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RECENT ECONOMIC SITUATION IN GREECE
Interview with Assist. Prof. Dimitris Tsarouhas, April 19th 2010
What do you think are the causes of the economic crisis in Greece?
The causes are many and the current crisis only one expression of the structural economic problems Greece’s has. I would say that the fundamental problem is a chronic lack of competitiveness which has eventually burst out into the open following Greece’s entry into the Eurozone area. Entry into the Eurozone area has instead of becoming a motivation for the improvement Greece’s economic performance has in some respect become an excuse not to implement reforms that have been long overdue. These reforms are many and, in fact, should not be limited to the economic sphere only. When it comes to the economy itself we are fundamentally talking about the need to make both the public and private sector work more efficiently. That is something that has not happened in Greece and I believe at the heart of the current problems of Greece is this chronic lack of competitiveness, as it has been manifested over the last few years.
The EU wants to seem to be in control over the situation and the Germans have been cryptic in their announcements, but they finally agreed to the idea of offering Greece a loan. Do you think the situation in Greece will lead to any serious disagreements in the European Union? Will it cause problems in inter-EU relations and in the functioning of the Eurozone? There are upcoming elections in some EU countries; will Greece become a part of the election rhetoric?
There are two things to mention. First of all, this is not a bilateral loan. What has been agreed upon both in late March and then again in early April is that the EU would come to the rescue of the Greek economy should the Greek economy, i.e. the Greek government, be unable to raise funds in the open market. This is not a bilateral loan and the Greek government has repeatedly said that it is not after a bilateral loan.
Secondly, I would agree with the assessment that disagreements have risen between Germany and the other countries in the Eurozone. I would say that there has been a clear disagreement and here the issue is not Greece anymore. Here the issue is the Eurozone. The German government has taken the position that any Eurozone economy which finds itself in difficulty – it happens to be Greece now it could have been Spain or Portugal, and in fact it maybe Spain and Portugal in the future – should find the way out themselves. The predominant opinion in the EU, and one which I also share, is that within the Eurozone mechanisms of assistance are necessary, not because anyone wants to bail out any particular economy – in this case, the Greek economy – and of course no tax payer wants to bail out the failings of another economy. Greece’s fundamental economic problem is one which it needs to sort out itself. However, here we are talking about the functioning of the Eurozone and the credibility of the Eurozone’s own common currency. The vast majority of the opinions, as expressed by the European Commission, the European Central Bank and by the vast majority of EU member states and Eurozone states is that when a country finds itself in difficulty, there needs to be a mechanism of assistance so that the credibility of the Euro in the international market will not go down and the Eurozone economy, as whole, is not going to suffer. So, yes, there is a disagreement there, there is a misunderstanding on the part of Germany – or there possibly a failing on the part of the current German government to appreciate the need for a mechanism that will build on a certain amount of sovereignty so as to help not Greece, Spain or Portugal individually but Eurozone collectively.
Why can they not see it? They probably can, but the answer is very much related to internal politics and the fact that the current German coalition government composed of the Christian Democrats and the Free Democrats are suffering from a lack of direction, a lack of popularity and it has upcoming local elections, in which its opinion poll ratings seem to be quite low. So the idea of creating an image according to which Germany somehow going to be asked to bail out Greece is a very comfortable image and I am sure it sells well domestically, but it does not do much to help the Eurozone.
Greece was offered 30 billion Euros by Eurozone members and the IMF also offered to pitch in another 15 billion Euros. Should the loans be insufficient to alleviate Greece’s economic problems, might Greece seek money from other sources in the future?
Yes. First of all let me clarify that I am not familiar with the details of the last few days the picture I left this prior to our conversation was a mixed representation group featuring IMF and EU would be coming to Athens but they might have been delayed because of the ash-cloud. They were meant to go to Greece today and speak with the respective ministers to decide on the details of how a possible package would look like. So, both the amount of money you mentioned and the actual mechanisms are not clear to me and I do not wish to take position on an issue I do not know all the details of. What I can say is that Greece has a large debt to defend and the debt runs, to a very large extent, until May for the year 2010. However, we are also talking about tens billions of Euros of debt that need to be supported for 2011 and 2012 as well. My assumption is, and I am sure the Greek government has worked this out; any kind of package will be fairly medium-term. There is going to be a need to cover financial needs over the next 2-3 years.
Will the funds be enough? Goodness knows. My prediction is that they will be, for one simple reason: if this package was to be made available in terms that would allow the Greek state to borrow with reasonable interest rates, I think that would be enough. I do not think any extra measures would be necessary. I think the Greek government has taken enough measures on the domestic front to raise revenues and it is to be hoped that this will happen. With regard to the debt it needs to defend, I think that such a package would be a good deal. However, to me it seems to be very important to understand what the nature of the problem is. The nature of the problem is not an attempt by Greece to be bailed out – this is not what the Greek government is requesting. What the Greek government is requesting, and legitimately, that it be allowed to borrow – no state aid – in the open market with normal interest rates. The picture we have had is one of utter amazement and confusion, because despite the repeated messages being sent out by the European Union that it is ready to come to Greece’s aid, the markets refuse to reduce the interest rate on the basis of which they lend money to the Greek state. We are talking about interest rates which are clear robbery: 6-7%; in some respects, hundreds of millions of Euros extra. There is a speculative game being played out and Greece is the first victim of this in the Eurozone. I hope not that others will follow. This game has been based primarily on two pillars. The first one is the unregulated free market, which is a dogma the Europeans are now paying dear. Secondly, the absence of mechanisms within the Eurozone to prevent such speculation from taking place. That is the nature of the problem and is what the Eurozone economies and the Greek government has to face. It is only to be hoped that the problem will be solved the problem in a way that will make sense for all of them.
Have you been to Greece recently? What is going in Greece, domestically? What do the Greeks think about the current economic situation and the EU?
I have not been to Greece in recent months but from what I read, the people are very disappointed with the fact that their economic conditions are getting worse. They are angry at the political establishment and by that I mean both previous governments and the current one. On the basis of the latest data that I have seen, they are not very optimistic about the future. They believe that the future, at least over the next 3-4 years, is going to be much worse than the recent past. That, of course, is to be expected. It is something that happens in all such occasions when a crisis is revealed. I should also add the public is very much worried precisely because it sees that the economic prospects for the future are very bleak. This is not simply about the present. I am afraid that most people believe, or have reason to believe, that the effects of the austerity measures the Greek government has taken are going to start hitting in the next few months and in a few years to come. They have not yet hit the Greek economy. When they start doing so, things will be gravely seriously and I think the people can foresee this. They can see that the tax measures that have been taken and the budget cuts will all hit them in the years to come. The consequences will be very large and I am afraid quite dramatic in some cases.