On the eve of Greece agreeing its first EU-IMF bailout in May 2010, the CEO of investment firm PIMCO, Mohamed El-Erian, expressed doubts about the package, what it demanded of Greece and whether the Europeans would be able to manage the process. “This is a daunting challenge,” he wrote in the Financial
Times. “The numbers involved are large and getting larger; the sociopolitical stakes are high and getting higher; and the official sector has yet to prove itself effective at crisis management.”
El-Erian raised the issue of private sector involvement, or PSI, almost two years before it happened and warned the eurozone that it was walking into a potential disaster. “What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe,” he wrote.
This week, Bloomberg revealed that PIMCO has been selling the Dutch bonds it was holding. Until now a financial, AAA-rated safe-haven in the eurozone crisis, the Netherlands’ bond yields are edging upward, its coalition is under pressure and “austerity fatigue” is apparently setting in. El-Erian’s warning in May 2010 that the Greek debt crisis would “morph into something much broader” has been proved correct.
El-Erian is one of several voices whose wise words were not heeded at the onset of this crisis. The eurozone’s initial thought block is not that surprising given that the nascent eurozone entered a new and unprecedented phase of its development when Greece went off the rails. The inability of core and periphery along with sovereigns and banks to match up their interests was perhaps predictable in the absence of the necessary institutional architecture, which is still being furiously put together. What is far more alarming than the eurozone’s naivety is that in 2013 skepticism, cautiousness and dissent are either ignored or flattened by the crisis juggernaut, driven at varying times by the European Commission, European Central Bank or national politicians in certain core member states.
Despite the plethora of evidence that the crisis has been dangerously mishandled, the eurozone maintains an almost childlike inability to take in criticism or turn it to good use. When the IMF held its hands up over the last few months to admit failings over assessing the economic impact of austerity via the fiscal multiplier and then to admit that the Greek bailout had been wrongly constructed, the Commission’s response was to turn on the IMF rather than to look at itself. Yet, when EU Justice Commissioner Viviane Reding suggested that the troika had run its course, as she did in an interview with Kathimerini, this idea was also batted away.
As with any relationship, though, the only thing worse than being repeatedly rejected is being persistently ignored. The eurozone’s insistence on turning a deaf ear to measured criticism is counterproductive. Its inability to foment a progressive debate denotes a worrying immaturity.
It was instructive to follow the reaction to recent high-profile challenges to how the Greek bailout and the crisis overall have been handled. When Italian Prime Minister Enrico Letta visited Athens last month, he was unusually outspoken in his criticism of the European response to the crisis. “There is no doubt that serious mistakes were made about Greece by Europe in the past few years,” he said.
“The timing was wrong. The instruments were wrong. The interventions were not made in the right way and at the right time, and this worsened the crisis,” Letta added. “The crisis would have been different. It would have created less of a financial disaster, it would have led to fewer job losses across Europe if Europe’s attitude to Greece had been different at the beginning.”
There cannot have been many clearer or more biting assessments of the last three years from a eurozone leader but Letta’s comments passed largely without comment. It is an odd state of affairs when the prime minister of the eurozone’s third-largest economy is so critical of the bloc’s central policy but his words hardly register.
Letta’s skepticism was overshadowed a few days later when Brazil’s IMF representative, Paulo Nogueira Batista, did not support the release of a new loan to Greece. Batista said the Fund’s debt outlook for Greece “seems all but a delusion” and that the adjustment program was in danger of veering off track. “Implementation has been unsatisfactory in almost all areas; growth and debt sustainability assumptions continue to be overoptimistic,” he said.
Batista also raised concerns about the political and social impact of the program; subjects that the eurozone has rarely countenanced. “Never-ending economic depression and severe unemployment levels have led to political discord,” said the Brazilian. “The widespread perception that the hardship brought on by draconian adjustment policies is not paying off in any way has further undermined public support for the adjustment and reform program,” he added.
After making the comments, Batista was recalled to his country. Brazil said he had not been authorized to abstain from the IMF vote. This despite the fact that he had failed to support previous releases of bailout funding without being challenged by his government, which has been repeatedly critical of the IMF recently. Although not exclusively of the eurozone’s making this time, the opportunity for a more diverse debate was stymied again.
All this is not to say that bailout skeptics have a monopoly on the truth. They can be just as devoted to their ideological foibles and economic orthodoxies as those who insist that the eurozone is following the right path. What must be of concern, though, is that the critics’ voices are not being heard because there is a concerted attempt for the eurozone to sing from the same hymn sheet. Any chance for a progressive discussion is being stomped on from a great height. Trying to mold this uniformity of opinion means we are not learning from our history, even if it’s as recent as three years ago.
Nick Malkoutzis
Inside Greece 
Nick, I am Greek also and never called myself as European. I do accept that Greece culturally has nothing to do with Europe. Greece is oriental and not occidental. This illusion to join the EU and become an ally with the strong westerners is nothing but Caramanlis propaganda of the 70s who besides didn’t ask us at all if we want to become a member of this fiasco. Did the majority of people during the 70s wanted to join the EU? I don’t think so…
We must understand that we are not protestants and we will never be. We are different and we will continue living that way. Besides, I would rather commit suicide than spending my whole life working for everything and asking for nothing. Modern European culture is a culture of slavery. I would prefer to die than living as a slave European who knows nothing apart from executing orders. Modern Europe is not about freedom but of perfect subordination, called protestant work-ethic, rational mastery and Neoliberalism.
Do you remember what happened with the Lisboa treaty? Why the Irish NO vote was rejected? Is this democracy? Do you still want to be a member of the EU when this inter-state dictatorial organization cannot guarantee even basic human rights? Besides, why should I become a pro-EU since it is crystal clear that they don’t like as and we know it. See how they treat Spain, Portugal and Ireland. The European media never said anything such “the lazy spaniards,” or “the crooks in Portugal”. They only speak against Greeks. What’s the point to be among such people who think we are subhumans? If I am invited in a place that nobody likes me, simply I leave. And why nobody likes us? Because we are not occidental. Greece vs Europe is a reflection of east vs west.
Let’s get rid of the European myth. We are alone, we stand alone and we will pass through these hard times alone. So let’s exit the EU, close our borders with the EU and seek stronger ties with other countries who have much closer with us. Not Europe, not…
Regrettably, most of these discussions (this article as well) are debt-related. Regardless how important an issue the issue of Greece’s sovereign debt is, it is NOT the most important issue. Excessive debt is always the ‘derivative’, the symptom of something, namely of the ‘underlying’. One never solves the problems of the underlying by playing around with its derivatives. It seems to me that 99% of the discussions are about the derivatives and only 1% (at best) about the underlying, the real economy. I will explain.
Suppose the creditors of the Greek Republic would offer to FORGIVE ALL SOVEREIGN DEBT. In other words, about 300-350 BEUR, whatever the correct amount now is. They would only put two conditions to it: for at least 10 years (a) a prohibition for the Greek state to borrow abroad and (b) a prohibition for all state-owned entities (except banks) to take up NEW debt abroad (existing foreign debt could be refinanced). Both, the state and state-owned entities, would be allowed to raise debt domestically.
On the surface, this would not be a problem for Greece. The state’s primary balance is now break-even or in surplus, so there would be no need to borrow new funds for the state’s operations. And state-owned entities would have their existing foreign debt locked in. Should the state or the state-owned entities require NEW debt, they would have to raise it domestically. There are sufficient savings in the Greek banking system to finance quite a bit of NEW borrowing by the state or state-owned entities.
Regrettably, at the end of this exercise, there would still be over 1 million Greeks unemployed and many more in financial hardships. Unless one wants to tell all those ‘superflous’ Greeks to emigrate, one would need to do something. That something would have to be growth and growth requires financing.
Before long, the Greek state would have to tell foreigners “You know, we need to finance growth to get rid of unemployment but we don’t have enough money domestically; we need to borrow money abroad”. And the foreigners would say to the Greek state “You remember that you are prohibited from borrowing money abroad. We understand that you need foreign money to finance growth but you will have to get it by way of foreign investment and not by way of debt”.
And that would open the eyes of Greek leadership that what is really necessary to exploit the country’s potential is – foreign investment (both as a source of funds and of know-how transfer). And it would be the job of Greek leadership to provide an economic framework which attracts foreign investment (or continue to have millions of Greeks live in financial misery).
Is the above hypothetical? Not really. My own guess is that, when all is said and done (maybe this year, maybe next year, maybe next decade), foreigners will have had to forgive 70-80% of the 300-350 BEUR which the Greek state owes today. If someone wants to know how I come to that conclusion, I will be happy to explain.
My conclusion? Instead of devoting all its energies to abstract debt issues, a Greek government should start devoting its energies to measures which would have to be taken even if there were no foreign debt.
Debates are just parlor tricks for votes. The Greek public demands to know the reason why Europe transfers tax money by the truckload but actually pocketed for bribes.
I do actually see a learning curve going on in the european institutions. And it’s quite a steep one in fact. A couple of examples:
1. The ECB used to be more deferential to german financial shibboleths, and rarely challenged either Bundesbank pessimism or populist utterances by politicians or media figures about periphery countries. That is now quite different
2. Bail-ins. That has really been a big learning curve. Back in 2010, The Irish government was begging for the permission to haircut its zombie banks’ senior bondholders. It’s a complicated issue due to ireland’s broad bank guarantees in 2008 and 2009, but this was between €5bn and €30bn “haircuttable” bank debts that ended up on the state’s books, making the debt not very sustainable. The IMF agreed with them, in fact.
Both ECB and EC were dead against a haircut for senior bondholders, fearing contagion but also an increase in unwillingness to loan to banks. Contrast with Cyprus this year. They pretty much forced the cypriots to do in 2013, what they wouldn’t allow ireland to do in 2010.
Sovereign Debt sustainability now trumps the interests of senior bondholders – and they’ve even got agreements on how to structure the bail-ins at eurozone level. The IMF have, finally, won the argument over the European Commission. Hence Ms. Reding’s sour grapes.
Have their been mistakes? Yes, loads of them. But the “spin” on what those mistakes were tends to be national. And to see the learning curve in operation, one must look at all the program countries at once.