Greece, Spain and the blame game
by Nick Malkoutizis
When Jeroen Dijsselbloem, Dutch finance minister and president of the Eurogroup, implied that the euro area crisis was a result of the south wasting its wealth (on wine and women) he exposed a damaging side to discussions about the euro.
The idea of there being a higher and lower ground in the euro area has fuelled the moralistic approach to crisis management. This has driven a wedge between the core and the periphery, while compounding rather than solving many of the problems.
Solidarity is a myth
The definition of solidarity is when people act together for a common purpose. However, when European officials talk about solidarity in the context of the euro crisis, they present it as a one-way transaction: countries that were in danger of going under were rescued with loans from their partners.
This is a very limited interpretation of what happened. In fact members of a single currency that lacked fiscal unity and the tools to deal with a crisis ran into economic problems and were bailed out with loans that came with strict conditionality. Although this staved off disorderly defaults, meeting the conditions put a severe strain on the economies of the countries concerned.
They put their public finances in order, they embarked on structural reforms and endured falls in their economic output as well as rises in unemployment levels.
As this adjustment was taking place, some of the euro area member states providing the loans were able to shore up their defences. This prevented a potentially devastating crisis dragging down their banks, which had lent freely to the bailed-out countries in previous years. The International Monetary Fund described in its 2013 evaluation of the first bail-out how the core insulated itself from Greek contagion.
It said, ‘An upfront debt restructuring would have been better for Greece although this was not acceptable to the euro partners. A delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands. This happened on a significant scale and limited the bail-in of creditors when private sector involvement eventually took place, leaving taxpayers and the official sector on the hook.’
While the rest of the euro area put up the firewall, Spain, Cyprus, Portugal and Greece felt the heat of shuttered businesses, job losses and rising emigration, especially among their young people. The truth is that the bail-outs of southern euro area countries were partly designed to protect core euro area banks. Pretending they were selfless acts of solidarity is misleading. In the cases of Spain, Cyprus and Portugal, the terms of the programmes were met and the countries exited the bail-outs. Greece is yet to reach this point but each step it makes is defined by the terms its lenders set out.
The other point to be made about Dijsselbloem’s comment relates to the impression created (inadvertently, he says) that the crisis was a result of the south’s profligacy. It is true that the onset of the crisis found Greece, Ireland, Spain, Portugal and Italy with a collective current account deficit of almost 7% of their GDP, suggesting that their economic priorities had gone awry.
But one cannot make a proper economic assessment by looking at just one side of the balance sheet. While the periphery was struggling, the core, including Germany and the Netherlands, recorded a surplus of around 6% of its GDP. A deficit in any country requires a surplus in another to finance it.
As economists Alexandr Hobza and Stefan Zeugner point out in a 2014 European Commission paper, the euro area’s overall current account ‘stayed moderately positive’, never exceeding 1% of GDP. ‘The euro area current account position during its first decade thus could be called an “imbalanced balance”,’ they write. ‘This implies that the deficits were almost exclusively financed from the surpluses in other euro area countries.’
What the euro area witnessed in the build-up to the crisis was a capital flow from the core, which was capital-rich thanks to excessive savings, to the periphery, which was in a hurry to catch up with its partners in the newly created euro. The crisis brought these flows to a sudden stop.
In many cases the periphery did not invest its new-found (borrowed) wealth wisely, as perhaps it should have. Some of it was spent on imports from the north, from consumer goods to military hardware, rather than on domestic production. Spain produced a property bubble, Greece inflated its public spending, Portugal increased consumption, and Cyprus lost control of its banks.
However, where there is bad borrowing, there is also bad lending. We cannot speak of unacceptable actions on the part of the borrowers and ignore the lenders. They benefited greatly from the financial integration the single currency provided but were absolved of any responsibility when their practices failed.
In Greece’s case, the discussion centres almost exclusively on wasteful public spending and hardly ever on the equally reckless lending. German and French banks had an exposure of $150bn to Greece in 2010, when it signed its first Memorandum of Understanding.
To ignore the failings of the lenders means that euro area policy-makers are not genuinely interested in strengthening the single currency as a whole and each of its members individually. They are simply looking for a scapegoat to blame because short-term national politics outweigh the long-term interests of educating voters about what actually happened.
Seven years on, Cyprus has exited its bail-out and is returning to growth, Spain is gradually overcoming the damage inflicted by its property boom, Portugal has posted its lowest budget deficit (2.1% of GDP) since 1974, and Greece stands on the verge of a deal with its lenders that may put it on a path towards genuine recovery.
This of all years, when the European Union is celebrating its 60th anniversary, is not the time to sow the seeds of division. We should, instead, be looking at how the euro area can move towards genuine convergence. ▪
Nick Malkoutzis is Editor of MacroPolis. This is an edited version of an article originally published at www.macropolis.gr. Back