On Thursday April 8, the Economist hosted a virtual event titled “200 years of Economic Survival” on the occasion of Greece’s bicentennial after the Greek revolution. In this context, Poul Thomsen, former IMF European Department Director and Thomas Wieser, former president of the Euro Working Group, discussed the Greek bailout programmes, the outlook for the Greek economy, as well as the challenges ahead for the Euroarea. John Papageorgiou, Founder and Head of the Athens Digest, moderated the panel.
During the discussion Poul Thomsen argued that the decision for Greece to get admitted into the eurozone clearly was a political one, not being based on economic realities. “It was based on the notion that if you put a country in a straitjacket, politicians will be forced to adopt the necessary reforms. That has proven naïve,” he said. “I still think, given the lack of a firewall and a crisis resolution mechanism, we had no other choice than bailing out creditors in 2010. But I think we -certainly the IMF- at that time, with the benefit of hindsight, should have insisted with the Europeans that once these firewalls are in place, there will be a debt restructuring. We didn’t do that and I think that that was, in retrospect, a serious mistake,” he added, referring to the first Greek programme. He pointed out that the country’s problem is rooted in clientelism: “Reforms were either not implemented or later reversed. I don’t see Greece closing gaps. I see it will struggle to prevent that. Its young people will continue to leave Greece in large numbers to seek a better life abroad, all because of the clientelism.”
Thomsen said that European institutions attempt to justify the high debt by providing debt sustainability analysis that goes far into the future, based on growth assumptions that are not consistent with the political realities regarding reforms. “But in the euro area, creditors have been willing to accept it. Because they know they will be bailed out (…) The overarching conclusion from the euro crisis is that it has not created any meaningful progress towards a political union,” he stressed. Finally, he argued that once the covid crisis is over, there will be a need for debt restructuring in the Euroarea. “This current crisis will dramatically increase North-South tensions down the road,” he insisted, adding that austerity measures will unavoidably return on the table.
Thomas Wieser stressed that the no-bailout clause of the euroarea treaty has been shattered and there is no way of going back to that. “The sooner we come to admit that in politics, economics and also legally speaking, the better it is,” he said. He argued that a common fiscal union is not going to take place ‘in our lifetime’ as such a change is not something where you jump from no coordination to full political union, but he added: “I still strongly believe that we can move step by step(…) The dilemma is how we run fiscal policy, which on the one hand is under the purview of national sovereign parliaments, but on the other hand, is geared in such a manner that does not create imbalances of instability for the other members of the euro area (…) We need to devise some kind of methodology about how political costs for prime ministers, how political costs for finance ministers are significantly increased if they run bad policies.”
Referring to the 2010 Greek crisis, he emphasized that back then there was a complete lack of understanding by many actors of what the issues were, including prime ministers finance ministers, but well down into many chancelleries, finance ministries and central banks. “Given this lack of understanding, there was also a total lack of instruments. And if you don’t understand what the issue is, then you don’t start building an instrument to solve the problem that you don’t understand,” he said. And he added: “The times for a haircut in 2010 were absolutely not appropriate, but one could have dealt with it in a different manner. What we need to remember is the whole setting up of the euro area was built on the totally mistaken understanding that there could be no current account crisis, no hardly any meaningful imbalances between member states because money was fungible.”
Regarding the Greek reform agenda, Thomas Wieser stressed that Greece, compared to other countries that had adjustment programmes, is the one most prone to saying the crisis ‘was the foreigners fault’ and therefore didn’t change too much. But he added that it is the member state that should have the ownership of its reforms: “This is an issue that ultimately, in the interest of sovereignty, self-respect and the interest of the representativeness of democratic institutions and elections.” Accordingly, the institutions shouldn’t be asked to be even more invasive as this “this can’t work”.
You may read the discussion (transcript) below or watch it on youtube here
John Papageorgiou: There is a lot of talk _ and allow me to say a lot of speculation _ about the 2009-2019 decade. So, before my questions I would like you to share with us your conclusions after the Greek programs and if possible, some highlights from your personal involvement.
Poul Thomsen: This is a very timely debate. Because I personally think that we are at the risk of repeating some of the mistakes that we did dealing with it. Let me say in this regard, that I certainly look at the situation quite different from how I did in 2010. Let me make four brief points.
The first one is that I am quite pessimistic about Greece’s ability to prosper within the eurozone. And we are looking at 10 or 20 years; what happens beyond that… I don’t know. My views are very much rooted in what we have heard today, the clientelism of the system. Mr. Papandreou (c.c. during the previous panel) just brought it out very clearly. The decision to admit Greece to the euro was clearly a political one that had no basis of economic realities. It was based on the notion that if you put a country in a straitjacket, politicians will be forced to adopt the necessary reforms. That has proven naive. It has not happened. It didn’t happen before the crisis, not happened since. In 2012, Greece was forced by the Europeans and the IMF to adopt some pretty important labor market reforms and in 2015 to some pension and tax reforms that would have made the fiscal policy much more growth-friendly. But these reforms were either not implemented or later reversed. You might say that the current government is doing things. Yes, I know it’s picking up on privatization, some digitalization, but this is really tinkering on the margins compared to what really needs to be done in a world where everybody else is doing structural reforms. I don’t see Greece closing gaps. I see it will struggle to prevent that. Its young people will continue to leave Greece in large numbers to seek a better life abroad, all because of the clientelism.
This leads me to my second point. The 2010 program was clearly much too optimistic in its assumptions about economic growth because of my first point. This also meant we were far too optimistic about Greece’s debt-servicing capacity. I would stress that this doesn’t mean we should have insisted on a debt restructuring in May 2010. I still think, given the lack of a firewall and a crisis resolution mechanism, we had no other choice than bailing out creditors at the time. But I think we -certainly the IMF- at that time, with the benefit of hindsight, should have insisted with the Europeans and Germany that once these firewalls are in place, there will be a debt restructuring. We didn’t do that. And I think that that was, in retrospect, a serious mistake.
My third point is on debt sustainability analysis. They are not only wrong, they are also irrelevant. And I’m talking both about what the IMF is doing and what European institutions are doing. European institutions attempt to justify the high debt by providing debt sustainability analysis that goes all far into the future and shows that over the very long run, at some day in the future, debt can become sustainable, based on growth assumptions that are not consistent with the political realities regarding reforms. But more important, of course, any solvency problem can be shown to be a liquidity problem. If you allow a projection period for several decades, that’s not a credible projection. And creditors would of course not consider it credible. They would know that the country will be a sitting duck for decades while debt slowing down, waiting for the next crisis to blow it off. But in the euro area, creditors have been willing to accept it. Because they know they will be bailed out. And this brings me to …what I think is the overarching conclusion from the euro crisis. The euro crisis has not created any meaningful progress towards a political union; certainly not as far as reforms and fiscal policy is concerned. One can argue that in the SSM and the financial sector, there has been some progress. But on fiscal policy and reforms, the things that matter for real convergence, we are not anywhere closer to a political union. But what the euro crisis did due to the troika bailouts and in particular the ECB promise to do whatever it takes was that the creditors are just not interested in debt levels as long as they can be persuaded that they will be bailed out. I am going to endless investor conferences in Greece, in Italy and others where investors are not really interested in the local policies or in whether Europe is going to bail out whatever happens. So, I think all these debt sustainability analyses are largely irrelevant. And we certainly in the IMF failed to understand that by providing debt sustainability analysis we did not take into account that this is a currency union where all the other countries are supportive. But the Europeans, on the other hand, should have had these projections that show that one day we will get there in the very long run. The critical issue here is, of course, that: We have nothing to ensure that the countries use this bailouts as a breathing space to do the right thing. And we have a moral hazard problem. Let me give you one observation, which is actually quite spectacular. All Europe’s high debt countries entered the Covid crisis with debt levels at or above the already elevated levels, which they had exited the euro crisis. Despite the fact that they had huge increasing debt, they did nothing to bring it down in the anticipation that they will be bailed out. And they were right. They were bailed out. I’m not saying we should not have done what we did recently under the current covid crisis. There’s a strong humanitarian case. But we should not fool ourselves. It is a bailout, in a situation where Europe does not have a mechanism for ensuring that the countries do the right thing. And we should certainly expect the need for more bailouts down the road.
My fourth and last point is very related to this. This covid crisis will, despite the mutualization and grants coming from the European Recovery Fund, entail a huge increase in debt levels of the already indebted countries to very high level. There will be pressures for more austerity down the road. There are significant pressures for austerity. Of course, this is politically unsustainable. And of course, there will be strong tensions and north-south tensions and pressures for debt restructuring and bailouts. This time around, it’s not happening through the ESM, which is too small, but through the European Central Bank, which means that I cannot see how the European Central Bank can avoid to be severely politicized in the future the way we are handling this crisis. I, of course, understand why here in the midst of the crisis, policymakers would not want to insist on a debt restructuring of the highly indebted countries. But let’s not fool ourselves. Once we are over the crisis, there will be a need for this debt to be written off. And of course, we are already seeing pressures from Italy for the ECB to write off the papers that it’s buying under its asset purchase program. One way or the other, there will be a need for that, for debt restructuring. And there will be there very noisy, very political (tension). But this current crisis will dramatically increase North-South tensions down the road.
Thomas Wieser: I just was able to catch the former Prime Minister Papandreou contribution today. And I think very much of what I would have initially said would sit by him about clientelism, etc. And I still distinctly remember the day when George Papaconstantinou entered the Eurogroup meeting room and essentially said, Brussels, we’ve got a problem. And the conclusions that other finance ministers drew, were that the main problem or the only problem was fiscal. And of course, the more that we delved into the underlying issues, the clearer became to me and quite a number of others, that the fiscal side was merely a surface phenomenon of totally different and very severe underlying imbalances and problems. But as I said, the situation had very many actors to believe that the only problem was fiscal and this had consequences for the programs and also for policy developments at the European level. And even though many of us realized at the time -I think by now very many are cognizant of the fact- that we in Europe, collectively _the word is collectively _ stumbled into the situation, lacking understanding and instruments and the political ability to solve the situation. That also, again, reflects the design of the first program and these instruments and understandings and politics that evolved over time, but not very rapidly. And that, in a way, also led to the fact that the IMF was involved.
There was quite a discussion at the time among European politicians on whether the Fund should be in or out. And interestingly enough, I remember on one occasion what Wolfgang Schaeuble said to Jens Weidmann, who at the time was the economic policy adviser of Angela Merkel. He turned to him and said “well, if you honestly remember how the discussion went at the time, you will recall how very much against the involvement of the IMF I was and how much I was insisting that we, in Europe, had to deal with this issue by ourselves. But you successfully persuaded the Chancellor that the Fund should be involved”. At the same time over there in Washington, the managing director of the Fund and quite a number of staff, we’re all gung-ho to be involved in these issues because it came at a period of the era where the Fund was laying off people en masse, thinking many outside commentators and member states reflecting that in the Goldilocks economy of the time, the Fund as such, in the structure, etc., was not necessary any longer. So, as we know, there was hardly anybody in Europe who knew how to put together such an adjustment programme. And we’ve seen a couple of reasons why the issue of debt sustainability was not solved in a more decisive manner, more upfront. And if I think… what was the largest mistake we made between 2009 and 2018, it is the debt sustainability issue. As others have said before me, the times for a haircut in 2010 were absolutely not appropriate, but one could have dealt with it in a different manner. But what we need to remember is the whole setting up of the euro area was built on the totally mistaken understanding that there could be no current account crisis, no hardly any meaningful imbalances between member states because money was fungible, we had one central bank and as such, entering EMU, the euro area had done away with the balance of payments mechanism, which wasn’t as Fund to fund such adjustment programmes.
Given the enormity of the Greek problem, it would have been pitifully too weak. But again, I want to emphasize there was a complete lack of understanding of what the issues were and not only among prime ministers and finance ministers, but well down into many chancelleries, finance ministries and even central banks. Given this lack of understanding, there was also a total lack of instruments. And if you don’t understand what the issue is, then you don’t start building an instrument to solve the problem that you don’t understand. We collectively, Europe collectively, learned the hard way, and we do now have the European Stability Mechanism. We also have the Single Supervisory Mechanism. But did we want to and were we able to solve the huge structural underlying issues that not only the Greek economy but the Greek society was facing? And I’m not as pessimistic as Poul. We have to keep our respective attitudes there. I would say there were significant attempts in the programmes to solve these distributional issues. But I think we should have tried to define what should the outcome be and not prescribe minutely the liberalization of taxis services, of pharmaceutical issues and shipping industry between Athens and Crete andso on; hundreds and hundreds of pages of actions. But as soon as you’re confronted with the reality on the ground… bingo, there you go. You attempt to liberalize pharmacies, taxis, etc not by saying to the Greek government, you will get some adjustment loan if you liberalize your economy and get rid of clientelism. For some reason, it never works that way. And again and again, I was approached by Greek friends who said… oh, the program is not intrusive enough, you have to change our educational system, you’ve got to change our justice system, you’ve got to make sure that the police come into universities again. You have to make sure that this doesn’t happen, this happens etc. I said… “we’re already under fire because we’re much too invasive and intrusive into to the Greek economy and the Greek society. This is an issue that ultimately, in the interest of sovereignty, self-respect and the interest of the representativeness of democratic institutions and elections; the Greek society has to want and implement. And if you don’t, you don’t. But don’t want us, the institutions and the other member states to be so invasive that the last vestiges of government disappear, it can’t work.” So this, in a way, encapsulates for me the huge dilemma that one faces with all programs and with programs within the euro area very specifically.
A couple of conclusions there. One, the role of the European institutions: A bunch of geniuses in 1944 set up the Bretton Woods institutions and created the IMF as an institution which had more or less one mission in life. It was financed with one or two exceptions, with central bank money, which is not under the purview of national parliaments. It is the nasty boogeyman sitting in Washington. And you could be totally pissed off with the IMF and get on with your other business. The European Commission, on the other hand, is the central European institution in dealing with member states. And out of the… 189 issues that the Commission has to deal with, for the… 188, it needs an amicable, not antagonistic way of collaboration. Then you expect the Commission to behave, as the IMF does, as being intrusive in order for a member state to do something. It doesn’t work. So asking the Commission to do anything similar to the IMF was a failure right from the beginning. We are not quite sure if the ESM as it is set up under finance ministries and financed by governments is yet fully fit to take over this role.
Secondly, within a monetary union, you give up a huge amount of sovereignty, and it is well known to prime ministers, finance ministers and others. But few people want to realize, how much of fiscal sovereignty and other sovereignty you give up. That is a dilemma. How do we run fiscal policy, which on the one hand is under the purview of national sovereign parliaments, but on the other hand, is geared in such a manner that does not create imbalances and instability for the other members of the Euroarea. And lots of people writing about stop dreaming about a common fiscal union, common fiscal policy in our lifetime, no matter how young we are. And the three of us on the screen will not live to see a fully functional fiscal union. So, as Mario Draghi used to say, either you’ve got institutions, the ECB, or you’ve got rules. But how do you deal, how do you structure the rules so that they’re intelligent, are kept, and respect the issue of sovereignty but (maintain) solidarity and treating policies as matters of common concern within the monetary union? It is very difficult, and I think we’re still quite away from here.
I will just pause for now by saying that in 2014 I was pretty confident that Greece could be, in a way, on track to having debt relief and exiting the second program in a fairly decent manner. So, for those who think that it was only from 2015 onwards that problems emerged, no (they didn’t). The second half of 2014 made one already extremely pessimistic and showed that the multiple problems were Greek problems and not confined to only one government. But in 2015, of course, we came extremely close for the euro area, all of a sudden being made up only of 18 and only 19 member states. And much of the trouble and grief that Greece went through over the past five or six years can be attributed to happenings in the first half of 2015.
John Papageorgiou: I will come back to the euro area upcoming framework but let me for a bit refer to the reform agenda. In my opinion, and I do not think that I am an exception, when we say reforms, we mean development, change, progress. But that was not the case in Greece. In Ireland, for example, it was pretty much different. So, there was -and at some point there still is- a misunderstanding or a lack of ownership. First of all, the question is why? And second which a package of reforms has not been implemented and could be a game changer?
Poul Thomsen: I think there’s no sort of silver bullet as far as reforms are concerned, one by one single reform. It is really a broad modernization of the economy. And here I want to say that I fully agree with former Prime Minister Papandreou that they tried. They were able to stand up to their own political base by doing difficult labor market reforms. New Democracy never stood up to its base by opening up the economy, closed professions and as a result, of course, Pasok paid a terrible price. So, I think what we need to give Papandreou and his colleagues, Papaconstantinou and others, credit for that.
The reforms did not happen because of the clientelism that we talked about, which you don’t see in Ireland. In places like Ireland, they basically told us what they wanted to do, and they did it. The key issue, I think, in the public sector is pension reforms. Pension systems are totally unaffordable and tax reforms are essential. Greece gives a sort of northern European type pensions with a sort of European type tax system where it doesn’t tax the middle class. It’s fundamentally unsustainable. The result is that it has to compress all other expenditures to levels that one state cannot deliver, basic public services and compress capital spending, which is best for economic growth as well. But the problem is rooted in clientelism. What we learned from the troika, which the IMF had learned long before that, is that you cannot impose these reforms. Uou cannot impose the structural reforms on a system, that it sticks. And this, of course, comes back to what Thomas said and what I said before. Europe has not developed the means for forcing Greece to do it because it’s politically just not possible. This would just this would require a transfer of sovereignty that will not happen in our lifetime. But let me also say again, when I hear, for instance, Papandreou say we should pool our risks because we are stronger together. No northern politician in his right mind would accept, or should accept to pool the risk in a country, as we have discussed, that has 200 years of clientelism. So that is the dilemma. It is a dilemma that Europe needs to provide to support but Europe has no meaningful way for ensuring that Greece to the does the right reforms. And that’s why I am fundamentally pessimistic about the outlook.
Thomas Wieser: We had five adjustment programs for Greece, Ireland, Portugal, Spain, and Cyprus. And if we have a sort of spectrum where countries say ‘this was largely my fault’ and where countries see ‘this was largely foreigners fault’, Ireland is the country with the greatest degree of critical introspection. They said we did things wrong, we’ll do them right, we do change, and there we go. And Greece is the country most prone to saying ‘it was the foreigners’ and therefore, let’s not change too much. And I think that colors very much this question on ownership.
Ultimately, if you think of where one would really want to be, one would love to see Greece, if needed to be short, I’d say as soon as it is a meritocratic society where you have equal access to hospital services _ where you don’t need an envelope _ where access to concessions is equal, a country where you don’t have the same ownership structures of industry or shipping and media, which in most other countries would be subject to severe limitations because they push special interest groups_ i.e. get away from nepotism and towards meritocracy. And if you pursue this principle, this deals very much with the quality of public administration, which for me, which started out many years ago, not so bad, but then for a variety of reasons, went down the hill. It would solve issues with how you define pension rights, access to social policy payments, etc. So it does away with favoritism. And if it does away with favoritism, many issues that also Poul mentioned would not be as severe as they may be. Let me say already now that I don’t see the future as bleak as Poul does.
John Papageorgiou: Looking forward, Mr. Thomsen, you told us in the beginning that the presence of Greece in the euro area back in 2010 was a problem in order to face the fiscal problems and the debt crisis. Today, there is a new EU framework. Common debt is going to be issued through the Recovery fund. And actually the landscape is a bit different. The Greek debt is, let’s say, in the family, in the euroarea. So, what Greece has to do in the short term and which questions have to be answered within the euro area in order to create a new fiscal or financial framework when the pandemic is over, when the general escape clause is removed?
Poul Thomsen: As I said, despite the grants, despite the debt mutualization that is now in the new pandemic recovery programme, debt levels will go up dramatically. France and Italy will have debt that will get significantly above where they are now. Italy will be close to where Greece’s and Greece will be off the charts when it’s all over. How much they depend on (factors with some) uncertainty but it will go up dramatically. That will entail pressures for austerity.
You’re not going to get the Europeans to say, are we going to continue to bail out and provide future bailouts (without) an understanding that debt comes down through austerity. We know that will not happen and we know that the pressures and political tensions will be there. And, of course, debt will not come down significantly. And when the next crisis comes, Europe will have to bail out again. The fundamental dilemma is, as I said, the moral hazard one: in such a system, there are really no incentives for Greece and other countries to deal with their problems. And that’s why the eurozone is fundamentally dynamically unstable in the absence of a credible move towards political union, where essentially Brussels tells the Greeks when to retire. That’s politically not going to happen. I agree with Thomas at that. I think the major issue now is that there no longer bailing out through the ESM. It is the ECB that is bailing out. And now the ECB is deviating from its key or stand ready to deviate from its key; creditors are very happy with that. And actually, the ECB doesn’t have to deviate much because as long as it promised to do so, creditors are very happy. But once we get to the point -and I personally think it comes faster than most people think, but that’s a personal view- where the ECB will start tightening, this North-South fragmentation will come back with a vengeance. Because there will be a time where cyclical conditions in the north suggest that there should be a tightening.
Once that tightening comes there will be major problems in southern countries. When that’s going to happen? I don’t know. One year, two years, three years… But it’s going to come. And at that time, there’s clearly a big risk that the tightening will be late. The ECB will be further politicized. Now, southern countries have already put ministers of foreign affairs, ministers of finance at the ECB board, at the ECB management. So this will become a significant political issue down the road. The tightening will probably come too late. Inflation will go up. At one stage it’s going to have to come. And at that time, you get dramatic North-South tension and pressure for debt reduction. Europe has not moved meaningful to a political union. On the contrary, instead of catalyze movement toward a political union, the bailouts and the “whatever it takes” have actually undermined the compliance with the feeble rules that were put in place as a substitute for political union. And Europe doesn’t have an answer to that. And it will come back to bite Europe in the end over the coming years.
John Papageorgiou: Mr. Wieser, what do we have to do within the EU, first of all, in order to answer the right questions, and then to avoid what Poul Thomen just described?
Thomas Wieser: Let me just remind you about the point of the ‘two finance ministers’ of the ECB that one is the former managing director of the IMF. So I would argue that she –and very much not not only she- is well qualified for that role. Look, I think the fundamental dilemma as we all realize is that if you call for solidarity within the monetary union, either through monetary policy or fiscal policy or whatever, it’s a two-way street. And you can not only request others to come to your help, you also must give up a certain amount of sovereignty over your policies. That is exactly what Poul meant when he talked about the role of Brussels in a political union. But of course, such a change is not something where you jump from no coordination to full political union.
And I still strongly believe that we can move step by step along that continuum and need to have a _ not only a rules-based system that produces better policy outcomes, but _ some kind of political mechanism which increases the costs of non-compliance. And we’ve tried quite a number of things over the past, over twenty, nearly twenty five years. The Stability and Growth Pact had nuclear fines and very large, complex series of administrative and political steps that never worked because it was just too unbelievablably nuclear. For a time, there was a belief that the no-bailout clause was a valid one. And as long as people believed that there was also a certain strength or a hardness around national policymaking. So we need to devise some kind of methodology about how political costs for prime ministers, how political costs for finance ministers are significantly increased if they run bad policies. That can be accountability to appear before the European Parliament _ naming and shaming _ there are many different variants, none of them 100 percent satisfactory. But what is clear to me, and is clear obviously to Poul as well, is that belief in the no-bailout clause of the treaty has been shattered and there is no way of going back to that. And the sooner we come to admit that in politics, economics and also legally speaking, the better it is.
I offer you one thought experiment: How is it in the United States, let’s pick Mississippi, which runs a sometimes astonishingly separate as many others do, environmental policy, social policy, etc. It works in the US, but there are a few consequences. One, there is a higher degree of reliance on federal funds and the federal tax policy. Secondly, the talented people get on the Greyhound and they move to Georgia, Massachusetts… And thirdly, there is an acceptance in the United States (for) very different levels of income, per capita and poverty, which is why Mississippi is where it is in the ranking of US states. And that is also a possibility for Europe but it is not a way I would want Europe to go. So for the medium term, which is over the next 10-15 years, we’ve got to realize there will be no significant pooling of sovereignty. I don’t think there will be a bailout. I share the concerns of Poul about what happens when there’s been a reversal in monetary policy. But for now, things are quiet and financial markets change their tone every six months, and contacts tell me there’s absolutely no concern at all… (There are) hardly any spreads, interest rates are low and we know that these things don’t stay as they are for eternity, but can turn around pretty fast. So, I’m sure that the Greek political system has it in it – if it is willing to have a national debate on what the problems are, if it is willing to have such a national debate. I believe there is a willingness to change. Indeed, Prime Minister Papandreou was punished for trying to have that debate. And as peculiar as it sounds, I think some of the ministers around Alexis Tsipras were also cognizant of many of the problems that Greece was facing, but they fell into the same traps as the previous government.