Handelsblatt Global Edition: Looking back on the creation of the euro and its forerunner the ERM, there was some academic doubt whether the result would be economic convergence within Europe, or divergence. Of course, politics prevailed, but pressures undoubtedly arose. How do you review that debate?
Panos Tsakloglou: Until the mid- to late 2000s there was convergence, but that process broke down with the current crisis. The big question now is what will happen in future. Can we have a monetary union without fiscal union – which in theory can happen only in an optimal currency area – and synchronization between economies?
The original thinking was that a common currency would help achieve a common business cycle, subject to the differential impact of external shocks across countries. However, that did not turn out to be the case.
If you look at historical precedents, the only successful monetary unions are those that were also fiscal unions. But a fiscal union requires a common budget, and a common budget requires some form of common state entity. Currently, this is not feasible, as in many European countries euro-skeptic parties seem to be on the ascendant.
Yet we may still see some form of common fiscal policy emerging in the near future, in the form, firstly, of Eurobonds financing large pan-European infrastructure projects. Another possibility could be a common unemployment insurance scheme. Without those kinds of initiatives we could be heading for the end of the road.
There is also a need for steps in the direction of further economic integration, some of which in fact have already taken place, such as the European Stability Mechanism (a kind of IMF for the euro region). The banking union is also such a step, despite the fact that it does not include a common deposit guarantee scheme. Nevertheless, overall, the system we have now is still quite loose.
There used to be a sense, particularly under ERM, that policy adjustments to keep harmony between the member countries should be two-sided. But that symmetry as envisaged was lost somewhere along the way? Do the corrective processes within the euro zone work properly now?
In theory, there should have been processes not only for the deficit countries but for the surplus countries, too. In practice, this is not currently the case.
Can we all be Germans, running large current account surpluses? Clearly not because, as Nobel laureate economist Paul Krugman says, for us to all have export surpluses we would need to find a colony on Mars to trade with.
Of course, that does not mean we can all run that large persistent deficits either; prudence is needed there. But coordination within the euro zone cannot be just for the deficit side. If this asymmetric approach to adjustment continues, there will be two problems that affect Germany, and threaten the very existence of the euro.
The first issue is economic. If the euro zone were to break up, the German currency would rise to stratospheric levels. For an export-oriented economy like Germany, the ensuing loss of competitiveness would be a very serious blow.
The second is political. Germany is currently rightly perceived as a global power. This is because it is at the helm of the E.U., of which the core is the euro. Jeopardizing the euro endangers that preeminent status, especially taking into account demographic trends.
Since Germany’s principles appear immovable in key respects, doesn’t that critical fault line render the outlook for the euro project prohibitively difficult?
Necessity is the mother of invention. Many things have been accomplished in a short period of time during the crisis period, and I hope that this process will continue and, eventually, lead to genuine economic integration in the euro zone.
European integration has always been an elitist project that depended on delivering progress to help maintain the public’s support. Will there in future be more emphasis and spending on policies that boost productivity, as is necessary, on skills, training and infrastructures? As it stands, given Europe’s aging societies, we will need some kind of super-productive labor force in order to maintain high living standards.
From a Greek perspective, the current political climate worries me. Greece suffered a lot under German occupation during World War II, and anti-German feeling was riding high for some years after. Then they subsided, and when I was younger we tended to view Germany as a prosperous and peaceful partner. Unfortunately, sour feelings have resurfaced, while anti-Greek stereotypes have developed in a number of European countries.
How about the most recent developments and prospects? It seems extraordinary to an outsider that the Tsipras administration called a dramatic referendum, which shocked Europe, then won the national vote to resist austerity, but then accepted a harsh austerity deal, and was then nevertheless re-elected!
The amazing thing is that in 2014 the economy was turning around. The growth rate was positive, unemployment was declining from horrendously high levels, the budget was in a healthy primary surplus and our current account was in surplus too. Moreover, within just two years of the largest debt restructuring in history, Greece was back in the international capital markets.
But then there were elections, and historians in future may find it hard to understand what happened next.
Under the first Syriza government political capital was wasted. There was a chance to align with both the Greek people and the pressure from Europe, by cleaning out the ancient regime, which was perceived as pretty corrupt and unreconstructed. Instead Prime Minister Tsipras and especially then Finance Minister Yanis Varoufakis were sending confusing messages giving everyone lectures about democracy, as if the rest of our euro zone partners were not democratically elected.
That brinkmanship led to increased uncertainty, economic slowdown, deposit outflows, capital controls and eventually a third program. The result of this policy was an increase in our debt of some €40-45 billion, relative to trend, within just seven months.
Nevertheless, politically, with Syriza returned to office in this environment, Mr. Tsipras cuts a dominant figure. The third bailout program that he signed is extremely front-loaded, with almost all the fiscal measures expected to be delivered in the first six months.
If the first review of the new program is completed successfully, there are many benefits waiting to be reaped: banks’ recapitalization, discussion about measures to be adopted for easing further the Greek debt, participation in the ECB’s QE program, etc.
Hence, it is not unimaginable that the program will succeed. In fact, if the fear of Grexit with its devastating consequences is significantly diminished, Greece may return to positive growth rates in the second half of 2016.
Andrew Shouler is a freelance journalist. To contact the author: email@example.com