Dr Repapis spoke to us about topics that have dominated the economic debate about Europe for years – the origins of the crisis, the nature of technocratic rule, the economic and political reforms of the Union, and its importance in global economy. His views provide a refreshing pro-European outlook in times when Euroscepticism is becoming increasingly popular.
Dr Constantinos Repapis tutors economics at the University of Oxford. In the past he worked as a visiting lecturer at the University of Cyprus, and lectured and supervised students at the University of Cambridge. He is also a visiting fellow in the Centre for globalisation research, Queen Mary, University of London. His research mainly concentrates on macroeconomic theory. He received his Masters and PhD from the University of Cambridge.
Since the beginning of the Euro crisis a lot has been said about the Greek economy and its shortcomings. European press often concentrated on Greek pensions, retirement age, tax evasion, or corruption. However, only seldom did it provide a more systematic analysis of the problems. Where, in your opinion, are the origins of the Greek crisis?
What went wrong with Greece? I think a lot of the criticism in the beginning was based on real facts. It is true that there were excesses in the social system – in pensions, retirement age, and pharmaceutical expenditure. Prior to the crisis there were sectors of public service where people did retire in their mid-fifties. All of these are important facts. However, I am interested more in the structure of the Greek economy, because that's where the crisis originated. Most of the problems and inefficiencies were in the public sector. This had to do with the structure of Greek state that was unable to clamp down on specific groups which had a lot of bargaining power in the political process. They controlled key sectors of the Greek economy, like railways, tax collection, or public utilities. At the same time, there was an element of corruption between political leaders and some parts of society.
How has the crisis affected these structural problems of the Greek economy?
We must see the Greek crisis in phases because all the things that I have mentioned, and that played such an important part in the perception of the Greek crisis abroad, have been not applied in the last year and a half to some degree. Greek pensions have gone down considerably. At the moment, Greece has one of the best systems of monitoring pensions and pension expenditures. Retirement age has increased; benefits have been cut across the board. I agree with the IMF in that the fiscal tightening that took place in Greece is in many ways one of the heaviest in a developed country since the forties. Some of it was necessary; in fact I think that in the public realm most of it was necessary.
Why then is the economy still doing badly?
What I think all commentators found disturbing from the beginning, and especially in the last two or three years, is that you have had a huge depression in Greece at the same time. Where I part company with the official line is that I think that this has to do with the inability of the European market to be a unified market.
At the time when the public sector was trying to cut employment, benefits, and its excesses, the Europeans were very keen on what was happening with the banks. The continual fear of Greece leaving the Eurozone resulted in huge capital flight abroad and massive cash withdrawals. This meant that the private sector, which in itself was actually the healthy part of the Greek economy, found it impossible to get funds to continue operating. In fact, you have had millions losing their jobs, and because of the restructuring of the public sector and the benefits, a lot of people were very hard hit, almost destitute. This is because part of the reduction on fiscal expenditures came from tightening of the rules on getting unemployment benefit. This has made it more difficult for long- term unemployed to qualify for benefits at the time when job creation is virtually non-existent. This means that in a country with an unemployment rate of more than 27 percent, there are people who are genuinely unable to find employment and have no other economic resources at the same time. However, the stagnation of the private sector is not the only cause of capital flight.
What do you mean?
The other part, which is important and is not understood by the public, has to do with monetary policies and it also has to do with the liquidity problems of the private sector. There has been a lot of discussion in the Eurozone of how do you deal with banks that have made bad loans to governments which are no longer solvent. The outcome of the discussion is that these banks are problem of the national authorities. These national authorities are supposed to find the funding to shore up their banks. As a result, you have a vicious cycle, where these authorities – Greece, Spain, Portugal, Cyprus, or Ireland, find themselves to be non-solvent.
The government sector problem becomes a banking sector problem. The government has no means of shoring up the banks. But if you don't have well-capitalised banks, they cannot create growth in these economies, which would help the government sector problem go away over time. The problem in the EU now is that some governments, especially German, have been very hesitant to deal with this crisis because they are afraid that their tax payers would have to pay for the Greek banks, for the European periphery and for their bail outs. I agree with this fear, especially if the banking union goes on without a political union. So the question now is whether the Europeans want to move to the next step and genuinely talk about what they have talked about from the beginning – the monetary system can work only if you have a good fiscal union, which means a more substantial political union. I have not seen this happening. Without that happening we will either become a union of transfers and bargaining, which I see as very disappointing because it works against the very point of the union which is creating harmony across the continent, or we will see a break up of the union. That is my fear, and I hope that it is something we will avoid.
So if I understand it correctly, national governments are the ones responsible for their banks, and they are the ones who have to bail them out. There has been a lot of talk about the banking union. You mention more European involvement, however, how do you think this could help the Eurozone?
First of all, the ECB is a very new institution. Officially, its sole aim is keeping prices constant. Now if we look at other central banks, like the Fed, or the Bank of England, price stability is one of the objectives of the bank, but there is also the objective of financial stability. This is complex because financial stability is an objective that doesn't kick in unless there are extreme circumstances, as indeed there has been since 2008. The ECB has tried to deal with the crisis, but it has been facing many constraints. Does it directly buy government bonds of the governments that cannot finance themselves? Does it capitalise or recapitalise the banks within national states? The standard answer has been “no”, because the ECB officially cannot bail out states – that's not what its there to do. The problem with this, though, is that there is no big fiscal arm in the Eurozone that could take that responsibility. Ideally for me, we should work towards a system similar to the US- a fiscal authority that is monitoring banks, and this authority is also responsible for the fiscal resources to finance and recapitalise the banks. For example if the State of California goes bankrupt, the banks in that state will not go bankrupt. The banks are supported by the federal system, and there is another federal system of deposit guarantee. In short, the federal system makes sure that the financial sector within California survives and continues even if the state has to file for bankruptcy. The question is whether in Europe we would like to live with this kind of a more integrated framework like the one in the US because the variation in the standards of living across US states is very big. This raises a question, whether this is the model we should work towards, or whether we should try to create something different. But definitely the system in place today should be changed. This is then the answer to your question of why more Europe would be different. It would because it would for example mean that the Greek government could default, but stay in the Eurozone. This is something that is yet to materialise in the European setting because the two things are interlinked – the consensus in 2008 was that if Greece defaulted, it would automatically lead to Greek banks going bankrupt. With the banks bankrupt, and without anyone to recapitalise them, it would have possibly led to Greece leaving the Eurozone.
However, there is then the overarching debate of moral hazard. In short, if the ECB does behave in this way, consequently there will never be enough pressure to reform.
At the moment I am writing an article with a colleague on this topic. I disagree fundamentally with this story because it isn't a useful story – it doesn't give you a solution. What it says is this – if you bail Greece out, Greece will have an incentive to do the same thing again. If we do not bail them out, it will be painful but they will end up reforming themselves. This part of the story is false – I think that we have seen in the last four or five years that for the countries that have run into trouble only reforming themselves doesn't work. The narrative doesn't understand the situation well – the Greek state is not a monolithic organisation. It is composed of power groups, and these power groups have different agendas and policies. To see it as a block is very simplistic, and doesn't help you solve the situation. If you want to build a moral hazard narrative, the question is what you ask in exchange for the help. My answer would be to break the systems of patronage and dependence within the Greek economy so that the situation doesn't repeat itself.
How can this be achieved?
One way to do this is to institute political reform on the European level. You would then have the legitimacy to install direct commissioners in the Greek economy. For example the European Parliament, which is an elected body, could send in representatives to Greece to implement reforms. The Greeks, like the Spanish and the Portuguese, at least vote for this parliament. The changes that these commissioners would implement would probably be similar to the ones the countries that are bailing Greece out would want to see, but they would have legitimacy and they would break the institutional frameworks that created the situation in the first place. We must be careful with moral hazard and the oversimplification it leads to in the public debate. I think it has done an extreme amount of harm in the Eurozone, because the Greeks, the Spanish, and the Portuguese feel that the Germans do not understand the complexity of the situation, and the Germans are seeing a very simplistic story which, in a sense, doesn't help them to make the right decisions for themselves and the union. At some point the countries in crisis will have to decide whether the policies that are designed on the basis of the moral hazard story are going to work for them. After five or six years of depression Greece needs a way out, or it will have a problem. We already see who some people are voting for – extremist parties like the Golden Dawn.
What do you mean by a “way out”?
For example, a year ago, the Germans suggested a growth package for Europe, at least until more substantial measures are put in place, which is yet to materialise. I hope they have come to something like that, to a growth package that will help the private economy to rebalance the downward spiral and reduce unemployment substantially. Unless unemployment starts dropping, I don't think we can be very optimistic. If you have a third of your workforce unemployed, it is going to lead to explosive situations – we have seen that happening in the past. That being said, Greece is in many ways much better than it was in 2009. Through this process some of the politicians managed to affect change which will be good whatever happens. I mentioned the pension situation, now we also have an up- to-date very good register of the number of public employees we have, and of the payments and benefits they receive. There has been change. This change also means that Greece is now in a better position to negotiate than it was in 2010, when it was much more disorganised. However, I think what's also important for Europe, isn't just the economic situation of the south. I think that the people in Eastern Europe need also to feel that it is a union for them. For example, now with the end of restrictions on the movement for Romanians and Bulgarians – a lot of countries are trying to prevent this. I think this is all very dangerous – you don't want to alienate people in the poorer areas of the union. You don't want to reintroduce national borders in a way they existed before – this is looking back, rather than forward.
In the former Soviet Bloc, many policy-makers subscribed to the so-called free market “shock therapy” in the 1990s and 2000s. This was based on policies that promoted tightening the belts, reducing public expenditure, and implementing the reforms some of which the southern countries are now supposed to implement as well. In fact, in the Slovak case these policies did lead to spectacular growth and foreign investment. Do you think that a similar shock therapy which is being implemented now in the south will have the same effect?
2001 is very different from 2010. With these kinds of policies it is important whether the rest of the world is growing and how fast it is growing. If there is a growth, and export is a big part of your national economy, this is going to be a success. You can export and the tightening of the belt of the public sector will mean that the private sector will be able to take on people and increase national income. That isn't the case in the Eurozone at the moment – one of the main problems is that you have a very anaemic growth. However, there is a couple of other issues.
The problem of the Soviet bloc was different to the periphery because the Soviet bloc was building markets in areas where markets didn't really exist. Having said that, I think we know that the economic policies we are talking about haven't all been successful. Inequality has been increasing, there are big regional differences. Furthermore, a large part of this increase in economic production ended up going to the foreign investors, and the profits were not reinvested in the economy. There is something like this happening in the periphery at the moment.
In what way?
Because local businesses find it very difficult to get access to credit and expand, the only companies that can get access to credit are big multinationals – their access is through international capital markets, not the local ones. This means that they are the ones who can benefit from low wages and lower asset values. This is very similar to what happened in the former Soviet bloc. Furthermore, there is the case of specific individuals who increased their wealth immensely because they were well-placed during this period. However, there is an interesting deeper question here- competition and inequality. I think this is a question which has to be discussed on the society level – what is the trade-off between competition and inequality the society is feeling comfortable with. Personally, I am starting to feel uncomfortable with the situation in Greece, where certain segments of society are suffering much worse than others. This leads to a disintegration of the Greek social fabric, which mirrors itself in the increase of extreme parties. Therefore, we should be careful. Shock therapies need to be well-designed to work. I suspect that even institutions that were in favour of implementing them in the periphery, like the IMF, would design them differently now than they did before.
You said that you think that the continuing economic problems of the periphery are in many ways caused by the inability of the European market to be a unified market. What is your solution to this?
My solution and this, I am afraid is becoming less and less realistic, as we are moving more and more to bargaining at the national level, is more Europe. The level of Europe we had was obviously not working. You had nation states pulling the union in different ways – Germany extremely efficient in exporting, the rest of the Eurozone inefficient in trying to keep up. Therefore, I think that there needs to be more political integration at the European level. If that doesn't happen what you have is that even good measures taken in the periphery aren't taken by elected representatives. Instead, the governments are told what to do from abroad by institutions like the IMF or the Commission which have technical knowledge, but have no direct legitimacy because they aren't voted by people. I think this is a huge problem because it strikes at the very core of the society we have.
The way it has been addressed in many cases – voting for technocrats is not a long-term solution. It is because there are important political decisions to be made, decisions which are not technocratic – like the ones of competition and inequality. Do we want minimum wages? What type of pensions do we want? What are we willing to forego for having such services? These are normative questions – people have to decide between different agendas. To say that there is a technocrat out there who will do his best – well, I can't see why there should be oneʼs “best”. Why shouldn't there be different types of outcomes depending on what different sectors of society want? That is a democratic government’s principle after all. I believe that where we stand at the moment is not sustainable. Where do we go from here? We are losing continuously the vision of an integrated Europe, and I believe the alternatives are worse for all of us. In today's globalised economy with very big trading blocs, European states need to work together instead of against each other in order to do well.
The question which seems to be becoming more relevant these days, even among people who were originally pro-European, is whether the EU is something we should actually try to keep, or whether just to go back to the nation state, perhaps with some form of the common market in place. You mentioned the big trading blocs, and I would like to ask how relevant is the EU in the global economy, and why you think we should still try to work within the framework of the EU?
It is a question I have been thinking about as well. We have seen over the last twenty-five years amazing growth in some areas of the world. These are now much bigger players on the world economic chessboard than there had been before, India and China being the obvious examples. Owing to this, interesting things are happening in the periphery. In Greece, China is interested in buying specific parts of the Greek economy and investing in them, which they see from a long-term perspective. They have been buying harbours in Greece, building a network which will help them to push their products in the Balkans. So you see these days these big states and federations pushing their national agenda.
So you support federalisation of Europe?
If you are another federation of some kind, it gives you a different ability to negotiate. If you are just a small state on a small continent which is becoming less and less important in terms of global GDP, for example like Greece, you cannot fruitfully negotiate with a country like China. It simply isn't an equal match. But it isn't just Greece; it is also France or Germany. Germany is an economy of 80 million people, China has 1.3 billion. If the common institutions break up, and then each nation state negotiates by itself with these big trading blocs, European countries will be in a much weaker position. Whereas some of these blocs are starting to coordinate their actions, like Brazil and Latin America which is trying to work in unison, we in Europe are moving the other way. Strategically and especially from the economic point of view this makes very little sense to me. You see what has been happening in the negotiations between the EU and Russia's Gazprom. If there wasn't the EU, the nation states would have to negotiate directly with these big countries and companies. This would obviously lead to unfavourable outcomes. But there aren't just economic reasons.
What other reasons do you have in mind?
Culturally, no matter how much Europe is divided, it shares a lot, and there are very deep cultural ties between European countries. Much deeper than those between individual countries and the trading blocs which have very different cultural background and institutions, e.g. China. That's why I think it is important to make Europe work. We focus too much on the differences because we are coming from the vantage point of the last two or three centuries when Europe was too important in the world. And we haven't realised that we are moving into a period where Europe is going to be a smaller part of the world. That's simply going to happen and we must find ways to deal with this.
Denis Dobrovoda studied Philosophy, Politics, and Economics at the University of Oxford. Currently, he is a freelance journalist based in Paris.