From Athens to Rome: the classics in European crisis management

Italian Finance Minister Giulio Tremonti (L) and Greek Finance Minister George Papaconstantinou talk on October 18, 2010

From Athens to Rome: the classics in European crisis management


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If you have been following the Italian news, you might have a sense of déja-vu. History is making the most of experience, as it’s never repeated.

When have we seen this crisis before? The Italian government insists that maintaining a 2,4% deficit target for 2018 is the best policy to reign over its debt and encourage growth. The European Commission disagrees and is calling on Italy to reign over its budget deficit here and now. Rome remains defiant. Almost daily, Deputy Prime Ministers Matteo Salvini and Luigi Di Maio insist that an expansionary budget is necessary for jobs, growth and investment.

Their argument is not without support. The European Fiscal Board said on Wednesday that existing budget rules have largely failed to improve the long-term sustainability of public finances in several EU states. They urge for growth strategies. But, Italy is faced with demands for fiscal consolidation, here and now.

The International Monetary Fund (IMF) warned on Wednesday that financial markets might test the resilience of the banking system if confidence in public finances is lost. Meanwhile, Moody’s and Fitch Ratings are warning Italy that their own rating depends on Italy’s budget. Either Italy will move towards fiscal consolidation or the cost of servicing its €2,3 trillion debt will soar.

By Thursday, Italy was served with a warning in the form of reassurance. According to the head of the European Bailout Fund, Klaus Regling, there is no “immediate danger” of Italy losing market access or being downgraded below investment grade because the Italian economy has underlying strengths.

Greece will not default was also the cry of George Papandreou’s government, struggling to reign over market panic. In October 2009, the Greek Socialist Party (PASOK) returned to power. The New Minister of Finance was George Papacostantinou. Little did he know at the time that he was assuming the most unenviable role in Europe. He was to lead an unavoidable and historically unprecedented fiscal consolidation programme that reduced the Greek deficit by 5% of the GDP in one year. He later described what and how this happened in his book with the telling title Game Over.

The question now is whether he feels Rome is faced with a classical Athenian problem. He is well positioned to address this question. New Europe found George Papaconstantinou at the European University Institute in Florence, teaching at the School of Transnational Governance. There, Papaconstantinou teaches about governance beyond the state, in a world that seems to crave for the good old times, when the state could tax, distribute, and invest.

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New Europe (N.E): From dealing with a national crisis at the height of the 2009 Eurozone crisis you find yourself dealing with challenges of a transnational nature at the European University Institute. Are you confident that Europe is able to manage the balance between globalized policy and localized politics?

George Papaconstantinou (GP): I am not at all confident about that.

But Europe has an incredible opportunity. It finds itself at the better end of a huge crisis, having survived it and even having started to address some of the problems which brought it about in the first place. And in a geopolitical sense, it finds itself as the only true believer left in a rules-based international order. Trump’s US is a disruptor, while China seems to want to fashion a “globalization with Chinese characteristics”.

Despite its problems, Europe is unique in continuing to believe that the management of global common goods (from financial stability to climate, migration and the internet) requires cooperation based on principles and commonly agreed on rules, not a transactional approach to problem-solving. So it has a unique opportunity to for once rise to the challenge and punch at its global weight.

And yet it is failing to do so, held back by the same kind of populist and nativist forces within the EU that have become a majority in the US. This is a battle which needs to be won – it is more than about the future and even the very soul of Europe. It is about our collective global future. This is also the essence of the project on the Transformation of Global Governance we are undertaking at the European University Institute.

NE: Italy is the third biggest country in the Eurozone. Currently, its 10-year bonds have crossed the 3% mark, and we are heading towards the conclusion of the ECB’s bond-buying programme. When would you say is a good time to panic?

GP: I have a very strong sense of déja-vu – all over again, so to speak.

All the signs are there: a caricature criticism of the EU; demonizing the markets; exhortation to Italian state-owned firms to buy debt, and confident predictions that spreads will not spiral out of control. Italy may not be like Greece in many respects, but there are clear similarities to the first six months of 2015 under Syriza. That episode ended with the Greek government staring down the abyss and deciding on a last-minute U-turn in order to avoid disaster.

I strongly hope that the Italian government will not repeat this death-like experience; the cost would be extremely large, first to Italy, but also to the rest of Europe. I worry that the size of the country makes its government mistake that as leverage in the negotiations; they are wrong. Size does not necessarily give you leverage; it can also make you vulnerable more quickly. However, I do believe that in the end, it will not come to that; the clash can be avoided. We will manage to square the circle, without having to compromise on EU collective principles, but also taking into consideration the legitimate grievances which are behind the rise of the current majority parties in Italy to power.

NE: Can Italy eliminate the fiscal consolidation gains made by Greece? After the Troika left Athens in August 2018, is Grexit still a danger or even an option?

GP: The recent spike in Greek spreads, the collapse in bank stocks and in the Athens stock market all show that Greece remains very vulnerable – both to external turbulence (Italy, but also Turkey), as well as to internal back-sliding in the reform front. Even more so in fact, as it is no longer under the “protective umbrella” of a support programme.

I continue to think that it was a mistake to opt for an exit from the third bailout without a precautionary credit line. The extensive cash buffer which the country has is no substitute for that; the minute it begins to be used, it sends a clear signal of inability to obtain market funding. And while I believe that – barring a major external event concerning Italy – Grexit is no longer a danger in itself (it was never an “option” to me), the danger of getting stuck in a low-growth trap is very real.

What is required is a fresh commitment to honouring commitments made, coupled with a willingness to pursue reforms in markets and in institutions and to use whatever fiscal space exists for truly progressive redistribution, not clientelistic politics. In short, a small revolution in political and societal attitudes that will bring in much-need foreign investment, significantly increase productivity, and more importantly modernize the polity.

NE: In 2009 your government was calling for Eurobonds. The Macron agenda is broader, calling for risk-sharing, a European budget, a Eurozone parliament, and European taxation. All these proposals have been rejected from net budget contributors. Do you see a way out of this political stalemate?

GP: We seem to be far from achieving the “grand bargain” we were hoping for and which would reconcile the fundamentally different existing positions within the EU regarding what is necessary to unlock Europe’s economic potential.

Politically speaking, it would seem the moment has passed; both leaders who could have pushed for such a compromise (President Macron and Chancellor Merkel) are weaker than they were at the beginning of their (new and renewed respectively) mandates; and the populist voices from Italy, Hungary and beyond are louder than ever before. But let’s not lose hope; the European project has advanced in small steps, and despite setbacks.

We are today in a better position than we were a few years ago; we have made progress in certain issues (such as the financial backstop); on other difficult ones, there is an ongoing discussion, though we are far from agreement. I believe that the 2019 European Parliament elections will be a defining moment in that respect; the challenge by the populist international to core European values should force like-minded forces (despite differences on some of the difficult economic issues) to work together by finding acceptable compromises on issues of substance. But it is of course not only about finding common policy positions; more importantly, we need a new convincing political narrative; it has yet to be articulated.

NE: Why is it that Central Eastern Europe and the Baltic States are thriving and the Mediterranean economies are stagnating? Why are populist movements thriving in both regions? 

GP: Let’s not fall into easy generalizations.

Not every country in central and eastern Europe or the Baltics is doing well; nor is every country in the Med doing badly. And within the first group, there are enormous differences. Those central European economies which have developed over decades their industrial base, education and social systems and institutions are different from the countries which started more recently from a weak position but made the right choices and are reaping the advantages of a catch-up development phase. More broadly, I would single out two elements for success: robust institutions; and a functioning social contract with citizens.

And it is in current weaknesses in these two elements that one can trace the success of populist parties across the continent. Populists are propelled by the uneven benefits of hyper-globalization, the disruption coming from pervasive technology and AI, and the threat to identities from all these changes. But their success or failure of their flawed solutions getting traction depends on two factors. The first is the capacity of our institutions to function, protecting democracy and the fact-based political dialogue which is its oxygen. The second is for the social contract to continue to function; when citizens feel they are no longer represented, or that the balance between rights and responsibilities is skewed, populists gain ground. On both counts, we need to do many repairs.

NE: In your experience in managing the Greek economy, are migrants and asset or a burden for an economy immersed in crisis.

GP: I know it is not popular to consider migrants an economic asset for a country – but they are.

 I am not blind to the fact that uncontrolled immigration in the middle of a crisis poses problems, but these are problems that any European society can handle. Indeed, after the initial shock a few summers ago with the large numbers of people arriving on Greek shores, the “problem” has actually become manageable, both in absolute numbers and certainly when immigrants are seen as a percentage of the overall population. But instead of simply managing it in a humane and productive manner, we have allowed arriving migrants to live in conditions which are simply disgraceful for a European country. Lack of money has not been the issue – there are enough EU funds earmarked to this effect.

More broadly, we seem to have a paradox: it is clear that previous waves of immigrants have assimilated, and that both in terms of geography as well as economic activities they now represent a net positive contribution to the country. And yet we have no coherent policy of assimilation in Greece. This is of course not something unique to my country. The positive imprint applies to European societies more generally, but populist sentiment makes it very hard to articulate a European strategy for migration governance.

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