Better Understanding the Greek Crisis: Interviewing A Top Greek Economist

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This past week I was fortunate to sit down and talk with a leading Greek economist on the economic situation in Greece and throughout Europe. While traveling through the original Athens (in Greece), I interviewed Panos Tsakloglou, a Professor at the Department of International and European Economic Studies of the Athens University of Economics and Business.

Dr. Tsakloglou is not only an accomplished academic but also previously served in the government, advising the Prime Minister from 2010 to 2012 and serving as Chairman of the Greek Government’s Council of Economic Advisers from 2012 to 2014. Now that he is no longer employed by the Greek government, he feels that he can speak more freely and wanted to convey that Greek economists and academics do not necessarily share the same views as the government.

One of the first things I saw about you when I was reading about the referendum, there was a letter of almost 250 Greek economists asking Greece to vote yes on the referendum. You were one of the economists who signed the letter. Could you explain your reasoning?

First of all, the very foundations of the referendum were very dubious. The government asked the people to vote on a proposal that was no longer even on the table. The broader interpretation from our European partners was, ok you can have a referendum, but ask the real question – do we want to keep staying in the euro with more measures or return to the Drachma without any extra measures?

From this point of view I have a good feeling that the majority of the Greek population, and this is something that has been confirmed by poll after poll, is strongly in favor of staying in the Euro. Apparently, we failed in this attempt, and the majority voted no in the referendum, believing the argument of the government that this was more or less about austerity.

The results were truly disastrous in every sense of the word. The government signed a new agreement that was far tougher than the one of the referendum. There was a bank run and the government was forced to implement capital controls. Growth prospects for the country deteriorated sharply and as a consequence we are facing even more austerity.

The recent deal that was negotiated still keeps Greece in the Eurozone and imposes more severe austerity measures. The former Finance Minister Yanis Varoufakis said it is going to be a disaster. Do you agree with him?

It’s funny you mention Varoufakis. The economy started with growth prospects this year from 2.5-3 percent and we managed to end up with prospects of -3 percent. During his tenure, two things happened. Every time the economy grows by 1 percent, 0.5 percent goes to the government in the form of direct taxes, indirect taxes and social security contributions. As a result of the growth deterioration, this translates into 3 percentage points less in public revenue. This is enormous and is purely a result of Varoufakis’ policies.

Moreover, as a result of these policies, we face increasing uncertainty about Greece’s prospects in the Euro. We are drawing large amounts of money from the banking system and forcing it towards imminent collapse. We have ended up with capital controls, which in turn have devastated the overall economy. Many argue controls on the outflow of savings should have been imposed earlier. However, whenever we have capital controls, we always have dislocation effects – you cannot import freely and do other important things to maintain the economy.

There is a litany of problems with the most recent deal. But is it still better to accept it to stay in the Eurozone? Is there something better that Greece could do or is this the only option they have left?

In our life, we always have options, and we always try to pick the least harmful or most beneficial. Leaving the euro, the so-called Grexit, has very few if any benefits. First of all, why do countries devalue or leave a monetary union? To gain competitiveness by reducing the price of labor. But Greece has carried out a very substantial internal devaluation; wages are at the level they were back in the 1990s.

The main problem with Greece is that there is no inflow of capital. A Grexit would not attract foreign capital, at least in the short to medium term. The only thing it would do is generalized impoverishment of the population.  Several of the arguments mentioned by the proponents, like getting rid of austerity, are not written off without the Euro. Our debt will still be in Euros, while our currency will be the Drachma and will devalue faster, and the debt-to-GDP ratio would reach astronomical ratios.

Besides this there is something else, a greater political reason. It is of paramount importance for Greece to be part of the core of Europe. If you look at history there are several attempts to create monetary unions. The only successful monetary unions are those that were also fiscal unions. In fact, most of the time fiscal union precedes monetary union. To have a fiscal union you need a substantial budget and, hence, you need political union as well. If Europe is going to move in this direction, Greece must be part of the process, for political reasons as well as economic ones.

The Eurozone seems more like a political than an economic project. When you were working and teaching when the Eurozone was created, did you see these problems coming? Did you see that monetary policy would be near impossible with such different economies?

You are absolutely right that it was a political not an economic project. In economic terms, there were several problems that the founding fathers were well aware. Primarily, the euro area is not an optimal currency area. Even the United States is not exactly an optimal currency area, however if there is a recession in California and a boom in New York, you can transfer resources from New York to California and vice versa. This mechanism does not exist in the European Union. The hope during the creation was that once the euro was introduced, the business cycles of the various countries would be synchronized. This did not happen.

As a result we do have this problem in the construction of the euro. What they were hoping was that, if this situation developed slowly over years, they could gradually develop a common economic policy. The first years of the euro were an outstanding success, but a lot of imbalances were building. Some countries, Germany notably, were building up large current account surpluses vis-à-vis the South’s current account deficits. The theory was not to worry because as soon as we have deficits in current accounts, there would still be an inflow of capital. This inflow didn’t happen in the way they were anticipating. For example, they were hoping Greeks would buy Mercedes Benz cars, and Germans would buy houses on the island of Crete. However, the difference was covered by Germans buying Greek government bonds, and this was something that led to the current crisis.

During the crisis there were several mechanisms that were set up quickly. For example, the European Stability Mechanism that exists now to play the role of the European IMF.  Then, there was the swift implementation of the banking union. Plus there were several surveillance mechanisms that were set in place. All of these things were absolutely necessary and a huge progress was accomplished in this short period of time. However, the main element is still missing – combining elements of fiscal policy which will entail closer political integration. Already, there are movements in this direction, and I have a feeling that once the Greek crisis settles down we will see this. We already saw President Hollande speaking about closer political union.

Once the Greek crisis settles down, will we see another crisis pop up elsewhere? Maybe in Spain?

If you look at the history of capitalism, in fact far before capitalism, it is a history of crises. At some time there will be another crisis in another part of the continent. However, the question is whether we will have mechanism ready to deal with the crisis quickly and effectively. This is something that did not exist when the Greek crisis erupted.

In relation to austerity, you along with a lot of other Greek economists do not agree with the totalizing view of no austerity whatsoever.

When the Greek crisis erupted, the primary deficit in the Greek budget was equal to 10.5 percent of the then-GDP. In other words, even if our entire debt was forgiven, the next year we would have created another debt of that magnitude. To close this primary deficit, there are not many ways. You increase taxes, you cut spending. Given the size of this deficit, there is no question that some recession was inevitable. The question was how deep a recession, given that Greece experienced the largest recession of any European country since World War II. With the addition of the expected recession for this year and next year will even overtake the United States in the mid-war period.

Therefore there is the question, was so much recession necessary? The answer in my opinion is no. There were definitely flaws in the design of the first Greek program which looked at the Greek crisis as a problem of liquidity not a problem of solvency.

Could you explain that distinction for the non-economics folks?

Suppose that you own a firm and you have customers that owe you money, reliable customers. Then you are in a position where you need to make some large payments. Even though there is a substantial cash flow in the future, you do not have cash now – that is a liquidity problem. Solvency problem is that the portfolio of your customers is problematic and you have large unmanageable debts accumulating.

If you are in a position of a government that has a solvency problem, a haircut is necessary, but it is better to do it at the beginning of the process rather than later. There is no question that some sort of haircut to the Greek debt will take place, but this will not be a nominal haircut. There are several ways to reduce the net present value of the Greek debt that could be used. For example we could extend the maturities of Greek debt, extend the grace period, reduce interest rates, etc. There are several techniques.

The Syriza party was a marginal party that is now hugely popular with the Greek public; do you think they are sustainable? Is their agenda sustainable?

Yes and no. Syriza is definitely a creation of the crisis. If you go back to the elections of 2009, their share of the electorate was around 4 percent. It exploded very quickly, benefiting from the collapse of the mainstream parties. In politics in general, there is no notion of vacuum, and what’s happening at the moment is that there is a large portion of Greeks who identify as center left, however due to the fragmentation of the centre-left they voted for Syriza. Taking into account the recent 180 degree turn of Tsipras, this may be accomplished in the short to medium term by a shift in the ideological position of Syriza or at least the fraction of Syriza (given that we might have a break-up of the party) that will be represented of Tsipras.

Under these circumstances, Tsipras may survive, and Syriza may survive, but they will have reconfigured everything. If they remain in the same kind of ideological position, in my opinion Syriza will collapse either with the collapse of the country, something I hope will not happen, or it will collapse as soon as the economy recovers.

In terms of debt payment, a recent letter written by 35 Greek economists asked the troika to create a program of debt cancellation, new terms of payment, do you agree with that? Thinking from the perspective of the creditors.

Let me put it this way – why do banks often forgive debtors? Because they know in the end, they will be receiving even lower payments otherwise. It is the same thing that is happening here, the only realistic way that Greece can pay back the debt is economic recovery. If we continue with negative growth rates, our debt will never be repaid, there’s no question about it. This is understood by the governments of other countries as well.

On the other hand, we should take into account that most of the Greek debt is not in private hands; it is held by other countries and international organizations. It is very difficult for the politicians in these countries to explain to theie electorates that we gave this money to Greece, they are in trouble, you will lose some of the money on face value. It is far easier to tell them we gave them 100 dollars and we will get back 100 dollars plus some interest rate in a period of the next three generations if not more.

We have talked about the structure of the Eurozone, but you write a lot about the structure of the Greek economy – tax collection, public assistance, abuse, etc. Do you think these are bigger factors than the Eurozone?

This is the factor. The Greek crisis can be looked at in the following ways. The Greek crisis was primarily a crisis of competitiveness. In 2008, our current account deficit was a tad lower than 15 percent of GDP. That’s an enormous amount. If you go back to the 1980’s, Greece initiated an austerity program as soon as our current account deficit reached 6 percent of GDP.

What was the reason we ended up with the severe loss of competitiveness? To answer this we must go back to 2001. The government tried to tackle one of the most acute problems – pensions. Our pensions system was bound to explode if left unreformed. When the government tried to reform the system, Greece was paralyzed by strikes. It was a situation of self-denial. As soon as this reform failed, the whole reform process was halted. Then we had the government of New Democracy for five years (2004-2009). In those years, no reform occurred, and the changes that did happen only put us further back. As a result of these factors, our competitiveness started declining.

We know that reforms have a lag period – if we adopt something now, we won’t observe the consequences immediately. It will take some time. There were several reforms that were adopted before 2001. When Greece joined the euro and enjoyed lower interest rates, these reforms contributed to booming in subsequent years. However, the lack of subsequent reforms led to loss of competitiveness and increases in the current account deficits. There were no reforms, we were losing competitiveness, and we ended up where we ended up.

Unlike what is often said, during the period of the program there were many serious reforms that were undertaken.  For example, according to the OECD’s reports “Going for Growth.”, Greece has been a champion of new reform efforts in recent years. The problem is that we were starting from an extremely low level, and we had a long way to go. The reform process should not have stopped, and this is the point of many economists that I fully subscribe to.

Does the crisis in Greece and the Eurozone have ripple effects in the global economy? Some people think it will be harder for weaker economies in the Eurozone, like Ireland or Portugal, to attract investments. Do you think it will be contained or have lasting effects?

It may have lasting effects but not for the reasons you have mentioned. The main fear of several people is that if Greece fails, the next weak link is Portugal. I do not think this will happen for a different reason. What is happening at the moment is that the European Central Bank is adopting quantitative easing. If there are pressures on Portugal, I have a feeling the European Central Bank could kill those pressures very easily by buying Portuguese bonds.

However, down the road, in two or three years’ time, bigger economies like Italy or to a lesser extent Spain or France, may have difficulties in the bond market. These markets are substantially larger than the Greek bond market and many people in the markets will remember that a far smaller economy like Greece was collapsing and they did not save it. At that time we would be in big and imminent danger, with the potential collapse of the entire Eurozone with consequences for the entire world economy.

– By Robert Galerstein/Photo Credit: FinWeb

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