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Europe’s bumpy road to recovery

Athens, 1 November [Gulf News] – On the streets of Athens it seems the writing is always on the wall — whether the ubiquitous graffiti daubed regrettably around the city’s historic monuments as well as on humdrum buildings, or psychologically, for a citizenry that for decades has been used to episodes of distinct volatility and underperformance. Today Greece is again a somewhat traumatised society, one scarred by the ravages of recession and unemployment.

The hustle and bustle of the sweeping thoroughfares and many teeming sidestreets belie the country’s reputation for inertia in dealing with issues of economic governance that have persisted for time immemorial. In the crisis era, these conspired to help deliver a state of slump, financial distress and to an extent philosophical conflict with key European partners.

Just now, though, that vivid contrast isn’t featuring so prominently across the world’s media. It is the rest of Europe that is stirring again. More precisely, as British eurosceptics understandably insist, it is the European Union, not the continent itself, that is being shaken. Yet it will indeed be as if the very land mass is crumbling if events do not find a way to settle into some kind of order.

In the past week the Portuguese president has sought to debar a change of government, ratcheting up the tension between the EU’s technocratic drivers and the democratic will as demonstrated through national plebiscites. Commission President Juncker has even, heretically, admitted to the growing popular disillusionment with the so-called European project.

Meanwhile, an overwhelming migrant crisis emanating from the Mena region threatens to undermine the authority of Angela Merkel, German Chancellor, as the increasingly visible leader of the putative superstate. And, all the while now, the UK is trudging step by step towards a renegotiation objective, or Brexit, that might just apply a coup de grace to the whole experiment in supranational, federal ambition.

Economic conditions on the continent these days are soft to middling, benefiting ironically from the slide of the euro. Yet it remains a slow-growth, rather sclerotic arena, one seemingly reliant on increasingly heavy doses of medicine from the European Central Bank, as constantly monitored by the financial markets.

Amidst all of which, the turbulent period very evident in Greece only months ago has slipped away from the front pages, as a re-elected government seeks to put flesh on the bones of a third bailout programme for the country.

Time, then, to test the waters of this shifting current of Brussels-defined, locally-administered austerity, as was accepted, most remarkably, in the wake of a referendum that appeared to defy another such template.

Gulf News spoke with Professor Panos Tsakloglou, a leading economist, until recently engaged in negotiations on behalf of Greece with the European bodies pursuing a deal for the country to break its policy impasse. His tone was suitably regretful towards the sorry state of affairs reached.

Tsakloglou was chairman of Greece’s Council of Economic Advisors in 2012-2014 in the government of Antonis Samaras. During that time he was Greece’s negotiator with the (EU-IMF-Commission)Troika and representative of Greece in the Eurogroup Working Group (EWG). Previously he was advisor to PMs George Papandreou and Loukas Papademos.

Essentially, the workings of the euro, and its forerunner the exchange-rate mechanism, we discuss, were not meant to be as they have turned out. Firstly, economies were intended to converge, not diverge, in their performance. Secondly, policies were meant to find appropriate adjustment mechanisms for both stronger and weaker member countries.

“The original thinking was that a common currency would help achieve a common business cycle,” says Tsakloglou. “Until the mid- to late 2000s there was convergence, but that broke down with the current crisis.”

The issue is deeply systemic, namely: can there be monetary union without fiscal union, which in theory is a matter of whether there is an optimal currency area, and synchronisation between economies?

Whether so or not, “a fiscal union needs a common budget, and a common budget requires some form of common state entity,” Tsakloglou observes, and the mood palpably doesn’t support that objective now, if it ever did, with eurosceptic parties notably in the ascendant, not least because recovery from the credit crunch has been so difficult, fraught with lopsided policies and political acrimony.

For those convinced of the underlying merit of the project, however, there remains hope, based on certain, rather administrative steps towards commonality.

“We may still see some form of common fiscal policy, in the form firstly of Eurobonds financing large pan-European infrastructure projects,” Tsakloglou believes. “Another possibility could be a common unemployment insurance scheme.”

Other elements of necessary integration are in train, such as the European Stability Mechanism (“a kind of IMF for the euro region”), and the banking union being constructed, even if not including a common deposit guarantee scheme.

These remain very much works in progress, though. “Overall, the system we have now is still quite loose,” says Tsakloglou. Critically, they may be the turnkey to the euro’s survival. “Without those kinds of initiatives we could be heading for the end of the road,” he says, ominously.

As for the pressures testing the euro’s inherent viability, the issue is one of asymmetry, the professor maintains, as the countries on the periphery endure serious sacrifices while countries in the core relatively prosper.

“In theory, there should have been [corrective] processes not only for the deficit countries but for the surplus countries, too.” It’s noticeable, for instance, that Germany receives faces no sanction, as supposedly prescribed, but merely recommendations for reflating her economy to help ease the pressures elsewhere.

Tsakloglou cites Nobel laureate economist Paul Krugman’s observation that not everyone can be Germany in this particular respect, otherwise the world would need to find a colony on Mars to run a surplus with.

That doesn’t mean prudence isn’t needed, he notes. It just means a requirement for balanced coordination. Moreover, Germany cannot itself afford to view the present situation in isolation, having benefited from the euro in two ways that it wouldn’t want to endanger by insisting ceaselessly on a blinkered, austerity-obsessed approach.

“The first is economic,” he says. “If the Eurozone were to break up, the German currency would rise to stratospheric levels. For an export-oriented economy, the ensuing loss of competitiveness would be a very serious blow.

“The second is political. Germany is currently rightly perceived as a global power, which is because it is at the helm of the EU, of which the core is the euro. Jeopardising the euro endangers that pre-eminent status.”

I put it that Germany’s principles appear immovable in key respects, which may eventually render the euro project prohibitively difficult. Tsakloglou doesn’t buy it.

“Necessity is the mother of invention,” he responds. “Many things have been accomplished in a short period . During the crisis period, and I hope this process will continue, leading eventually to genuine economic integration in the Eurozone.” The implication is that it’s not remotely ‘game over’ yet.

The trouble is that, as an elitist project, that conception has depended on delivering economic progress to help maintain the public’s support, whereas its product so far has been witnessed limitedly, he explains, in microeconomic, technical fields, rather than on the macroeconomic side.

That won’t be enough to secure prosperity ahead. “Given ageing societies in Europe, we will need some kind of super-productive labour force in order to maintain high living standards,” he affirms. The key issue in that light is whether there will be the necessary emphasis on investing in skills, training and infrastructure.

That sounds plausibly where both demand- and supply-side impetus could work in tandem, but requires a degree of agreement and trust between the constituent states that could now be absent. “Unfortunately, sour feelings have resurfaced,” rooted indeed in sentiments dating back to the Second World War.

That being the case, what prospect is there of Greece recovering its poise and delivering on its commitment under the terms of the latest bailout?

To an outsider, it seems extraordinary that the Tsipras administration this year called a dramatic referendum, which shocked Europe, then won the national vote to resist austerity, then accepted a harsh austerity deal, but was then nevertheless re-elected! It’s a bewildering outcome.

“The amazing thing is that in 2014 the economy was turning around,” Tsakloglou reminds us. “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.

The professor’s verdict is quite scathing, but highlights where useful common ground could have been found between the Greek authorities and their counterparts in the continent’s other capitals.

“Under the first Syriza government political capital was wasted,” he argues. “There was a chance to align with both the Greek people and the pressure from Europe, by cleaning out the ancien regime, which was perceived as pretty corrupt and unreconstructed.” Instead key officials were sending confusing messages and kept giving lectures about democracy, “as if the rest of our Eurozone partners were not democratically elected”.

The frustration felt at a supreme opportunity missed is evident, as the result was costly. “That brinkmanship led to increased uncertainty, economic slowdown, deposit outflows, capital controls and … an increase in our debt of some Euro 40-45 billion, relative to trend, within just seven months.”

Still, politically, with Syriza returned to office, premier Tsipras cuts a dominant figure, I suggest. The point is acknowledged, but solace is found in the associated stability.

“The third bailout programme is extremely front-loaded, with almost all the fiscal measures expected in the first six months. If the first review of the new programme is completed successfully, there are many benefits waiting to be reaped: banks’ recapitalisation, discussion about measures to be adopted for easing further the Greek debt, participation in the ECB’s QE programme, etc..”

In fact, Tsakloglou musters support for the plan. “It is not unimaginable that the programme 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.”

In the circumstances, that’s about as ringing an endorsement as one could seriously hope to find.