May « 2012 « Euro

Archiv: May 2012

The Choice between a Hard Landing and a Crash

23. May 2012, von Alexander Tietz, Comments (0)

by Nikos Chrysoloras*

Many would argue that the phrase “they all got what they deserved” could serve as a stand-alone snap analysis, on the inconclusive result of May 6th’s elections in Greece. The centre-right Nea Democratia (ND) and the centre-left PASOK – the two parties which have dominated Greece’s political landscape since the restoration of democracy, in 1974 – got what they deserved for allowing the country to go bankrupt under their watch. Both suffered unprecedented losses in polls, attracting fewer votes than any other time in the country’s post-authoritarian history. Also, the eurozone Member-States, especially Germany, got what they deserved for imposing the most extreme programme of austerity measures ever implemented in modern history. The outcome of the elections in Greece is a huge blow to the EU-backed Adjustment Programme, since the majority of the population rejected it, casting doubts not only over Greece’s future, but also on the eurozone’s stability as a whole. Markets’ sentiment and reactions since May 6 are indicative of what is going to follow…


But such “got-what-you-deserved”-analysis would be superficial. First of all, the numbers are more complicated than they look: pro-Adjustment Programme parties (including those that did not pass the 3% threshold to elect MPs) got almost 40% of the vote. Hence, although not supported by the majority of the population in Greece, austerity attracted an extremely high number of votes, despite its severity. Moreover, the Coalition of the Radical Left (SYRIZA, 16, 78% of the votes) and the Democratic Left (DEMAR, 6, 11% of the votes) also support Greece’s membership in the eurozone, although they oppose the Memorandum of Understanding between Greece and the Troika of International Lenders (ECB, EU, IMF). The same goes for the Green Party (2, 93% of the votes), the populist LAOS party (2, 90% of the vote), and the leftist “Kenoniki Symfonia” (0, 96% of the vote). In fact, the only parties in Greece, which clearly favour an outright default, a return to the drachma and an exit from the EU, are the Stalinist KKE (8,48% of the vote) and the Neo-Nazi “Chrissi Avgi” (6,97%), while the nationalist “Independent Greeks” (10,60% of the vote) are ambiguous on the subject. Thus, despite the painful measures, the insults by EU governments, the lecturing and often demeaning comments in the international press, and the implementation deficiencies of the Adjustment Programme, an overwhelming majority of Greeks still supports the country’s membership in the eurozone and the EU, while almost 4 in 10 Greeks voted for even more austerity.

Obviously, the election result reflects the deep fragmentation of Greek society. Greek voters, blaming the two big parties for the fact that their country is in recession for a fifth year in a row and unemployment has reached record highs, chose to support fringe formations in the far left and far right, all of which blame the Adjustment Programme for Greece’s woes. PASOK lost 30 percentage points since the last election, in 2009, while ND suffered a 15 points drop from its last historical lows, also in 2009. Both are blamed as well for economic mismanagement, nepotism, incompetence and corruption. On the other hand, under ND and PASOK’s watch, historically poverty stricken Greece made it to the list of the world’s 30 richest countries and, before the global crisis, it was ranked among the 20 most developed nations in the world, according to the UN Development Index.


Their mixed record is reflected in last Sunday’s results: PASOK and ND lost millions of votes, but no one replaced them in their hegemonic place in Greek politics. In fact, no party attracted more than 19% of the votes. It is therefore clear that Greek voters are divided about what to do next. The once stable ground of old certainties is shaking. And obviously, there is anger and frustration, among a significant part of the population. Anger and frustration explain the rise of Chrissi Avgi (Golden Dawn), which attracted almost 7% of the vote.


Readers should know that Chrissi Avgi is not a “typical” far-right party, even by the stretched standards of European extremism. Numerous members of the party have been arrested in the past for attacks against immigrants and leftist activists, while at least one of them served time in prison for attempted homicide. Its leader Nikos Mihaloliakos made no effort to hide his intentions, during his triumphal post-election press conference, in Athens: “All those who have betrayed our country, should now fear us. We are coming!” Before that, the journalists who had refused to obey his command and stand up to attention when he entered the pressroom of his party’s office were kicked out.

Chryssi Avgi started as a fringe organisation of “Nationalist Socialist Studies” more than two decades ago. It published a little known magazine, often praising Hitler’s contribution to humanity, while its muscular activists and its leader, casually exchange Nazi salutes among them. Until 2010’s municipal elections, it drew very little support. Besides, Greece has suffered a brutal Nazi occupation during WWII and has tasted the bitter experience of a military dictatorship, between 1967 and 1974. However, after the financial implosion, the influence of Golden Dawn’s virulent anti-immigrant and anti-IMF rhetoric, often accompanied by “militia patrols” of its members in the most crime-stricken neighbourhoods of Athens, grew faster than its most fanatic supporters could dream of.


The next steps

 At the same time when a non-negligible part of the Greek population is flirting with extremism, while another significant part continues to support the country’s membership in the EU, eurozone Member-States have made clear that if Greek voters choose to oppose the Adjustment Programme in the forthcoming elections, which will be held on June 17, then the financing of the Greek economy and banks will stop and the country will be forced to abandon the Eurozone. So, what is the right course of action?

First of all, I have to admit that I feel incredibly guilty for making suggestions from the safe distance of Brussels, and while, unlike hundreds of thousands of Greeks (including members of my own family), I still have a job. But I am totally and fully convinced that, even though austerity indeed depresses economic output, the Adjustment Programme is not the root of Greece’s woes. Greece’s growth model, based on fiscal laxity, cronyism, nepotism, and corruption, is unsustainable in the absence of cheap credit. In fact, the Greek economy went into recession not after the implementation of the MoU in 2010, but well before that: immediately after the global 2008 financial crisis, which signalled the end of cheap and easily available credit. Already in 2009, Greece ran a huge public deficit (15.6% of GDP) in order to avert the recession, and it failed to do so (GDP contracted by 3.2%). So even if Greeks ‘kick out’ the people of the Troika, cheap credit will not be made available again in the country, for decades to come. Greek economy will keep contracting. In a sense, Greece now finds itself in “the desert the real”, as its standards of living are adapting to a world without loans, and reflect the actual production of wealth in the country.

Expansionary policies, like those followed during the 1980s, even if they were feasible today, will not stimulate growth, just as they did not stimulate growth during the 1980s (the economy was growing at an average annual rate of 0,75%, while public debt quadrupled, and inflation was consistently above 20%). Most importantly, they will not solve any of the problems of the Greek economy: public finance mismanagement, over-reliance on public and private consumption, lack of medium and large export-oriented enterprises, extremely high percentage of self-employed professionals, low competitiveness, tax evasion, corruption, and weak administrative capacity. Neither is drachma and depreciation a solution, while comparisons with Argentina are out of place. Unlike Argentina, Greece does not have its own currency to devalue. It will have to introduce a new currency from scratch. Leaving aside the logistics of such endeavour, printing a new currency while already in a state of default is a suicidal move. Unlike Argentina, Greece is not a net exporter of raw materials. Hence, it will have no means to support the new currency, which will have no exchange value. The country will be unable to pay for oil, gas, food, and medicines with drachmas. Chaos will ensue and uncertainty will spread to the rest of the Eurozone. If we allow populism to prevail, the EU will lose a strategic outpost at the crossroads between Europe, Asia Minor and Northern Africa, while it will have to deal with a new source of tension in the wider Balkan region.


At the same time, the Greek economy will keep shrinking, until we decide it’s finally time to move on with reform. This is no easy path. Tens of thousands of Greeks will find it difficult, even impossible, to adapt. Changes will take years to bear fruits, and Greece can only hope that, with the help of the eurozone, it will be able to support the most vulnerable. Hard and insensitive as it may sound, in my most humble opinion, this is the best of all possible worlds for Greece at the moment. Restoring the competitiveness of the Greek economy and changing its structure is the only way for the country to survive in the absence of cheap credit. The gigantic support programme by EU and IMF can only help Greece escape a crash. But the hard landing cannot be avoided. So the greatest mistake of the Troika so far was that it promised quick solutions, both to the Greek and the German voters. The hard truth is that Greece will have to stay in intensive care for years to come. Embracing this truth in Athens, Berlin, and in Brussels, will eliminate uncertainty, a key factor, which has led the Greek economy into depression.

In addition, parametric changes to the policy followed by the eurozone can and should be made. First of all, giving the medicine of Greece to everyone else in Europe, even to countries that run primary surpluses, is a German fixation, which is difficult to understand. If consolidation programmes relax in the rest of Europe and the continent avoids a double dip recession, then the Greek economy will also benefit from increased tourist arrivals and stronger exports. More importantly, from now on, conditionality for the disbursement of cash from the bail out mechanism should be tied to meaningful reforms that will improve the quality of life of the Greek people. A one-year extension to the deadline for reducing the deficit below the 3% threshold would also give the Greek economy some valuable breathing space, at a very low cost for the eurozone. All this not much, but it’s the best we can hope for in Greece. The alternative will be a disaster for both my country and Europe. Unfortunately though, as we approach the date of the new elections in Greece, it seems that both my countrymen and many European politicians are determined to jump from the cliff, just to see what happens.

*Dr. Nikos Chrysoloras is a Brussels-based correspondent for Kathimerini, Greece’s leading newspaper and a Robert Bosch Stiftung “EU Journalism Fellow” for 2012.

Japanese Views on the Euro – or Whether the Plane will Eventually Fly

22. May 2012, von Alexander Tietz, Comments (1)

by Daniela Schwarzer

During a recent symposium on global governance held in Tokyo, a Japanese moderator said: “Flights and reforms have something in common, both in Japan and in Europe. First, a delay is announced, because no one dares to say the truth. Later, it turns out that the flight has been cancelled.”

I found this rather thought provoking. The other thing was that the European participants, who spent most of the time explaining crisis management in the euro area, were much more optimistic about the economic and financial perspectives of the EU than the Japanese participants were of their own and the euro zone’s future.

It is a frequent phenomenon that external observers are more ready to address weaknesses and raise the taboo issues. And indeed, we discussed eurozone dissolution or temporary exits of Member States and the deep risks attached to both options, back and forth. One of the main factors that seemed to shape my Japanese interlocutors’ perceptions about the euro were bond spread movements. The fact that market movements rather than economic fundamentals shape the perceptions of many observers is an expression of Europe’s biggest problem: we are in the midst of a self-fulfilling crisis in which market perceptions determine collective behaviour – and tend to make the worst expectations come true. Europe is particularly vulnerable to such effects, due to its complex decision-making system, the lack of clear crisis communication and, most of all, because it has not been able to solve the sovereign debt crisis in more than two years. Very recently, political developments add to the critical external perception of the crisis, the inability to form a new Greek government being the most obvious one.

There is a double problem of information and interpretation. In general, the further away one travels from the EU, the less information is available about the profound reforms that are on their way in several EU Member States, consider for instance in Spain or Italy. European self-perceptions stand in a stark contrast to external views. Enjoy this one: a senior Japanese speaker found that some European states were showing elements of Chinese-style state capitalism.

Moreover, the complex reforms that have reshaped the euro area governance system are even less understood outside the euro area than they are within. The complexity of the new rules and mechanisms is generally acknowledged in the EU. But its consequences are not considered rigorously enough. Tackling the sovereign debt crisis means re-establishing confidence, not only in public finances of Member States, but also in a governance system still in the making. The EU with all its complexity and lack of political leadership is not up for the challenge. Outside observers note that the eurozone has not been able to tackle the sovereign debt and banking crisis. Indeed, measuring the eurozone by whether the crises have been solved leaves it with a bad record. Measured by relative progress, we score much better. But this is not the criterion for many observers, given the complexity of things.

This is part of Europe’s Catch 22 situation: the eurozone needs to re-establish confidence among the outside world (investors, corporates, policy makers, journalists, think tankers, academics…) in order to solve the crises. But what if those observers want to see success in crisis management before they are willing to trust the euro area? The task for the eurozone is clear though not easy to fulfil. As good as it can, it has to overcome the problems of communicating political progress made in a complex multi-level system with a structural leadership problem.

All of this has to do with the plane and the question whether a signalled delay implies a cancellation. Things take longer round here, and all too often and to our own misfortune, progress is well hidden. We can comfort ourselves, as we know: it eventually happens, somehow. But: to the outside world we need to make positive European dynamics known, immediately and much more determined.

Dr. Daniela Schwarzer is head European integration research division, Stiftung Wissenschaft und Politik (German Institute for International and Security Affairs), Berlin.


Greece: the Euro’s Democracy-Compatibility Test

20. May 2012, von Alexander Tietz, Comments (0)

by Ferdi De Ville

The election of Francois Hollande as the new French president did not come as a surprise to anyone. It had – as I argued in a previous blog – been anticipated in advance in EU circles. This led to a reorientation of the crisis discourse in the EU towards growth and jobs as at least a complement to austerity.

Judging from the reactions, the results in Greece did come as a revelation to many. While I was also shocked by the images of the neo-fascist Golden Dawn celebrating its entry into parliament, I was not amazed that the traditional governing parties New Democracy and PASOK did not secure enough votes to constitute a parliamentary majority with each other (they together not even convinced one in three voters). It seems that some in Brussels, Berlin, Frankfurt and elsewhere were still hoping that behind the protesters on Syntagma Square, a silent majority of the Greek population supported the Memoranda policies because they want to stay a eurozone member. Quod non.

To be frank: what the hell were they thinking? While consistently laying all of the blame for the Greek (and euro) crisis with the Greek policies of the past decade, they were expecting Greek voters to once more support the parties that have reigned during this decade (and ever since the democratic revolution). They pressured the PASOK and New Democracy to sign a declaration that they would respect the agreement also after the elections (and thereby seal their doom). But at the same time expected them to appear as winners from an election that was all about dismissing this memorandum.

Also after election day, they seem not to have learned and changed their mind. Barroso, Merkel, Weidman and others have insisted that the Greek government honours the terms of the bailout. Or otherwise the peninsula has to leave the club. This equals to telling the Greek population that if they want to remain a member of the eurozone democracy will only be a farce for many years to come. At the time of writing this entry, New Democracy’s Antonis Samaras, Alexis Tsiparas, leader of the radical leftwing party Syriza and PASOK leader Evangelos Venizelos have failed to form a governing coalition. Unless the Greek president succeeds in bringing together a national coalition (behind a technocratic government?) we are heading to new elections somewhere in the middle of June.

Leaving aside the much debated question if the euro zone is ready to manage and deal with a Grexit legally and economically, I want to raise the issue of what this episode, and a possible more-or-less forced Greek exit, means politically. In my opinion, this is a crucial test for the compatibility between monetary union and (real) democracy. It is well known that the establishment of the Economic and Monetary Union with a single currency and an independent central bank entailed (voluntary) losses of autonomy for nation states in currency and monetary matters. Moreover, in the 1990s the members of the to-be-established eurozone argued that for monetary union to succeed, they also needed to agree to respect fiscal rules that were included in the Stability and Growth Pact.

This architecture eventually proved to be insufficient to prevent micro- and macro-economic imbalances to build up within the eurozone, which member states were unable to contain because of lack of competencies (e.g. on the interest rate or capital controls). The reaction, based on a mistaken reading of the euro crisis as being caused solely by governmental profligacy, has been to contain democratic sovereignty even further. Eurozone states that had to be rescued through emergency funding had to agree with harsh conditionality programs. And all euro zone states and most non-eurozone EU Member States agreed to stricter rules and enforcement of fiscal discipline through the so-called six pack and the Fiscal Treaty that prescribes the constitutional anchoring of a budget equilibrium. Of course, all of this has been agreed (if sometimes under much pressure) by democratically elected governments, and thus has still at least a semblance of democracy.

However, by insisting that a newly elected Greek government should respect an agreement that its predecessor has grudgingly agreed to or otherwise it will be (kindly) requested to leave the club, the eurozone is really trampling on its democratic credentials. What signal does this give to other countries in trouble? And also: policy-makers are blazing around that a Grexit would be an exceptional event, and that this acknowledgement would suffice to convince everyone (including investors) that there would be no contagion. But exceptional until when? Until another population decides through the ballot box that it no longer wishes to suffer to repay the debts that are a collective responsibility of the debtor states, but also of the creditor states and of the systemic defects of the monetary union? Until the Irish vote wrongly in a referendum again?

Paul De Grauwe is right to say that to save the euro forgiveness rather than punishment is needed. The self-righteous imposing of punishment by northern countries and calling this solidarity will self-defeat the euro. Northern countries need to accept co-responsibility for the crisis. The consequence of this will be the cancellation of part of Greek – and possibly also Portuguese, Irish and Spanish – debt that has by now become official lending. This is nothing less than real transfers, and thus unconcealed solidarity. But there is no alternative, and it has the virtue of clarity. If Greece leaves the eurozone (and possibly others), it may default on even a larger part of its debt. This should be explained by politicians in northern countries. It would make clear that transfers are an inevitable feature of a monetary union, and that this might be managed better, more transparent and less acrimonious on a permanent basis than each time after crises. The euro zone has to become a solidarity union or it will disintegrate, and the unravelling will not stop with Greece. Of course, such solidarity could also be democratically rejected in Northern countries. But in any case, the policy of muddling through has reached its limits. The euro now desperately needs a vision. People are not willing to make infinite sacrifices for a currency. The currency should be reformed so as to serve the people.


Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

Supported by