John Sfakianakis: European Union has serious problems ahead – and Greek debt is just one

One way for the EU to survive its economic woes is a parallel currency, allowing less adept economies some flexibility on currency and interest rates.

During the Greek debt crisis in 2015, pensioners were unable to get hold of their money. Its future depends on its creditors working together. Daniel Ochoa de Olza / AP Photo
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On March 25, leaders of the European Union’s member states will convene in Rome to celebrate the treaties signed in that city 60 years ago which allowed Europe to progress on its path towards union, peace and success. “United we stand, divided we fall,” Donald Tusk, the president of the European Council, said in a letter to the 27 leaders last month. In that very same letter, he highlighted three threats facing the EU.

The first one relates to the geopolitical situation in the world and around Europe. Mr Tusk’s letter mentioned an assertive China, Russia’s aggressive policy in Ukraine and its neighbours, terror and turmoil in the Middle East and Africa and the worrying declarations of the new American administration.

The second threat of which Mr Tusk spoke was an internal one, which is more important and probably at the core of the EU’s challenging future: the rise in anti-EU, nationalist and xenophobic sentiment.

The third threat, which in my opinion is related to the second one, is a decline in political integration and compliance to populist arguments.

The third threat is in many ways the consequence of failed policies of European economic exclusion and fundamental economic challenges facing many EU member states. Look no farther than Europe’s south: Greece continues to be an economic corpse.

Notwithstanding Greece’s own faults, which are many, the EU has in many ways inadequately responded to the Greek crisis. Greece’s debt problem was not dealt with on time until it had become too big to handle. Then, when the situation was “too big to fail”, the EU’s wealthier countries chose to save their banks, which had lent money to Greece.

The crisis in Greece was defined by its international creditors as a liquidity crisis, whereas in reality the country suffered from perennial macroeconomic faults such as a bloated public sector, lack of competitiveness and governance.

There is no doubt that the Greeks are to be blamed for reaching the tip of the debt cliff, but the recipe provided to fix the debt problem was faulty and never tested before. And as Greece is facing an ever-increasing crisis with no end in sight, there is greater incongruity between the EU and the IMF, which are both responsible for offering economic and technical assistance to Greece.

It remains to be seen whether Donald Trump, the US president, will want the IMF to support the Greek bailout programme over the medium term. In 2012, he tweeted that, “Greece should get out of the euro and go back to their own currency – they are just wasting their time.”

There is little doubt that Mr Trump is not very fond of supranational organisations and believes that the EU has “tilted strongly and most favourably towards Germany”, according to Ted Malloch, who had been tipped as Mr Trump’s ambassador to the EU, although concerns about his credibility have since arisen.

There is a distinct difference of opinion between the IMF and Germany about the Greek debt crisis.

The IMF believes that there has to be significant debt relief agreement, and that is something that Germany is not prepared to support. The IMF believes that without relief of the country’s debt, which is now above 175 per cent of its GDP, any further austerity measures will force the economy into a steeper depression. The Greek economy receded in the three months to December. The incumbent government is under pressure to step up economic reforms, including another round of pension cuts and tax rises. If anyone has any knowledge of basic economics or business, they would immediately expect that higher taxes lead to fewer investments, loss of confidence and, more importantly, loss of domestic demand. It remains baffling to a lot of analysts how Greece will ever reignite its growth potential if more is demanded from its citizens in the form of taxes.

Some sort of compromise will have to be reached in the coming days or weeks to avoid a bigger crisis in Greece, for now. Germany is facing national elections this autumn, so a debt relief compromise that favours the position of the IMF and the Greek authorities might not be attainable. However, if there is no agreement by June the Greek authorities will find it very challenging to make bailout repayments of more than US$8 billion in July alone. It will have to call for elections, something the current incumbents would not favour as most probably they could lose out, as most polls are showing.

The anti-EU parties are getting stronger, especially in the Netherlands, which is having national elections soon. France and the Le Pen movement should not be underestimated. Currently it’s a hypothetical, but in the era of all that is unexpected happening, a Marine Le Pen presidency would almost certainly lead France out of the EU, which would inevitably lead to the end of the euro.

The EU has to reinvent itself fast, something its bureaucrats are not known for. If not, Europe’s politicians will have to lead, likewise a tall order. Greece is simply emblematic of the symptom, not the problem. Nationalist demagogues are gaining traction causing internal confusion. The currency union admittedly shouldn’t have included some countries, Greece is one of them, and that needs to be addressed. A parallel currency might be one option that can allow less adept economies some flexibility on currency and interest rates.

The EU’s expansion to include former Eastern Bloc countries was done for political expediency in the 1990s after the collapse of the Soviet Union.

That has its limitation today, although some have performed much better than Spain, Greece and Portugal, which had more than a decade of prior EU experience. The notion of open borders and global markets will have to be addressed as discord prevails.

The Greeks are not absolved from not being blamed for their economic disarray. The leaders of Europe will have to take some tough, rather quick, decisions this year and Greece is just one of them.

John Sfakianakis is the director of economic research at the Gulf Research Centre in Riyadh.

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