David Madden (SEESOX Associate; Senior Member, St Antony's College, Oxford)
Professor Loukas Tsoukalis spoke on this subject at SEESOX on 14 November. He spoke mainly about Greece as a catalyst in the crisis: and also about Italy, Spain and Portugal (and Ireland as an honorary member of the Southern European group): less about Cyprus, where the main problem had been over-exposure of Cypriot banks to Greek government debt.
Although a whodunnit, there was not yet a happy ending in sight. The worst economic crisis since WW2 would continue to have profound effects, and shake integration projects. The series of matryoshka dolls got uglier: the bursting of the biggest international bubble since 1929, a systemic crisis of the Eurozone (a currency without a state), and national failures of unsustainable economic models and dysfunctional political systems.
The creation of the euro rested on the assumption that either Germany would change, or that other countries would become more like Germany. Neither had happened. Germany set high standards which other countries did not follow: southern Europe partied on cheap credit. But German banks had added to the problem by recycling money to the “sinners”. Also, the statistics revealed that although there was fiscal laxity in Greece, this was not the case in Spain or Ireland: where accumulated deficits were not bad. The problem there was the banks. But all problems were none the less treated as if laxity was the cause, and austerity the solution.
When the crisis struck in Greece, both the outgoing ND government and the incoming PASOK government were slow to act/react. As for Greece’s partners in the euro, the reaction cycle was shock and horror/denial/punishment/buying time. The question was whether the problem was illiquidity or insolvency. It was treated as illiquidity, but Greece’s problem was insolvency and it got worse. Another question was sovereign default. Was it allowable? Since the answer was initially No, restructuring was delayed. In Ireland, the ECB forced the tax-payers to bail out the banks.
Greece had reduced its fiscal deficit from 15% to 1.5%: a record. But it had lost 23% of its real GDP: another record. The adjustment had been longer and more painful than necessary: because of ineptitude in Greece, incoherence of European governance, and the madhouse of financial markets. The troika and the creditors had basically asked Greece the impossible. Implosion might lead to explosion e.g. a revival of Grexit.
Professor Tsoukalis concluded with two observations. Germany benefitted more from the euro than anyone else, and therefore might have been ready to make more sacrifices; but internal political debate in Germany made this impossible. Secondly, there was no Greek narrative on the reform process. Instead, there was a series of Troika demands and Greek responses. By contrast, such a narrative had developed in Ireland and less so in Spain and Italy.