Spilioti for TA YP OPSIN – CONSIDER THESE
podcast: Dr. Kierkegaard, within your
current research, you have written extensively on European economy and reform,
and you have foreseen some time ago that Greece among other countries would
need a third aid package soon. Now, although Europe was not the focus of this
recent summit of G20, there are still questions that make people very, very
concerned. It's the third aid package to Greece. It's the talk about the IMF
eventually leaving the Troika arrangement some time in the near future, and
there are also the German elections.
seems that with all that has been done during the last three years, there's
been too much cost for the people, too little gain for the countries involved,
and a lot of turmoil among some creditors and investors, and this doesn't
really look like a good financial strategy. What is wrong with this picture?
think we need to take a step back and recognize that the crisis that we have
seen in the Euro Area since 2010 is a crisis that has very deep roots because
what it basically shows is that the original design of the Euro common currency
itself as it was laid down in the Maastricht Treaty in the early 1990s, where
you have a common currenc,y centralized single monetary policy, a single
central bank, but no fiscal and political union, is essentially a structure
that doesn't work.
many of the political problems that we have seen in Europe repeatedly in Greece
and many other instances, now most recently in Cyprus, of course, are really a
reflection of the fact that the crisis itself and the necessity of agreeing
bailouts for countries or countries' banking systems in some cases are really
issues that require a much closer fiscal policy collaboration and therefore,
obviously, also direct political integration than was foreseen in the original
you, for instance, see right now what Greece need quite likely, whether we call
it a third IMF or Troika package, or we simply call it closing the financing
gap of the existing one, it's going to be basically a rerun of the same kind of
political clashes that we have seen before, although I will say that there is
one major difference this time in the case of Greece, precisely because of the
lack of a politically-integrated Euro Area.
is always a need, a simple political need, when you give a bailout package to
have political conditionality attached to this. This is essentially the same
model that the IMF itself has been using for decades when it does financial
rescues. The same kind of logic applies in the Euro Area, namely that
governments in Germany and any other Euro Area country, for that matter, will not
give money to a country without control over how this money is spent. That's
essentially, of course, where the political conditionality comes in.
the difference this time, the third program for Greece, is that by and large,
unlike in previous cases, I would argue that the current Greek government has
actually implemented more or less what the Troika has requested it do in terms
of reforms in Greece and therefore, I do not believe that there will be
particularly large political problems associated with Greece receiving this
third round of aid because, so to speak, the Greek government has done its
homework in advance.
also do not believe that the German election itself is actually a particular
concern for this issue. It is clear that Chancellor Merkel does not necessarily
want to have this debate or this decision taken before the elections in Germany
in a few weeks' time, but on the other hand, this is not a debate that she and
her finance minister, Wolfgang Schaeuble, has shied away from during the
debate. In fact, Wolfgang Schaeuble has been quite clear about this, that
Greece will need more aid and therefore, I would expect this decision to be
taken some time later this year. ( Note:
the interview was taken before the German elections)
on this issue of the IMF leaving the Troika arrangement, I think this is
inevitable. I think it is actually in some ways potentially a good thing
because it partly will reflect the institutional improvements that we have seen
in the Euro area since the beginning of the crisis because the Troika itself,
this bringing together of the IMF, the European Commission, and the ECB is
really sort of a crisis improvisation. It was something that needed to be done
in a great haste at the beginning of the crisis when Europe didn't really have
just to give you an example, when the ECB becomes the main regulator for banks
in the Euro Area beginning next year, then the ECB will have to leave the
Troika because otherwise, the ECB would essentially be negotiating with itself,
being now responsible for banking supervision in the Euro area. For that reason
alone, the Troika arrangement will have to change.
it is now that the ESM is a permanent institution with a lot of capital at its
disposal, and the relationship between the ESM, which is a Euro area
institution, rather than the European Commission, which of course is for the
entire EU, I think is something that needs to be resolved as well and
therefore, I wouldn't be surprised if we end up with a situation where it is
actually some version of the ESM that is actually going to be part of the
Troika in the longer run, rather than the European Commission. For the people it
may be the same, simply being transferred from the European Commission to the
ESM, but I would expect that institutionally, this would be done by a Euro area
from the perspective, of course, of the IMF, what I think now that we're seeing
risks of crises in many large emerging markets, India, Brazil, and others, I
think it is quite natural that the IMF should want to deploy some of its
resources in other parts of the world. The IMF is a global organization. It has
global commitments. It has global responsibilities, but it has, of course, in
the last number of years been almost exclusively focused on Europe because
that's where the main crisis in the global economy has been.
isn't going to be the case much longer, in my opinion and therefore, we
shouldn't necessarily be so sad or disturbed or concerned … Some might actually
applaud it … that the IMF is potentially also going to exit the Troika
structure as we know it today. I think IMF reformed policy and economic advice
will still be needed, but I certainly do not believe that any more IMF money is
going to be required in the Euro area rescue, and I also therefore do not
believe that the IMF will contribute financially to the third round of aid to
Greece to be likely decided later this year or early next year ( Note: 2014).
this is supposed to be a smooth process, why there is talk about disagreement
between the IMF and the other two members of the Troika?
has been some genuine policy disagreement over the years between the IMF, the
European Commission, and the ECB. I think that if we go back to 2010, 2011,
there were disagreements among the different members on the precise design of,
for instance, the program in Greece, how hard to push fiscal austerity versus
the need to privatize state assets versus the need to liberalize Labor market [inaudible
don't think we should minimize this. This is, in some ways, natural, that there
are disagreements among three institutions as different as the European
Commission, the ECB, and the IMF, because remember that the European Commission
has by designation a responsibility for the stability of the entire European
ECB is, of course, naturally, much more focused on only the Euro Area and
particularly the Euro Area banking system, whereas on the one hand, the IMF is
a global institution but on the other hand, it basically deals with the member
states of the IMF, which means that in the case of Greece, for instance, the
IMF has a responsibility for Greece rather than stability of the Euro Area as a
whole and therefore, there are these conflicting political areas of policy
responsibility, so there has been friction, absolutely, but I don't think that
this is a level of friction that has prevented the Troika from functioning.
actually think that everything else being equal, this Troika arrangement has
actually worked relatively smoothly because we also have to remember that this
is an entirely new process or experience for the European institutions. There
has never been a crisis like this in Europe before. The ECB is a new
organization. The European Commission is older, but European Commission does
not have crisis management experience in the way that, of course, the IMF has
had it for many, many years.
else being equal, I think that the performance of the Troika has actually been
quite good. Conflicts of interest are inevitable, but the way that the Troika
is now moving towards probably the end of the Troika as we know is a natural
and indeed welcome, in my opinion, development because it reflects in many ways
the institutional changes and indeed advancements that have been made in the
Euro Area since the beginning of the crisis.
stay on Greece a little bit longer. Since, of course,” new” is an opportunity
but it's also a risk, it seems that people in Greece are concerned, especially
after the admittance on the part of IMF of specific mistakes. They have a
government which indeed has made progress, but on the other hand, the cost, as
we said before, on the people has been enormous. Now, some of the parties in
Greece are convinced that we should go into unilateral cancellation of the
debt, along the precedent of Germany before World War II. What is your take on
think, first of all, that it is very difficult to minimize the economic hardship
that Greece has suffered. Greece has now had a cumulative decline of somewhere
between 25 and 30% of GDP. Obviously, unemployment is extremely high, so the
hardship of the Greek population is very clear and extremely harsh. In that
situation, it is not surprising that there are appeals of parties that
seemingly presents an easy way out, and in this case, the easy way out is, of
course, to just cancel the debt, now that Greece is close to having a primary
surplus and indeed, probably actually will achieve it this year (Note: 2013).
problem of doing that, however, are enormous, and I believe that at the end of
the day, this will not happen and were it to happen, it would unleash further
economic disaster on Greece because we need to think through what would happen
if Greece suddenly unilaterally decided to revoke or cancel its debts. Most of
this debt is held by the other Euro area governments as well as the ECB. The
first result would therefore be that the Greek banking system would lose access
to ECB liquidity operations, which is another way of saying that the Greek
banking system would close overnight. That would, of course, in among itself,
lead to a further disaster for the Greek economy.
it is very, very unlikely, in my opinion, that such a unilateral cancellation
of Greek government debt held by other governments would not lead these other
governments to essentially initiate a process that would lead to the expulsion
of Greece from the Euro Area, which is another way of saying that then the
drachma would, of course, in some way or another have to be reintroduced.
would be a disaster as well for Greece because the value of the drachma, in my
opinion, would drop very dramatically, and we should also remember that if you
are a Greek business and you have a contract with a foreign company that is
denominated in Euros but all of a sudden, you as a Greek company, will need to
have this redenominated into Greek drachmas, that is a default event, which
means that every private contract that Greek businesses or people have with
foreign companies or entities will be in default, which is another way of
saying that the vast majority of private businesses in Greece will collapse.
finally, there is this issue that if you try to reintroduce the drachma in this
way or are forced to do it because the other Euro Area countries are
essentially initiating such a process in whatever form that might take, and
this will not be easy politically or legally, but as I said, if the Greek
government were to cancel all the debt, I am absolutely convinced that would be
the outcome. Then, of course, everyone would try to get their Euros out of
Greece before conversion of this wealth into drachmas, because that is the way
you would maintain the value.
would have an enormous capital flight out of Greece, which again would mean
that there will be no investments. Businesses would relocate. Indeed, I would
predict a great many Greeks would relocate in this scenario, so I think that at
the end of the day, unfortunately, the reality is that Greece at this point
does not actually have this opportunity that some parties in Greece may be
willing to entertain as a quick fix to the situation in Greece. If they were to
do that, then I would predict that the Greek economy would actually completely
collapse, and the situation would be far, far worse than anything we have seen
in the last couple of years.
one of your articles, you have written about Greece and Portugal, that they
have no choice but to carry on, and you mentioned specifically, "…
throughout the Euro Area crisis the previously politically impossible suddenly
became possible when the Euro itself was at risk … " Then you go on
talking about an eventual fiscal loosening to give some breathing space to the
what extent this entire crisis has been politically motivated to bring about
certain structural changes and transfer of sovereignty from the member countries
to the main structures of the European Union?
think, as I said initially, one of the underlying reasons for this crisis
beginning in the first place is that when the Euro area was designed, there was
a lack of appreciation that you cannot share a currency without sharing at
least some fiscal policy or some pooling of sovereignty over fiscal policy
because fiscal policy is what is required in a crisis. I think there is a large
degree of what the crisis has done is because it has brought Europe to the Euro
as a whole on the brink of collapse. Basically, fundamentally leaders in all of
the Euro Area has had a choice between economic disaster or agreeing to pool
sovereignty over fiscal resources. This is what the ESM really is as well as
the new permanent fiscal surveillance mechanisms that the powers that the
European Commission have gotten with the Six-Pack and the Two-Pack and the
Revised Stability and Growth Pack, etc.
of these measures have been taken because the alternative was worse, the
alternative of a collapse of the Euro. Therefore, that is essentially the
essence of that the crisis has made what was previously impossible politically
possible because, back in the 1990s, when the Maastricht Treaty was written,
there were many economists and political scientists who warned politicians in
Europe, warned Helmut Kohl and Francois Mitterrand and other political leaders
of the time that you cannot have a common currency without a fiscal and
political union as well.
course, there was no political willingness to do that in 1992, 1993, but now,
because of the crisis, at least some of that political will has been found
because it is necessary, because if you don't do it, you will have to undo the
Euro and fundamentally, political leaders have chosen what I regard as the
pragmatic and sensible choice of rather than abandoning the Euro, which would
be enormously costly for everyone involved … Not just Greece, but Germany,
have chosen to try to fix and reform the institutions of the Euro Area in such
a way that actually they are viable in the long run, and I think this is the
right approach, but it entails that governments are going to have to hand over
considerably more political and economic … especially fiscal … sovereignty than they were willing to do
before the crisis.
was indeed there in the beginning, but we were wondering whether the deepening
of the crisis was driven by political motives, and I'm saying this because of
the spasmodic measures that seem to have been taken since the beginning, and of
course, the European Union was not prepared. There are concerns about that.
There are concerns about the sincerity of the efforts, but of course, this is a
huge issue. Maybe we can talk about that some other time.
don't we focus a little bit on Germany and its role in the European Union? My
question would be what is the balance,
and what are the limits between exercising leadership and having an
authoritarian attitude for which Germany has been accused recently?
of all, there's no doubt that Germany is the undisputed political and economic
leader of Europe at the moment. Absolutely no doubt about that, but I think we
should also be clear that that position in Germany is in many ways accidental.
Indeed, Germany, if you like, has been very lucky because Germany did a lot of
very deep structural reforms in its economy back in 2003, 2004, the harsh reforms
and the so-called Agenda 2010 that then Chancellor Gerhard Schroeder
meant that when the global crisis hit, Germany was, so to speak, prepared. They
had already reformed many of their domestic institutions, which means that,
combined with the fact that emerging markets have grown very dramatically
throughout the crisis up until very recently, and there of course, major export
markets fought for Germany, Germany did very well during this crisis, but there
was a significant degree of dumb luck involved with that from the perspective
of German policy, because when Germany did this, six, seven, eight years ago,
it wasn't to prepare for the crisis. It was something they did because the
German economy at the time was doing very poorly.
that it's only less than 15 years ago that Germany was regarded as the sick man
of Europe. German strength is in some ways accidental, and we should not expect
it to be a permanent feature in the Euro Area the way it has been during this
crisis because at the same time, of course, what the crisis did was that it
undermined the political and economic standing of all the other major Euro area
countries, noted to be France, Italy and Spain.
Germany really stood alone, if you like, as the undisputed leader of Europe
during this crisis, but I don't believe that is going to last because I believe
that as a result of some of the reforms that has been taking place in a number
of the crisis countries, they will eventually return to growth, and therefore
improve in economic strength and therefore also political standing. We
shouldn't assume that what we're seeing now in the Euro area is permanent.
with respect to the accusations of Germany for having an authoritarian or
dictating nature during this crisis, of making very, very large demands on
other countries in this crisis, I think, as I said earlier, there is a very
clear and very evident political requirement that when you receive a bailout
from another country, then this country or the IMF or anybody else that
provides the money is going to want to have control over how this money is
spent, and it is in this regard that Germany's demands should be viewed, and I
would also say that we can certainly debate whether or not the precise amount
of fiscal austerity that has been imposed on, for instance, Greece, Portugal,
or some of the other peripheral countries, have been optimal or whether less
would have been better.
think there's no doubt that in hindsight, less austerity would probably have
been better, but on the other hand, I think there's equally no doubt that more
and quicker structural reform in Greece would also have been better. I, for
instance, believe that it is very, very strange to realize that it is only now,
more than three or four years into the crisis in Greece, that the government is
actually beginning to contemplate laying off some public workers.
think that if you compare to some of the measures that were taken in, for
instance, the Baltic countries or Ireland, for that matter, where you saw deep
structural reforms of the public sectors much earlier in the crisis and
therefore, these countries have generally also performed better in recent
quarters. It is clear that many of the demands for change that came from
Germany and the IMF and the rest of the Euro Area and the ECB for reforms in
Greece was related to the fact that Greece needed a lot of reforms, and Greece
fundamentally had a, in my opinion, deeply uncompetitive economic system.
Greece exports very little, apart from tourism. Some shipping services and
others, but it has very little exports of goods.
part of that has to do with what I regard as exorbitant political influence of
Greek labor unions and other institutions.
Partly, it has to do with, in many ways in my opinion, a fundamentally
corrupt political system that you have had in Greece in many years where you
received a job in exchange for votes. Many of these things needed to be changed,
and the fact that Germany demanded that they be changed in return for providing
financing is not something that I think is the same as saying that German (sic)
had an authoritarian nature.
basically would turn it around and say, I think that in some ways, it
represents probably the best chance that Greece has had to reform itself and
get rid of many of these uncompetitive and dysfunctional institutional features
that its political and economic system has had basically since the end of the
dictatorship. It's a great opportunity for Greece. It is only unfortunate that
it came as the result of this deep economic crisis rather than as a bottom-up
demand for reform politically and economically, demanded by the Greek voters
themselves before the crisis.
couldn't agree more with you that Greece has had to have done its homework
much, much earlier; however, let me ask you the same question using a different
term this time. Could it have been wiser for Germany, in the spirit of European
solidarity, to make these reforms -to the extent that it could influence them,
of course - less painful in the sense of designed to have less gain? For example,
having lower interest rates. After all,
the European Union has struggled for several years to create a European
identify for people that have been completely different, although they were on
the same continent. In that sense, maybe the German leadership could have been
manifested in a more flexible way. What do you think about that?
think that there's no doubt that the initial rate of interest that was charged
on the loans offered to Greece in May 2010, absolutely, they were much too
high, and they have subsequently been lowered. That was clearly, in retrospect,
a mistake made by Germany. It would have been better, much wiser, to have
adopted immediately the model that is now adopted, which is that you give loans
at very low rates, similar to the rates that are offered by the IMF on sort of
concessionary terms because that would clearly have helped the economic
confidence in Greece and elsewhere, and I think that has been acknowledge by
the German leadership, certainly by the ECB and other members of the European
Commission, Commissioner Rehn and others, that this was a mistake.
that sense, absolutely. Initially, to follow up on what you said, giving these
loans at low interest rates would have been precisely an expression of European
solidarity from the beginning as you mentioned, and I think in retrospect, that
would have been far, far wiser by Germany and other Euro area economies that
were pushing for high interest rates at the time.
no doubt that Germany and other Euro area members clearly have also made
mistakes and have learned some valuable lessons during this crisis, and I think
it is helpful to see, or it is encouraging, therefore, to see that when you
look at the permanent features of the ESM,
it is going to be giving such loans potentially in the future, the rules
for those loans are such that they will be given at very low interest rates,
similar to those offered by the IMF, which is clearly an indication of much
more Euro area solidarity in economic terms than was the case early in this
our listeners, we remind them that ESM is the European Stability Mechanism.
Greece, despite the reaction against some European countries, against the IMF,
there are still several political parties that are pro European Union. However,
they struggle with the numbers in the different polls, and I found very
interesting a distinction, actually an observation that you made in another one
of your papers about the anger giving its place to fear, and I would appreciate
it if you could elaborate for us on that, since we are concerned because the
extremist right-wing party, Golden Dawn, is already the third party, according
to the polls.
what I'm arguing is that even in a country like Greece, which has gone through
a very traumatic economic crisis and suffered a tremendous economic recession,
even in Greece, but certainly also in every other Euro area country, the
reality remains that as I laid out earlier, if you choose at this point in time
to adopt policies that are advocated by Golden Dawn, canceling all the Greek
debt unilaterally and thereby likely exiting the Euro, the outcome of that will
be further and much worse economic disaster. Therefore, to put it crudely, the
reality is that every one, because most populations in Europe are still
relatively well off, they are still also aging in demographic terms, and that
makes them naturally more conservative because they have, quite frankly, a lot
to lose even if they, as is the case in Greece, have already lost a lot.
that is what I mean that when you have an economic crisis, initially you are
angry at your political leaders for having brought this crisis upon the
population. There's no doubt about that. It's exactly the way democracy should work.
what you want in some ways, and therefore, you are willing to look at
alternatives and perhaps, there is a party like the Golden Dawn or other
extremist parties in other European countries that offer a very easy and
seductive solution to the problem, but as the economic crisis deepens as has
been the case in Greece, and I think we saw this quite clearly in the case of
the two elections we had last year in Greece that as we got closer and closer
to the edge, if you like, then there was a rethink among quite a lot of people
because they were not willing to take quite the risk when it came down to it
and the decision had to be made. They were actually not willing to take that
risk because they were more fearful in the end about what the prospects of
these radical parties would actually be.
is what I mean when I say that in the end, as the crisis grows deeper, eventually
in countries that share the characteristics of the Euro area countries, meaning
countries that actually still, relative to its neighboring countries, are
relatively wealthy and are aging in population, they will vote more
conservatively because fear for the future will trump their anger at existing
do you predict for the next European Parliamentary Elections next about the
chances of extreme radical parties absorbing the dissatisfaction?
certainly would predict that a number of the extremist right-wing parties
across Europe, in Greece, certainly in France, maybe also the UK, will do very
well, so I would predict that you would have a very unruly European Parliament
starting next year ( Note: in 2014).
I would not, however, predict that these parties will get the majority of the
European Parliament. I would expect that the existing European People's Party
and the Socialist groups will still together have a majority, which essentially
is the same way as another way of saying that in the end, the European
Parliament will still be able to operate as a parliament, which is very
important, of course, because it has a lot of influence on a lot of these
processes in the Euro area.
would predict that it will be more unruly but ultimately, that the
establishment parties … In a way, not dissimilar to what we have seen in
Greece, where obviously, the two old parties have joined together in a
coalition with a majority and is essentially keeping the ship or the train on
the track, so to speak. I would expect some of the relatively same thing to
happen in the European Parliament.
Kierkegaard, thank you very much for this interview.