"Authorities... misread the real cause of the crisis": former Greek finance minister

Yannos Papantoniou on the Eurozone crisis.

The Cyprus bailout deal is a watershed in the unfolding eurozone crisis, because responsibility for resolving banks’ problems has been shifted from taxpayers to private investors and depositors. But imposing major losses on Cypriot banks’ depositors violates the deposit-insurance guarantee that forms part of the proposed European banking union, while the imposition of capital controls further erodes the monetary union’s foundations. So, is Europe chasing its tail?

Germany and the other countries of the eurozone core are signalling that debt mutualisation within the monetary union is out of the question, and that bailouts of countries or financial institutions will be balanced by “bail-ins” of their creditors. Increased uncertainty concerning the safety of deposits will push up interest rates and deepen Europe’s recession, and may also trigger capital outflows from the eurozone’s weaker peripheral economies to the core.
 

The implications of this shift may be far-reaching. The German model for resolving the debt crisis and returning to internal or external balance relies on fiscal consolidation and structural reforms for the deficit countries. But, if all countries simultaneously attempt to improve their fiscal or external balances by cutting spending and raising taxes, all will fail, because each country’s austerity implies less demand for other countries’ output, in turn perpetuating both domestic and external imbalances. “Bailing in” creditors will exacerbate these trends.

Moreover, a deep and prolonged recession implies vanishing support for reforms, as governments fail to convince citizens that current sacrifice will ensure a better future. Privatization, market liberalization, the opening of closed professions, and government downsizing involve conflicts with powerful vested interests, such as businesses in protected industries, public-sector unions, or influential lobbies. Resolving such conflicts requires social alliances, which are invariably undermined by discontent, civil disorder, and political instability.

The recent Italian election has shown how toxic the association of austerity policies with the pursuit of reform has become. Anti-austerity anger swept away the reform agenda of Mario Monti’s previous technocratic government, leaving Italy, its future uncertain, to continue muddling through. The same scenario seems to be emerging in Greece, where the depth of the austerity-induced recession, with output down by 25 per cent over five years and unemployment at 27 per cent, is paralyzing a reform-minded center-right government.

The gaps in the strategy are clear. First, the eurozone authorities misread the real causes of the debt crisis, which stemmed mainly from a growing competitiveness gap between the core and periphery countries. The resulting private-sector imbalances culminated in banking problems that were eventually transferred to sovereigns. Greece’s fiscal profligacy was the exception rather than the rule.

Indeed, in contrast to the United States, eurozone authorities were slow to consolidate the banking system after the global financial crisis erupted in 2008, and failed to sever the ties between sovereigns’ and banks’ balance sheets. Nor did they push strongly for structural reforms. Instead, they emphasized harsh austerity, which was to be pursued everywhere.

Second, the effects of austerity were exacerbated by the choice to pursue nominal, rather than structural, fiscal-deficit targets. Countries with a stronger fiscal position (that is, smaller structural deficits) should be encouraged to adopt more expansionary policies in order to contribute to lifting overall demand. Moreover, the European Investment Bank’s lending capacity could be increased substantially, and European Union structural funds mobilized, to finance investment projects in the peripheral economies.

Third, the European Central Bank’s announcement last August of its “outright monetary transactions” program – through which it guarantees eurozone members’ sovereign debt, subject to policy conditionality – has contributed significantly to subduing financial turbulence in the eurozone. But the OMT scheme has not been reinforced by a reduction in key interest rates, which would boost inflation in core countries with external surpluses and thus help to close the competitiveness gap with the periphery. Crucially, monetary-policy measures do not address the underlying problem of lack of demand.

Last, but not least, the eurozone authorities misread the confidence factor. In theory, simultaneous fiscal consolidation and supply-side reform facilitates economic recovery, because it increases confidence among consumers and investors, thereby inducing higher spending and production. But this does not necessarily work in an imperfectly functioning monetary union, such as the eurozone, where the continual appearance of systemic flaws erodes confidence; in such circumstances, the result may be hoarding and capital outflows, rather than increased spending.

The rest of this article can be read on economia.

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PMQs review: Jeremy Corbyn prompts Tory outrage as he blames Grenfell Tower fire on austerity

To Conservative cries of "shame on you!", the Labour leader warned that "we all pay a price in public safety" for spending cuts.

A fortnight after the Grenfell Tower fire erupted, the tragedy continues to cast a shadow over British politics. Rather than probing Theresa May on the DUP deal, Jeremy Corbyn asked a series of forensic questions on the incident, in which at least 79 people are confirmed to have died.

In the first PMQs of the new parliament, May revealed that the number of buildings that had failed fire safety tests had risen to 120 (a 100 per cent failure rate) and that the cladding used on Grenfell Tower was "non-compliant" with building regulations (Corbyn had asked whether it was "legal").

After several factual questions, the Labour leader rose to his political argument. To cries of "shame on you!" from Tory MPs, he warned that local authority cuts of 40 per cent meant "we all pay a price in public safety". Corbyn added: “What the tragedy of Grenfell Tower has exposed is the disastrous effects of austerity. The disregard for working-class communities, the terrible consequences of deregulation and cutting corners." Corbyn noted that 11,000 firefighters had been cut and that the public sector pay cap (which Labour has tabled a Queen's Speech amendment against) was hindering recruitment. "This disaster must be a wake-up call," he concluded.

But May, who fared better than many expected, had a ready retort. "The cladding of tower blocks did not start under this government, it did not start under the previous coalition governments, the cladding of tower blocks began under the Blair government," she said. “In 2005 it was a Labour government that introduced the regulatory reform fire safety order which changed the requirements to inspect a building on fire safety from the local fire authority to a 'responsible person'." In this regard, however, Corbyn's lack of frontbench experience is a virtue – no action by the last Labour government can be pinned on him. 

Whether or not the Conservatives accept the link between Grenfell and austerity, their reluctance to defend continued cuts shows an awareness of how politically vulnerable they have become (No10 has announced that the public sector pay cap is under review).

Though Tory MP Philip Davies accused May of having an "aversion" to policies "that might be popular with the public" (he demanded the abolition of the 0.7 per cent foreign aid target), there was little dissent from the backbenches – reflecting the new consensus that the Prime Minister is safe (in the absence of an attractive alternative).

And May, whose jokes sometimes fall painfully flat, was able to accuse Corbyn of saying "one thing to the many and another thing to the few" in reference to his alleged Trident comments to Glastonbury festival founder Michael Eavis. But the Labour leader, no longer looking fearfully over his shoulder, displayed his increased authority today. Though the Conservatives may jeer him, the lingering fear in Tory minds is that they and the country are on divergent paths. 

George Eaton is political editor of the New Statesman.

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