Is the eurozone working? Lessons from the Greek crisis

Report on a seminar held on 24 June 2010  

George Irvin

 George Irvin (Professorial Research Fellow, SOAS, London) opened the seminar by asking whether the Greeks really deserved all the opprobrium that was coming their way. Far from being overpaid and workshy, Greek salaries are low – the minimum monthly unskilled salary is €626, compared with an EU average of €1160 – while working hours are the longest in the EU at 1,900 hours per year and the average Greek retirement age is 61.3, higher than the EU average.  

Nevertheless, Greece was now faced with three options:
(1) to accept the conditions required by the IMF and EU for financial support
(2) to default on its debts and leave the euro
(3) to restructure its debts (a partial default, in effect) but remain within the euro  

The first of those options would lead to recession or worse. Greek GDP would fall by 10% over 2-3 years, and in 2015 would still be short of its 2007 GDP peak. There is a strong danger that retrenchment in Ireland, Spain, Portugal, Greece, UK et al will bring a co-ordinated depression to the EU.  

The second option would not benefit Greek citizens. The Greek government not only owes money abroad but also at home: these debts would be wiped out too, leading to the destruction of the Greek banking system. Furthermore, Greece would be forced in future to balance its budget rather than borrow for investment because no-one would lend to Greece after such a default, and there would be a strong risk of inflation arising from a devaluation.  

The final option is the most likely one. This would share the costs of the Greek failure with other European countries, principally France and Germany. It would not address the problems of competitiveness, thus cuts in real wages would still be necessary, but it would be part of an orderly process preventing the problem from spreading uncontrollably to other countries.  

This last point is important because it is not only Greece that is in trouble. In the next three years, Spain, Portugal and Italy have to refinance €691 billion of sovereign debt, but the EU/IMF package provides for €750 billion to support such refinancing. This means that whatever is agreed now does not settle the issue: there is likely to be more to come.  

It is not possible for every European country to be like Germany and run a current account surplus: for every surplus, someone else has to be in deficit. But one should not blame the Germans! Over the past decade, real wages in Germany have barely increased, so it is not surprising that German taxpayers look unfavourably on the prospect of providing greater financial transfers. The reforms needed are institutional: the eurozone requires a Treasury that can effect intra-zone transfers and pursue counter-cyclical policies in future.  

Finally, if Europe is to gain popular support, it needs to deliver tangible products for its citizens. Not only have German real wages been static, but economic growth in Europe has been low since the introduction of the euro. If the EU does not seem to provide benefits for its citizens, then it will lose their support. 

Graham Bishop

 Graham Bishop  (economic commentator, grahambishop.com) attributed the heart of the problem to a sustained Greek loss of competitiveness and the corresponding need to fund consumption by borrowing. In the past few years, Greek “compensation” (on an EU standard measure) has grown by around 6% per annum, compared with 4.5% per annum in the UK and 1.5% per annum in Germany. The Greek current account deficit, public and private combined, has been more than 10% of GDP per annum in the same period. Greece has therefore paid for its lifestyle by borrowing rather than by earning.  

To deal with this problem in future requires surveillance of the economic competitiveness of the eurozone member states. If the origin of the problem lies in Greek domestic policies, then these policies need to be examined.  

There also needs to be a rethinking of how public finances are policed, too. The Stability and Growth Pact has failed, in that sanctions have not been applied to member states that breached its terms. National finances ministers ran away from confronting their responsibilities. The Maastricht treaty created an independent central bank and took monetary policy out of the hands of politicians because they could not implement it properly; perhaps something similar will happen with finance policy.  

One idea is to require banks with sovereign loans to provide for greater capital to cover the risk of default: the capital requirement would increase as the public finances of the sovereign borrower got worse, thus increasing the costs of borrowing and forcing the sovereign borrower to change course. This would not require a change in the EU treaties.  

Overall, this crisis will turn out to be an accelerator for the integration of economic policies in Europe.  

John Palmer (former European editor, the Guardian) declared that the crisis was not caused by “too much” Europe but by “too little”. Jacques Delors had warned, when he was Commission president, that the macroeconomic policies of the member states had to be complementary, and therefore drawn up with each other in mind. This had not happened. Nor was there proper European supervision of the collection and publication of national statistics.  

We are not blessed with our political class. They are behind the curve in this crisis, running to try to catch up with events.  

On the issue of the publication of draft national budgets, it would strengthen parliament, not weaken it, if the budget were to be discussed with other national governments first. That way, parliament would know what other national governments thought of it when considering it itself.  

Jacques Reland (Head of European Research, Global Policy Institute) asked why the markets had attacked a eurozone country rather a country such as the UK or the US which had similar problems with its public finances. The answer, he said, lay in the eurozone’s lack of political leadership. There was no doubting the leadership of the UK or the US, but within the eurozone there was at present no obvious political strength to resist the power of the markets.  

This report is based on comments made at the seminar. The contents of the seminar report have not been checked with the individual speakers, so cite its contents with the appropriate degree of caution. 30 June 2010.  

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