case, really, of their weakness and complacency there.

I don't quite agree with you about nothing of substance happening. For example, it said that there was no focus on jobs. What was the stimulus package doing if not actually providing the capital which prevented more people from being fired in public services all over the country. Money went pretty quickly out of the door to some places where it started to show that -- provide the economy with a power stint.

What he's done badly -- an appalling job in explaining in basic terms to the American people that the stimulus was know, oh, big brother somehow wasting their taxes entirely on bailing out banks. It was doing something which was giving the economy a transfusion.

ZAKARIA: In a way, one part of the problem they've had to deal with -- they had to, I think, the bank bailout just to rescue the financial system. And that is what was deeply unpopular, and became associated with the stimulus. People think of the bank bailout as the stimulus, and say we don't want the government involved in any of that.

BARBER: Who did the bank bailout?

ZAKARIA: It was Bush, but then Obama extends it and continues it.

: Why would Obama not have the wherewithal, the intestinal fortitude to say, actually, this was a Republican precedent, may he rest in peace and retirement actually who did this.

BARBER: The stimulus package was absolutely necessary. I think it could have been more imaginative in terms of what it could have done to promote jobs. It was absolutely necessary to help bailout the states. And I think that it was certainly, definitely the case that you needed a bank bailout.

The problem is that this country always has a history of populism in recessions. What has happened with the Obama presidency, you've got a double whammy because it's not just a recession, it's the idea, the specter of big government. Obama has presented big government as a solution in these troubled times. That really has provoked a backlash. That's why you're seeing the Tea Party movement. And the Obama presidency, the white house was very slow to pick that up.

: It's not true that it always has a populist -- in times of recession, or at least it's not true that it's an --

BARBER: 1930S --

SCHAMA: But Father Coughlin did not get in the way of Franklin Roosevelt's institutionalization of the New Deal one bit.

ZAKARIA: What do you think the ideological moment is? What does it tell us? We're in this big crisis, and perhaps neither left or right --

SCHAMA: Lionel is right in saying that you can simultaneously have, as in the 1930s -- you're quite right about that -- you can have a kind of up-rush of adrenaline-driven populist fury, a kind of animal lashing out really at scapegoats. In Father Coughlin's case, it was the Jews, among others. At the same time, if you have a shrewd, determined, canny leader of -- true, setting the bar very high with Franklin Roosevelt and those around him -- he can actually sponge up some of that anger and say, I understand you, I hear you, and the presidency and my government is not the enemy of the forgotten man, of the small man. Here is what we're trying to do to make sure you and your children --

At the moment, we have to say Barack Obama has only -- we would only give him a B at best at doing that. Because sponging up populist fury is so not his style. When he has it, he probably goes and plays a round of pickup hoop.

BARBER: He's what was described to me recently as an NPR liberal. That means "All Things Considered." He's somebody who really believes in the power of persuasion. And I think actually a better parallel is 1991-'92, Ross Perot. That election was very close. Clinton -- In the end, Clinton had to move into the center, reach out to Republicans in order to get business done. And he suffered that big, big defeat in '94.

ZAKARIA: What does the Tea Party movement tell us?

SCHAMA: I was just going to see that even though it seems extremely likely the Democratic party will suffer severely -- we don't know quite how much. We would expect them to under better circumstances -- in the midterm elections, it's much less clear of whether this is a one-term presidency for Obama. It can't possibly have escaped his attention that if there is a kind of nervous division inside the Democrats about how much he is a government, or how frightened to run -- how frightened to be and run away from it -- what is Evan Bayh doing, for god's sake? Contemptible cowardice I think there.

Where was I? Yes -- there is --

(CROSS TALK)

SCHAMA: I remember his dad. He wouldn't have done that. He had balls of steel. There is a fury developing in the Republican party, which we're going to see unfold month after month, year after year. Be careful what you wish for, you know, Michael Steele and even Sarah Palin. Whether or not they have complete command or control of a seriously potentially violent, with a very small V, but extremely angry, rather anarchic movement on the right, and whether it's ever really compatible with party organization when you come to have to win an election, is really a moot point.

Obama will never want to win an election by default. But that -- with the excellent Ross Perot analogy -- may well be the case. It may well be the case that if the Tea Partiers, who are straight out of chapters from my revered predecessor Richard Hofstadter's book on the "Paranoid Stalin in American Politics," are really -- it's striking, isn't it, actually how hostile they are to some Republican party stalwarts right now. If they don't feel they can take control of the Republican party in the name and sake of Constitution, they may well- run a third party candidate.

ZAKARIA: We will be back with Simon Schama and Lionel Barber right after this.

(BEGIN VIDEO CLIP)

BARBER: If you're thinking about a holiday and grace periods --

SCHAMA: Disasters happens where the orange grows.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: We are back with the editor of "The Financial Times," Lionel Barber, and Simon Schama, the famous historian, author, Colombian professor. We have to talk about chaos in Europe before we leave. What is happening in Europe, Lionel? It seems like, for all of America's problems, at least the place is hanging together.

You have Greece in a kind of Enron-type accounting fraud that has been discovered. The Germans seem to have to bail them out, are hating to prospect of doing that. If they do that, doesn't that produce a follow-on effect for the other countries that have bad economies, Spain, Portugal? BARBER: I'll spare you the analogy with Greek tragedies and all that. What I would say is this is the first test of the European Monetary Union. The Greeks, as the prime minister told his fellow leaders at the Brussels Summit late last year -- the government has been corrupt to the bone, not just in recent years, but for decades. Of course, now they've got a huge deficit, more than 12 percent of GDP, and a massive amount of debt.

And the Germans are looking at this and saying, we told you so. They didn't -- they were very nervous about having a monetary rate to extend to the so-called Club Med countries. That is Spain, Portugal and Greece, highly indebted, fiscally irresponsible -- and Italy -- and Italy. So it's sort of "I told you so." In the end, the Germans will have to bail them out, lead a bailout. They're very reluctant. Mrs. Merkel apparently said, are you saying that the German people -- how am I going to tell the German people -- I've just raised the pension age from 65 to 67 in order that the Greeks can retire at 55?

So the price will be very high, austerity for several years and many more strikes. So if you're thinking about a holiday in Greece, Fareed, maybe staying put.

SCHAMA: I was thinking about the blessed Montesquieu in the 18th century. He believed that fiscal cultures were essentially determined by their climate. Is it fiscal disaster happens where the orange grows?

BARBER: There's some remarkable progress in countries like Spain and Portugal. I think Greece benefited from huge financial transfers. And frankly, they have enjoyed credit cover, if you like, from -- in the single currency zone. They've enjoyed low interest rates. And they've lived beyond their means. Now is the adjustment.

ZAKARIA: Doesn't this suggest the kind of unworkable nature of the European Monetary Union? You have one currency, but all these countries with widely different standards?

BARBER: If you don't have a fiscal union as well as a monetary union, then you get into trouble. And the really worrisome thing is that the Greek economy -- the Greek government have got to have a severe adjustment on living standards. And they don't have the flexibility of the exchange rate, because they're in a monetary unit. That's the problem.

So all the pressure is going to come on wages, on living standards. You know, in Ireland, where the economy is also going like gang busters, almost a leprechaun on steroids, the fact is that in the public sector, some of the workers are taking wage cuts of 15 to 20 percent. That's the adjustment. They need to do that in Greece.

ZAKARIA: What is the mood in Europe? Do you think there's a sense that the project is in danger? Is there -- or will this just -- will people move on?

SCHAMA: There's a certain amount of panic in Brussels, yes, for good reasons. I sometimes hear it invoked that the good news is that the new Europe and the countries formally in the Soviet world have actually weathered the crisis a little better. Is that right?

BARBER: I'm not sure.

ZAKARIA: They have stronger budgetary positions, certainly. The Pols, the Czechs, the Hungarians actually have reasonably strong budgets. The big problems, in deficit terms, are Greece, Spain, Italy, France, nine percent of GDP.

SCHAMA: Yes, but it's not just a deficit or debt problem. It's a current account problem. If you look at these countries that have been growing very, very fast, like the Baltic states, Hungary, they've had to make severe adjustment. Interestingly, of course, the IMF came in to help them.

In Western Europe, in the Monetary Union, the Germans, the French do not want the IMF in. Why? Because it would be seen that Europe has failed.

Second, a little subtext here, President Sarkozy does not want his socialist rival in the future presidential election -- Dominique Strauss-Kahn happens to run the IMF -- take any credit whatsoever for helping to achieve a Greek solution.

ZAKARIA: Before you guys go, since you're both Brits, who is going to win -- I assume Gordon Brown will have to announce British election sometime around Easter, which means they'll take place about six weeks after that. Who is going to win?

SCHAMA: Notice the very long pause, which is not helpful to you. I think it is going to be much tighter than most people think. I'm not going to bet for a hung parliament. I think David Cameron will win with a majority of less than two digits.

ZAKARIA: So tiny, which would be by historical standards, very, very thin.

SCHAMA: Yeah.

BARBER: I never make predictions about political races, particularly in my own country, in case people draw the wrong conclusions. What I would say is the conservatives have yet to close the deal with the British public. There's a lot of worry about the top circle, how experienced they are.

On the other hand, there's a lot of people who are just fed up with Labor after 13 years. And Gordon Brown --

ZAKARIA: Very tough to win after you've been in power for 13 years.

SCHAMA: Exhausted volcanoes was how someone described Mr. Gladstone's government.

ZAKARIA: We are neither exhausted nor volcanoes, but we have to end this. Thank you both very much. We'll be right back.

(COMMERCIAL BREAK)

(NEWS BREAK)

ZAKARIA: Now for our "What in The World" segment. What got my attention is what Defense Secretary Robert Gates warned of this week, the crisis the United States faces with its NATO allies. The North Atlantic Treaty Organization was founded to fight the Soviet threat, a threat that hasn't existed for 20 years. The new threats that we face are obviously very different, and a very different kind of force is need to defeat them.

We don't need tanks to rumble across the fields of Eastern Europe on route to an invasion of Moscow or a defense from Moscow. We need drones to kill terror leaders remotely, helicopters to swiftly drop troops into unforgiving terrain.

Here's the problem: European members of NATO don't have much to offer for any of this kind of warfare. In fact, Gates says that for years NATO has needed more helicopters, cargo aircraft and aerial refueling tankers, but NATO nations still haven't provided them. The lack of this kind of equipment is hurting operations, maybe even costing lives.

That's just part of NATO's current crisis. They have money problems. Just two months into the year, they already face a fiscal shortfall of hundreds of millions of Euros. Only four of NATO's European member nations have so far reached the self-set target of spending two percent of their GDP on the military. The US spends by far the biggest percentage of its GDP among the western nations, almost four percent.

For all that, NATO's European nations do spend about 300 billion dollars a year. The vast majority of their forces are defensive. They're really just welfare state jobs in many cases, and are certainly useless for conflicts like Iraq and Afghanistan. By NATO's own admission, only 30 percent of Europe's land forces can ever be deployed.

Thanks to the need for troop rotation and similar concerns, only about 10 percent of the continent's soldiers can be fighting overseas at any given time. While the US has half a million fewer troops than Europe, it can deploy twice as many.

Just take a look at the war in Afghanistan, which you'll remember is a NATO operation. ISAF, the NATO group responsible for conducting the war, says as of the beginning of February, the US supplied 47,000 of the 86,000 troops in country. The US is left picking up all of the slack from its partners in Europe.

Now, European countries do not need to instantly become war fighting great powers. That's not needed, probably not desirable. Been there, done that. But surely Europe can put together 100,000 to 150,000 troops, trained and deployable for actual fighting in war zones. If not, Europe's leaders must content themselves with merely issuing press releases and holding academic conferences on geo- politics as their slide to global irrelevance will continue. We'll be right back.

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ZAKARIA: Now for our Question of the Week. Here is what I want to know: both George Soros and Simon Schama talked about what President Obama had done wrong. We've heard a lot of that lately. But they also made the point that President Obama may be clawing his way back. Do you think we're seeing a resurgence of the president's once vaunted charisma and effectiveness? Is he turning a corner? Perhaps fulfilling some of his early promise?

I want to find out what you think about that. As always, you can go to our website to see great answers to last week's question.

Now, I also want to recommend a book as always. It's called "The Soros Lectures at the Central European University." I know the title may not grab you. Give it a chance. It's a compilation of five speeches Soros gave in Budapest just last October. He covers the economy, politics, the US and China, everything in between. It's a terrific look into the world view of one of the richest and most fascinating men in the world.

And now for the last look.

This week, it's literally a last look at that last great American gas guzzler, the Hummer. Its most famous fan, Arnold Schwarzenegger, might not be laughing any longer. GM announced this week it will shut the consumer brand down after a deal to sell to it a Chinese firm fell apart.

What happened? Well, only 325 of the vast vehicles were sold in December. The Hummer brand was hurt badly by the spike in gas prices in 2008, and by growing concerns about its carbon footprint. Until recently, most models of the Hummer were so heavy, they were in the same vehicle category as shuttle buses and exempt by the Environmental Protection Agency from even reporting fuel economy. But they are said to have averaged less than ten miles per gallon.

The Hummer had become an icon. In many parts of the world, it had become an icon of American excess and, in my opinion, bad taste. I say, good riddance.

Thanks to all of you for being part of my program this week. I will see you next week. Stay tuned for "RELIABLE SOURCES."