‘A whole generation of Greeks could miss out’
Europe's debt crisis threatens to deepen and prolong the current economic crisis. What are key causes of today's ‘Euro crisis’ and what are solutions? Marloes van Amerom asked five questions to Canadian-born Shawn Donnelly (LEGS), assistant professor in European Economic Governance and a regular blogger on the issue.
Were there, in hindsight, errors in the way the Economic Monetary Union was set up and managed?
‘Definitely. There were two main design flaws. Firstly, membership regulations were unrealistic. The tough rules in regards to the ability of countries to borrow money needed to be relaxed in 2005 ― out of a sheer need for economic survival.
Secondly, membership criteria were insufficiently applied when economics was mixed with politics. Take Greece’s acceptance into the Euro zone: it was allowed access for political reasons rather than on economic grounds. The numbers Athens provided simply weren't checked.
Meanwhile, within the EU Greece was a rather problematic partner country, easily engaging in political blackmail or blocking decisions while disagreeing with EU policies regarding Cyprus. To prevent further clashes, the EU's Council of Ministers continued to let themselves be willfully deceived, even when it became increasingly clear that the numbers provided by Greece were incorrect.’
There is a lot of focus on the inability of the Greek government to repay its debts to European creditors. What about other problem countries?
‘Most countries now violate the budget criteria due to ongoing economic decline, but circumstances differ. Portugal and Greece have no hope of recovery, whereas Italy is uncertain. Ireland and Spain have good cards. However, if Greece defaults entirely on its debt, a full-blown crisis will spread to France, Germany and the UK, which have invested heavily in Greece. Banking will implode, unless governments will fund the banks, but then they have to cut elsewhere to meet the euro budget criteria. And many European countries are already suffering from quite severe budget cuts. In a recession, this creates a downward-spiraling economy.’
What is the best solution to the Greek debt crisis out of the three scenarios that are currently under discussion?
‘Definitely, I’d say the ‘haircut method’, whereby investors receive part of their money back. This means that Greece’s creditors accept a partial return on their loans to Greece, for example, 70 cents on the euro. But sadly, three countries are blocking such an agreement: Germany, Finland and the Netherlands Countries where voters are demanding all or nothing. German Prime Minister Angela Merkel, for example, initially favored the haircut model, but after voters punished her in regional elections, she now insists on full repayment and total control of the Greek finances in return for aid. So, political polarization is winning over pragmatism. As a result, Greece must choose between decades of depression or abandoning the Euro and declaring bankruptcy.’
What would declared bankruptcy bring Greece?
‘A default might actually help Greece over the long term. Argentina and Russia defaulted on their debts and are prospering after short, sharp recessions. But massive unemployment and other effects would constitute a nightmare for youngsters in Greece, blocking their hopes and dreams for the future. A whole generation could find themselves lost.’
Besides promoting haircut packages for countries, what else should the EU do to conquer the euro crisis?
‘EU countries should follow Roosevelt-like policies. Stimulating economies by investing aid has disappeared into the banks until now, for which other areas of the budget have had to suffer. This ‘depression economics’ approach will create a crisis far worse than that of the early 1930s. If that happens, the cuts you see today are only the beginning.’
Dr. Shawn Donnelly on Europe’s economic crisis: ‘Attempts to have the EU and the IMF lead Greece's reforms in exchange for loans, instead of the Greek government, could undermine Greek democracy and raises questions about the integrity of the process. The EU started out as a voluntary exercise, after all.’
