di Valeria Elena Benko e Alberto Graciotti,
The economic crisis is poisoning the European Monetary Union (EMU) and a shared political agreement is needed to define a common strategy to ward off the risk of a wider contagion in the Eurozone. Optimists claim the EU has survived the political and economic hardships of the last sixty years. Nonetheless, the different views on who needs to take responsibility to rectify the political economy of the Area are leading to a particularly confusing scenario, where the hardest thing to do is to define some priorities and set up a consequent agenda.
As the financial markets shake and the stability of the Euro project is threatened the great debate of the early Nineties has been brought back into the public discourse: does the EU need to rethink the attributes of the joining states to make sure the whole system doesn’t come apart? And how?
We exposed these and others questions to Robert Hancké, Professor of European Political Economy at the London School of Economics. We met him on 18th of July, just few days before European Union leaders approved a new recovery plan for Greece and implemented further measures to restore confidence in the Euro Zone market, particularly in the Euro-Mediterranean countries. We did not get any solution, but we could grasp a northern perspective on the main challenges the European countries will face to preserve both economic and monetary unity.
Starting from what has recently happened in Greece, may you describe the challenges that Athens will face in the next 12 months, from the social, economic and political point of view?
Athens has to impose a massive austerity package. We now have to ask ourselves if this plan is politically feasible: even if the austerity program is approved in the Parliament it is not entirely obvious how the Greek population will take it. Papandreou is the leader of a left wing coalition, but there is a right wing version of the story that, to a logic sense, basically depicts Greece as a big kleptocracy, where everybody tries to steal from the state. That is why one of the problems that the Athens government will face is how to maintain the legitimacy in front of its natural constituency, which are the people in the bottom half of the income distribution.
Obama in the U.S. faces exactly the same problem and as we go on you will see how governments trying to consolidate the national budget will struggle to foster solidarity between the different parts of the income distribution.
Do you think these are the only solutions the government could go for?
As long as we are in a EMU of independent countries these are the only tools they have. Alternatively, there is another tool: to announce a default and to leave the Euro Zone. But if Greece defaults it means that its interest payments are going to rise even more, unless they are underwritten by a Euro Bond kind of a thing, which is not entirely obviously going to happen. If Greece leaves the Euro Zone their sovereign debt in Euro would have to be re-evaluated in Drachmas and it will be 40% higher.
The most drastic solution to Greek crisis could be an enforcement of the technocratic measures, so as to have technicians that move from Brussels to Athens and do what is needed to avoid the contagion. Would that be feasible? And what is the actual relationship between the sovereign states and the sovereign Europe created by the states?
Well, if the EU and the IMF were to send a team there, let’s say, this time with machine guns, hypothetically, to enforce the austerity measures, the first question you have to ask yourselves is «Yes, this is a solution, but to which problem?». After all, Papandreou is taking the papers from the IMF, having them voted by the Parliament and then move on. One of the problems that Greece has is not only that it is a particularly poorly run economy, it is also a particularly poorly run public administration, because they can’t tax, nobody pays any taxes, especially in the top 10% of the income distribution, and it’s not very simple to crack down on them. How the EU and the IMF would do it?
Let’s forget about machine guns. Wouldn’t a less violent nonetheless drastic measure be interpreted as a signal of restored confidence in the EU system?
This reminds me of the Warsaw Pact. You know, the Russian never invaded the countries; it was the countries to ask them to help them out. That would be the technical definition of such a maneuver, because the EU consists of democracies and what you describe is not any longer a democracy.
What are the main interests keeping Greece inside the EMU?
Well, there are two games that are being played. The first is: «let’s help Euro live as long as it’s possible and re-patch it every week as long as it stays alive». This game is supported by two main ideas. Number one: if you wait long enough then eventually growth will come back and you can grow your way out of the problems, so it’s a matter of patching up until that comes. The other idea is that there’s a lot of Greek debt held by banks out of Greece. Hence, one of the reasons you want to drag it on for two or three years is to allow the banks to re-capitalize prior to a default rather than after. If Greece were to default now, France, Germany, The Netherlands and a lot of countries would be in trouble. If Greece defaults in two years probably all these countries will have rebuilt its reserves so that it would be possible to digest the blow.
The second game is that if Greece were to default, let alone Ireland, Portugal and so on, since so many banks are sitting on Greek debt, we will end up in a situation similar to what happened four years ago, where we’re not lending to each other anymore because we don’t know whether we will ever see the money back. That time the situation was solved by the governments taking over the financial system but the governments are no long in that position, they cannot afford it, and that’s why we got here today.
The economic solution is probably shared by the EU and the bank system, but, at the same time, the new generations cannot sustain other thirty years of austerity package. This means decades of cutting public expenditures and raising taxes. What EU is asking to Greece, especially to the youngsters, is simply not sustainable.
Well, that’s the outcome of the times we’re in now. And it’s sort of a cyclical thing. And secondly, the point is to kick out the old guys. That’s the point, go and vote, because you are entirely right, they are mortgaging your future and the same is doing Greece, but than you have to think about the solution. Greece and Italy share that you have to be at least 65 to be recognizable as somebody.
So, for you the solution for Greek crisis should be pointed on domestic changes?
I think that if you want a solution that has to come from domestic policy, I can’t imagine anything else.
Yes, but history shows that not always economic crisis have produced more democratic governments and institutions…
The point is that you can imagine lots of solutions but there is not even one that is completely compatible with an advanced democracy. If Greece pushes through all this reforms, the people enforcing them will be dead in ten years but the people paying the consequences are a lot younger. It’s not easy to handle it. Every solution you can come up with has a massive monster just around the corner and that’s the problem at the moment. The only solution that could balance the European problems with the domestic problems with coherence would have something to do with a Eurobond, because that means that no money would move hands and the ECB would have to underwrite it. Then, growth on balance would be higher in the short run, that would allow space, domestically, to reform, to get majorities on board, and that would solve lot of the problems. But it’s not easy.
The Greek GDP is relatively low compared to Euro Zone GDP (barely 2,5%). The EU could easily back up Greek financial system, so the whole Greek situation is probably caused by a matter of confidence rather than by a lack of economic resources. In the light of this, is it reasonable to think that the Euro Zone instability is due to the weaknesses of the European political union? How do the domestic pressures in Germany and in France play a crucial role in Greek crisis?
Governments in a democracy, inside the EU, have two types of pressure to handle: how you keep the international political economy going and how you keep your domestic political economy going. At the moment it is impossible for Germans or French to do more at the European level compared to what has been done in this days without having a massive domestic back-clash.
I mean, look at what Chancellor Angela Merkel is doing at the moment: she’s actually trying to play the EU card and she’s already loosing the next election as a result. Politicians have to balance between these two pressures; otherwise you wouldn’t call it a democracy. Obviously, the outcome of this process is not necessary the best possible one for the European integration prospects.
Let me give a political thought on it. Let’s say they could have done more at the political level, so, you know, a fiscal union or a Eurobond. Well, probably they haven’t because if they do that without asking domestic electorates what they think about that, just imagine the number of Euro-skeptic parties that is going to arise both on the left and on the right of the political specter. And that would be more than 35% and it will be impossible to keep them out of office in the future and then you end up with something like the UK, where you actually get a massive shift out of Europe as soon as a center-right coalition gets to the government. It’s not obvious to me how you resolve this triangle in which the states find themselves, because when it comes to reality, if there is a solution at the EU level and everybody say we should go for it, the effect would be that close to 50% of the electorates will probably be anti European.
If we do not have a political union we still have the EU of the states. The Greek crisis shows the hardship of the EU of the states in reaching a common decision. Is that a shortcoming in the EU decision-making process?
I don’t think it’s a matter of a lack of leadership at the EU level. I think it’s just politically impossible at those conditions to move from a so lukewarm arrangement to one that would encompass a lot more. It’s simply that, in this very moment of the European Union history, you cannot get the majority or the unanimity needed to organize a serious fiscal union.
Yes, but at the same time this situation of uncertainty is troubling European markets and the stability of the same EU countries that fail to find a solution…
It’s easy to think to a technocratic solution but it’s very hard to convert it into a democratic solution, and since ultimately the solution has to be democratic, that has to be the test, the problem is that what is good for the Eurozone is going to be bad for EU democracies and vice versa.
And what’s your own opinion about current Euro Zone situation?
I think the whole system could have been thought through a bit more. I am also not sure that the Euro was the best solution, I mean, the European Exchange Rate Mechanism worked quite well most of the time, but now I suspect that in 10 years from now, or in 5 years, you will see a Deutsch mark block Euro. All of Northwestern European countries, Austria included, are already so tightly coupled with the German economy. I come from Flanders, and I have always considered it as the 17th land. Everything is the same for almost all the satellite economies around Germany, because they have shared for almost thirty years the same wage system, the same industrial and export profile, the same skills systems, trade union and employers profiles.
So, that entails a widening spread between the Northern and the Southern European countries?
Yes, I think there is going to be a massive exit of quite a few of the southern European countries. They’re trying to keep it alive but it’s not obvious whether they will manage to do that. I mean, what we need is a structural solution.
 European Financial Stability Facility (EFSF) was created by the euro area member states following the decisions taken May 9, 2010 within the framework of the Ecofin Council. As part of the overall rescue package of €750 billion, EFSF is able to issue bonds guaranteed by EAMS for up to € 440 billion for on-lending to EAMS in difficulty, subject to conditions negotiated with the European Commission in liaison with the European Central Bank and International Monetary Fund and to be approved by the Eurogroup. On July 21th the Eurozone leaders have agreed to empower the EFSF up to €750 billion. Moreover, Acting on a July request by the European Parliament, the European Commission will before year-end issue a report on how an EUROBOND could reinforce the monetary union.