How severe is the eurozone’s debt crisis now?
Europe is still battling between recession, deflation and very slow growth. There has been a gap between the more competitive economies and high-surplus economies. For example: Germany has bigger surplus than China which it should invest even if it invests just only in its own infrastructure which would create more stimulus, more jobs which allows for more consumption and that will help the European economy. In the view of the markets the crisis has been mitigated if not completely solved. However if you look at the debt of certain countries, for example Greece, if you don’t have growth in Europe we are getting into a spiral of cutting, further recession, more cuts… and that just means that the debt is just growing.
Greece has capacity for investment, it is a small country but still we have millions of tourists. Tourist industry… food industry is a growth industry — particularly, the types of foods which are based on our traditions. That is becoming a niche in many parts of the world. And if you combine that with health and tourism, culture…renewable energy… we have a lot of sun, wind and geothermal. We are No. 1 in Europe in exports of fisheries. Greece has a very educated younger generation. Many of them have left for other countries but if investment comes, they could return.
In Europe, we started the quantitative easing (QE) seven years after the crisis. There are two basic issues in Europe. First of all, Europe is at a turning point as far as its own basic structure is concerned. Secondly, there is a problem with the architecture of having a common currency with different economic policies and different levels of economies. We were a less competitive, less developed economy, than say Germany, and this meant that with common currencies we could not keep up. That was a structural problem.
Is it right to say that your fiscal policies were not integrated?
That’s right. This means that we have reached a crossroad where we say either we go into a deeper integration or we start feeling the pressures of splintering and going our own way. Some countries were worried to pull their own resources, I would say pool their risks in a common European Union, which then moves toward a banking union. That means then that whether you have your money in a Greek bank or an Italian bank or a German or French bank your euros are equally valuable and equally guaranteed. We haven’t reached there but we have done the first few stages, which is the monetary, the resolution mechanism. Now we have to get the guarantee. Guarantee, of course, means pooling risk.
An insurance company pools risks of thousands of people to give insurance to people who need it and that creates a sense of security. However, some countries say why should we put in our own capacity in pooling this risk, particularly, if we see ourselves as very separate nations. That’s the first problem. Second problem is the sense of can we become one family.
Q: At the height of the crisis, Greek people couldn’t withdraw their savings from their bank accounts, firms couldn’t make payments…
When the crisis began in 2009-10, I took the measures in order to avoid a run on the banks and therefore a need for capital controls. Unluckily, every government tried to do their own thing. I do hope now we are moving to a final stage of stabilisation and moving out of this crisis. Greece has made the deepest and quickest fiscal adjustment of any OECD country ever and that has taken a toll on not only the Greek economy but Greek families. 25% loss of GDP in these years, which is a huge loss but of course, has meant that moving away from a more nationalist based outlook of each other’s interests. Unluckily what happened with this sovereign debt crisis is that we started blaming each other rather than looking at how we solve the problem and we have heightened nationalism. That I think is a rising threat around the world, at a time we need more cooperation. Because of insecurities, changes, fluctuations of the markets, major technological changes our societies are going through contortions. Part of our societies can adapt quickly to these global economic changes other parts are feeling left behind. Some politicians like to tap in to that, through populism, through fear, renewed nationalism, tribalism, religion... Europe is not immune to this particularly because Europe is an experiment in how we can get beyond borders. This is the second problem: Europe is in transition in many ways. It was not accepted that a stimulus would be a good policy. This was done by the U.S., China. India also had a different approach. In Europe, the idea that austerity will bring …and everything will be fine did not convince the markets and helped very few economies. So we have been in a sort of a permanent borderline either a recession and now a deflation and this has been a drag on the world economy. These two elements have been playing together. If you inject into that the problem of the refugees, it becomes a huge problem and not a simple one. When we talk of one million people coming in last year and doesn’t seem like there would be an end. This is another thing that has stretched the capacity of Europe to work together. Some may take some refugees. Some may close borders…it’s like sort of your neighbour’s problem you throw it on to your neighbour but then this just moves the problem around and exacerbates it.
Is the banking crisis a less severe constraint now on the Greek economic recovery?
We just recently recapitalised our banks. The problem of the banking crisis …this is not just the Greek problem…has been so since 2008 is that even though at some point we did calm down the markets the banks became very reticent in investing. They would rather hoard the money to make sure that their accounts look good but that’s not their purpose. It is in fact to invest, take some risk and that’s what helps the economy. For a number of years now in many countries in Europe banks were slow to invest.
And if you particularly think of areas where we should… like small medium sized companies, start-ups, venture capital and so on that is riskier and that is an area which would create more employment, more innovations and so on…banks have been very risk-averse in that area. So that has been a drag on the economy. In Greece, we had an extra problem. All the discussion about leaving the European currency, the euro, made it more difficult. You can imagine having a euro or dollar, living somewhere and thinking maybe in the next few days or next few months or so this will be converted to a much cheaper or much less valuable money then you pull your money out of the bank you will hide it under the mattress and maybe take it to another country. You will not invest, you will not consume. Banks will not borrow or lend. And international investors, FDI will not come because investors will wait and see if they go to a cheaper currency I will have much better price.
There was such a freeze in Greece and what steps did you take to overcome them?
There was a freeze and that hit the economy…that by itself, while we were adjusting and making very very difficult sacrifices, the climate around Greece was devastating. So this is where I will say it is partly Greece’s problem but it was also very the responsibility of our common family called European Union to basically guarantee and say they are doing their job here we will not even discuss the idea of them leaving the currency. Had that been done at an early stage we would have been in a much better situation. But even till last year there was this discussion. So six years of insecurity is not good for any economy.
Take Greece as an example: we have done much which has been positive but the way the European community reacted, I think there's a lesson to be learnt. When Draghi [European Central Bank President Mario Draghi] in 2012 finally said we will do whatever it takes, we will even buy bonds of some of these countries to make sure the prices are low, he basically proved that fact that if we work together and consult and have strong reactions to some of our problems. In this case, it was the fears of the markets, which were overblown. You can deal with these issues. Maybe not completely solve them, but you can deal with these issues.
How difficult is it for politicians in Europe to sell this to the voters in their countries?
Of course, I had to…first of all when I was elected (in late 2009) I was saddled with the debt of the previous government.
Did you know this at that time? When did you first come to know of the actual size of the budget deficit?
No, I didn’t. And that was one of the problems. Well, in the first two-three weeks when the finance minister started gathering the data. Unluckily they had false reports from the previous government on what the level of deficit was. While they said that it was 6.5 ([% of GDP) officially just before the elections it ended up to be 15.6 (% of GDP) which is a very big difference. Actually, the difference was part of the problem but the fact that they had been misrepresenting the deficit was an even bigger problem because that created a deficit in credibility. I always say, having gone through this crisis, we had a deficit in our competitiveness, current account deficit but the worst deficit was the deficit of credibility and trust. So we had to restore that. To do that I had to take very difficult measures.
How soon did you reveal the real level of the government deficit?
Well, quite soon. I didn’t think that there was any reason to hide it because if I did hide it, it sooner or later it would be revealed. It would have been counter productive …and I would have undermined my own credibility and my country’s credibility. The message, I always say, is that this crisis is an institutional one. It was not so much an economic one but how we governed, how we managed the country. We have resources, we have capacities, we have human capacity…how we manage this country is really the issue. Therefore, brining in transparency in statistics… We have an ancient Greek word we call it ‘parrhesia’ which, if you Google it, means having the obligational responsibility of telling the truth even at the risk of your own life. So I knew I was taking big risk. Had I not done that I wouldn’t have been able to push reforms.
The first thing we did is we built up a statistical bureau which was completely independent of the government so that nobody could question the numbers. We put all the resources online — all the expenditures of local and central government were put online. We started dealing with the waste of resources, even some times corruption… electronic prescriptions for medicine. For example, a doctor would prescribe and you give him or her a kickback of some sort and they would over-prescribe that would then go to be paid by the public system. The electronic prescriptions we put in cut the cost by half, which was still half a billion euros. We cut it by 200 million euros, which was exactly the money we made by property taxes. So this is not just cutting, it is basically more transparent and more efficient government structures. When I did take on the prime ministership, I had to face very difficult decisions, be very honest and at the same time of course in order to cut the deficits and give the sense that they won’t just balloon. I also had to take very difficult measures in cutting salaries and wages. I didn’t have the luxury or the tool of the [currency] devaluation of the euro. We had to do what is called the internal devaluation. While other Prime Ministers will say the Turkish lira, the peso or something… we let it drop and you are still getting say 1,000 peso a month and it has less purchasing ability. I had to actually go and cut salaries. That hurts more politically. People see this: I was getting 1,000 now I am getting 700. Who is to blame? Prime Minister. I had to make those decisions. I knew they will cost me politically. Had I not done that Greece would have been in default and gone through a catastrophic spiral. Still the hit has been huge. Many mistakes have been made along the way, I’d say some times because of the ignorance. I think what we did in Greece was very much what was expected of us but …we took a number of decisions in Europe which were wrong …this has been a test for Europe. Europe is at a crucial turning point. Basically at crossroads of how we can integrate into a more federal type system.
What would that entail?
It will entail more common economic policies that we look at each other not so much as nations but as citizens. So if somebody’s unemployed then we give unemployment benefits not through the Greek government but through the European structures. A political system, which will be more transparent. For example we have to elect (election by the citizens) the head of Europe rather than sort of appoint. It could be by a parliamentary system or a presidential system but I would say bring in a democratic legitimacy. Europe has also been a bit of a project of the elite. It was there as a very grand and very important idea of never have walls again and link each other…
What sort of opposition is the idea facing?
Lot of opposition unluckily because of the crises… economic, financial, climate, the issue of movement of populations, whether they are migrants or refugees, conflicts also and there are pressures on our societies to adapt. Europe is still an attraction to so many people because of its social systems, health systems, employment systems, and so on. Lots of people are saying oh what we need to do is go back to our tribal instincts. Lets close our walls, lets close our doors. There is still a majority in Europe that is saying that but the forces of nationalism and populism, xenophobia, racism and so on are on the rise. The extreme case is Syria.
How long before we begin to see some semblance of normalcy? Will it get worse before getting better?
Some times, the governments are motivated to respond when they are in face of a crisis. That’s what happened in the sovereign debt crisis. We created new institutions which we wouldn’t have done otherwise. I want to believe that we don’t need to have another crisis in order to move forward but unluckily in politics some times a crisis is needed to give the opportunity to leaders ... Right now we have the refugee crisis. The economic crisis remains as a problem, not as severe. It could be months, it could be years but this is a historical period which would be the true challenge to see if the European experiment can succeed or will fail. My hope is it will succeed because I believe it is an experiment for the world. If we can succeed in one region of the world, working together beyond our differences, our cultures, our historical animosities and deal with the problems of the world not simply passively adapting to them but actually taking the lead and saying there’s an environmental crisis, lets lead globalisation, lets humanise globalisation, lets see how we fight inequality…
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