Greeks Bearing Gifts? An opportunity in the financial crisis

Dr. Gerhard Schick, MdB
In his recent blog piece, Mathias Vernengo invokes the Brazilian phrase “The Greek Present” (Presente de Grego) or unwelcome gift, to make his point that the Euro was an unwelcome present for Greece.  Rather than looking back and speculating about whether the Euro was introduced in a timely way in Greece, I want to look ahead and assert that the Greek crisis is an opportunity.  Never waste a crisis.  In a few years, if we succeed in overcoming the current problems, we might say that the progress made in economic governance in the wake of the Greek crisis was a gift.

The European Union is in dire need of new economic government arrangements as a consequence of forming the currency union and learning the lessons of the global financial and economic crisis. Tighter cooperation with regard to the economic policy is needed to ensure the success of the currency union.  But how might stronger cooperation be realized? To answer this question, one needs to scrutinize the prevailing governance of the Euro area in regard to two points: First, the inflation of consumer prices which is controlled by the European Central Bank (ECB) and, second, state expenditures, which are controlled by the European Commission in compliance with the European Stability and Growth Pact.  This governance arrangement creates two blind spots.

The first blind spot relates to private debt.  In recent years, the private debt soared in those Euro-countries which were most seriously hit by the economic crisis. For instance, Spain and Ireland accumulated private debt of more than 160 per cent of their gross domestic product (GDP). This rise inflated asset prices, especially the prices for real estate and financial assets. But the European Commission and ECB were not alarmed by these developments. To the contrary, prior to the crisis Spain and Ireland were heralded as shining examples with respect to their state expenditure levels which met the targets of the European Stability and Growth Pact.
But the crisis-stricken countries had only one way out – namely, to increase public expenditures in order to stimulate private consumption. This reaction to the crisis increased the public deficit and led to a breach of the Stability and Growth pact.  This situation illustrates why the ECB and the European Commission must overcome their dogmatic belief that, in a currency union, it is only public debt which causes difficulties.

The second blind spot of the current economic governance arrangements relates to the shifts in relative competitiveness among the EU member states. Germany’s competitiveness grew because, during the last ten years, harsh wage restraints were put into effect. But this caused a tremendous imbalance in the current account.  No one can rebuke Germany for its world champion status in exports due to the high quality products.  Yet, it’s not quite normal that wage restraints depress Germany’s demand for higher levels of imports.  A race to restrain wages isn’t a good idea for the Euro zone. In a strongly integrated economic zone, such as the European Union, the current accounts surplus of one group of countries is the current account deficit of another group of countries.

For its member states, the Commission’s key indicator must be the trade balance. As soon as the imbalances exceed three percent of gross domestic product, the Commission must begin a process of surveillance and – if necessary – reap the political consequences. Where the deficit or surplus exceeds 5 per cent of the GDP the surveillance process should be obligatory. Today, for example, Greece’s current account deficit with other European states (14.4 per cent of its GDP in 2008) forces only the Greek government to act. But, as a German politician I have to admit, the German surplus (7 per cent of GDP in 2008) necessitates a change in German policy as well.

There are also institutional gaps to be filled. George Soros is right when he states: “It is clear what is needed: more intrusive monitoring and institutional arrangements.” To achieve this, a reliable and a verifiable data base is needed because, at this point, Eurostat is dependent on the national reports from the member states. Soros is also right when he reminds us that a currency union needs a central bank and a finance ministry. Of course, in the institutional context of the European Union, we would not think about the creation of such an institution in the first place. But it is crucial to establish at the European level the competences that a finance ministry possesses: taxation, control of a budget that can be adapted in times of crisis, the right to implement and enforce the economic policy guidelines, and the organization of financial transfers between parts of the Union.

Whereas the union requires closer co-operation among member states, the need for unanimity in decision-making makes political progress very difficult in matters such as the Eurostat problem and the move toward more binding economic policy guidelines.  While European leaders are considering the levying of EU-wide taxes and the strengthening of the fiscal policy role by increasing the European budget, these matters are still on the side lines of the political debate.  Still, one should not expect that closer economic policy co-operation by member states, in and of itself, will be sufficient to avoid a breaking up of the currency union in the long run.

The issues raised here require a bold political move…a complete turnaround in the economic policy of the European Union. But a turnaround is needed if we want to avoid further crises in the European Currency Union.