An issue of statistical significance in Greece

The head of Greece’s statistics agency, Andreas Georgiou, is to face a criminal inquiry. An ex-employee of the Hellenic Statistical Authority (ELSTAT), Zoe Georganta, has accused him of colluding with the European Union’s statistical arm, Eurostat, to inflate Greece’s deficit figure for 2009, thereby justifying Greece’s EU-IMF bailout, signed in May 2010, and  its drastic austerity measures. Georgiou vehemently denies the charges.

Financial prosecutors have referred the matter to a special magistrate and the Greek justice system will have to decide on the validity of each side’s arguments.

Beyond the judicial process, some observations about the case are needed as it goes to the very heart of understanding how Greece’s public finances veered dramatically off course and the country turned to the eurozone and International Monetary Fund for emergency loans.

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EU banking union a product of the euro crisis but also its solution?

There is a dirty little secret at the heart of the euro crisis and it concerns Europe’s banks. Many politicians and much of the media have focused their attention on the role sovereigns – particularly in southern Europe – had in triggering uncertainty and economic instability in the single currency area but the part banks played in laying depth charges at the euro’s foundations has been largely absent from public debate.

Yet, most places you look, eurozone banks have left their mark through a mixture of risky practices, undercapitalization, and over-exposure to government bonds and the US subprime market. Ireland is the most obvious case, where taxpayers have been asked to stump up about 70 billion euros to bail out reckless and troubled lenders. Spain has just asked for a 40-billion-euro bailout for its banks, which fuelled an unsustainable property boom through cheap credit in the previous years. The most prominent example of the short-termism and entangled interest that led to this imprudent lending was Bankia, formed by the merger of seven savings banks, or cajas, in 2010.

Bankia has so far absorbed 19 billion euros of taxpayers’ money, shed 50 billion euros of assets as part of a restructuring and cut 6,000 jobs. French-Belgian bank Dexia found itself in a similar situation. France and Belgium have so far spent about 15 billion euros rescuing the lender and provided up to 85 billion euros in state guarantees after it was caught short by its reliance on short-term financing in 2008 and then to Greek debt in 2011.

Long live Europe, but which one?

Illustration by Manos Symeonakis

Europe is dead. Long live Europe. The demise of the political and economic union, as we knew it, became evident at the recent meeting of European Union leaders in Brussels. What is less apparent is which Europe will replace it. A rapidly changing world has forced the once-untroubled Europeans to think again about where their continent is heading and how it will get there. The decisions taken over the next few weeks and months will determine whether a brave new world lies ahead or whether we will be left clutching the remnants of a flawed past.

The February 4 summit confirmed that the European project, built on the expectations of decent salaries, respectable retirement ages and an abundance of jobs, mostly in the service sector, has reached its expiry debt. The “social Europe” envisioned by, among others, former European Commission President Jacques Delors, where workers’ rights were protected and adequate public services were available to all, has fallen victim to circumstances. The sovereign debt crisis has been a major catalyst in this, but the Union faces much wider challenges than just how to deal with debt and deficit problems.

Although one EU government after another has been cutting its spending and trimming the fat from its public sector over the past couple of years, February 4 proved a watershed in the process of sacrificing the old Europe at the altar of the new economic reality. French President Nicolas Sarkozy and German Chancellor Angela Merkel unveiled their “pact of competitiveness” as a strategy to help the eurozone out of the crisis and to harmonize economic and social policies between the 17 members. The six-point package includes proposals to increase each country’s retirement age to reflect its demography, abolishing automatic inflation-linked wage increases and setting an across-the-board minimum corporate tax rate.

The proposals have divided Europe, not just because Merkel and Sarkozy continue to forego consensus in favor of maintaining an agenda-setting momentum, but because some of their suggestions go against the European grain. “I can’t really detect a reason why abolishing the indexation of wages should improve the competitiveness of my country,” said Luxembourg Prime Minister and head of the Eurogroup, Jean-Claude Juncker. “This is not a competitiveness pact, it’s a perverse pact toward lower living standards, greater inequalities and more precarious employment conditions,” said John Monks, head of the European Trade Union Confederation.

The six-point plan is cast in the mold of the EU’s two dominant economies: the French and German — particularly the latter. But those who oppose the competitiveness pact argue that in a Europe that is not homogeneous, creating more economies in the image of Germany’s is unfeasible and undesirable. “The German model, which relies on a permanent trade surplus is neither sustainable, nor transferable,” wrote the left-leaning German daily Berliner Zeitung. “It works as a model for a selfish nation that floods the neighborhood with its goods and services and exports unemployment at the expense of others.”

“What the chancellor is proposing is a pact of insanity,” concludes the newspaper. “Europe doesn’t need more Germany, rather it needs more cooperation and community.”

However, there are many within Europe who think that Merkel and Sarkozy are on the right track and that although their proposals may reflect a grim reality, it’s reality nonetheless. “The competitiveness pact is a step in the right direction because it means that we are not discussing just narrow economic governance — having more rules — but the broader approach about what competitiveness is as well, and how we will ensure that what has happened over the last two years does not happen again,” Karel Lannoo, CEO of the Center for European Policy Studies told Kathimerini English Edition.

“It is much more important to have disagreement on issues of competitiveness, such as real unit labor costs and how to run public finances, than to have even more rules in the Growth and Stability Pact or balancing the budget. It’s much better to have agreement on broader principles and have them effectively applied.”

Merkel and Sarkozy, some believe, are trying to drag an aging Europe toward economic pragmatism; the lofty ambitions that accompanied the euro for the past decade and the dreams of social security and stability that have formed the cornerstone of the EU will have to be tempered, if not completely abandoned. The debt crisis triggered by Greece’s spectacular unravelling lit the blue touch paper for this dramatic reconceptualization but there is more to it than that. China is the dragon in the room that Europeans are only starting to talk about it now.

China has become a key trading partner for the EU and, in cases such as its purchase of Portuguese, Spanish and Greek bonds, is actively trying to help Europe through this crisis because it values having a reliable trading partner and a counterbalance to the influence of the USA. However, China has also become a competitor because of its meteoric rise in the production sector. The market dominance that has come with it has reminded Europe, that its service-based economy is not strong or versatile enough to withstand the force of the crisis, that it no longer makes things, that its industries are in decline and that it has little capacity for creating new jobs at a time when they are needed most.

Last December, China said that it had created 57 million manufacturing jobs between 2006 and 2010. Between 2008 and 2010, the EU shed almost 5 million jobs in industry while seeing its unemployment rate grow to an average of more than 10 percent and an increasing number of people (40 percent of the EU’s young) working in temporary jobs.

“A little while ago we declared that we were in the post-industrial age and this had a huge impact on such things as the structure of education: we didn’t have any engineers — it was more in vogue to become a psychologist than an engineer,” former Regional Policy Commissioner and current MEP Danuta Hubner told Kathimerini English Edition. “There were a lot of factors that made industry much less important in our economy. And then there is China, which is a completely new factor, which is competing with us mostly in industry and agriculture but not yet in the services. So, now we have to think about creating jobs in the real economy.”

Merkel and Sarkozy’s “competitiveness pact” suggests what underlying conditions, such as low debt and a more flexible and cheaper workforce, might be needed for growth to return to Europe but it still doesn’t propose how jobs will be created. This is an issue that the EU is only beginning to grapple with and the proposals on the table still seem nebulous. It is not clear if the focus has to be on better education, more research or gearing up industrial production. Will the new jobs be in laboratories, on factory floors or in design studios? If the plan is to improve the skills and knowledge of the next generation to give Europe the edge over China, India, Brazil and any other competitors, will Europe be able to survive a lean period in the intervening years? These are quandaries that the EU, collectively and individually, has yet to really address.

At a central level, the European Commission unveiled last October its plans in a communication titled “An industrial policy for the globalization era,” which called for initiatives to create more favorable conditions for industry, including simplifying legislation and offering financial incentives. However, this was somewhat contradicted by EU Research Commissioner Maire Geoghegan-Quinn, who at the beginning of this month said that Europe has to focus more on innovation, which would involve reforming education and investing more in research and development. Last year, the EU adopted the 2020 strategy as a successor to the Lisbon Agenda, which had sought to make Europe a “knowledge-based” economy. The 2020 strategy aims to set targets for reducing the number of early school leavers, increasing the number of people in employment and boosting investment in research and development. The chances of these targets being met in Greece, Ireland or debt-burdened Portugal, for instance, seem slim. Beyond this, the strategies and goals of the individual states have to be taken into account as well. Europe, it seems, is lost in the fog created by the debt crisis, unsure of which way to turn.

“There are still people in important European institutions who believe that just by training people you can create jobs, which I don’t think is really true,” said Hubner. “You still need investment, not just any investment; you need investment that is not just allowing us to compensate for what we lost in the crisis but to have a new type of production that will let us compete with everyone else.

“That’s why we want to focus on the knowledge that comes from education and innovation. We also have to look for jobs in combating climate change. You have to use the European budget to help with this because it has a strong catalytic function, and you must have national budgets working. We have to push for the European Investment Bank to have a greater role. But it is still not enough; we cannot create jobs without private capital,” said Hubner.

The Europe of the future, it seems, will have to turn back the clock by rebuilding a production base, albeit one that will rely on small and medium-sized enterprises pumping out innovative ideas and products rather than large factories pumping out carbon emissions.

“We have to invest in things that generate competitiveness,” said Hubner. “We don’t want just any growth but very concrete growth because we are losing jobs to India and China overnight.”

Although China is reportedly losing some labor-intensive manufacturing jobs to countries like Bangladesh, Vietnam and Cambodia because they offer even lower wages and more unskilled labor, it is still an immensely cheaper place to make things than Europe. Compensation rates for workers in China are estimated to be no more than 5 percent of those in Europe. So, even if European wages are suppressed, as Sarkozy and Merkel’s pact proposes, competing with China or India on labor costs is out of the question.

“I don’t believe that you can change Europe’s development model to compete with China,” said Hubner. “We have to invest in productivity.”

This argument is the starting point for those within the EU who say the answer to the Union’s problems is not becoming more like China, but becoming more like Europe. In other words, it must not stake its future on an export-driven economy supported by cheap, precarious labor but find a better way to harness the potential of a highly developed group of states with a combined population of more than 500 million people.

“At the moment, Europe is one of the most competitive regions in the world,” Jurgen Klute, an MEP for Germany’s leftist Die Linke party and a member of the European Parliament’s economic and monetary affairs committee told Kathimerini English Edition. “This talk [of competitiveness] is only designed to build up psychological pressure on people. It’s not reality.

“We have to look to be competitive but that is only one aspect. We should not focus just on the Chinese, we have to be focused on our own market and development. We have to organize a production sector, a service sector and a sector for delivering goods for our own population. That should be the first goal of every politician in Europe.”

The concern of many in Brussels, and other European capitals, is that Merkel and Sarkozy are pushing an agenda, which is to be reassessed at the next EU leaders’ summit on March 24 and 25, that suits them and their economies but not necessarily the rest of Europe. Their insistence on concluding their business behind closed doors and then presenting other European leaders with a fait accompli is heightening fears that rather than bringing the EU together so it can meet its new challenges with a united front, the Franco-German allies could cause irreparable differences.

“There was no democratic control over the discussion that happened,” said Klute. “Merkel and Sarkozy are trying to change the culture and procedures of the EU. In the past it was clear that you have to find compromises and balances.

“The Council [of EU leaders] is focused only on the single state, not the relationship between states. They ignore that there is a relationship between the deficit of some countries and the surplus of other countries. If there is to be solidarity, then the stronger states have to reduce their speed a little bit.”

The EU is not just facing an economic dilemma, it has an existential question to answer about how its decisions are taken and where these decisions lead, Klute suggests.

“There has been a change in the understanding of how the EU should develop, in the understanding of solidarity and of the democratic process. It’s a very big change in the direction of the EU.”

The issue of competitiveness, as set out in Merkel and Sarkozy’s proposals, therefore seems to be a misleading one. Few people have better first-hand experience of European affairs than Pierre Defraigne, the executive director of the Madariaga-College of Europe Foundation, who served as a European civil servant for 25 years. He is adamant that tweaking wages and retirement ages will not be enough to save Europe. He believes there needs to be a concerted effort to transform Europe into a much tighter-knit community with a specific economic agenda.

“The first thing I would do is to delete the word ‘competitiveness’ from the vocabulary of politicians and economists,” he told Kathimerini English Edition during a seminar organized by the European Journalism Center. “We have to climb up the technology ladder. This is a matter of public policy and small firms — start-ups and so on — and of large firms, of champions. We don’t have the right system and we are still just an economic space, a market; we are not really an integrated politico-economic system.”

Defraigne suggests that Europe can have an industrial future but that it will need to find the appropriate mix of labor market and social policies to achieve it. To reach this point though, Europe will need a level of coordination and harmonization that it has only flirted with in previous years. It seems that the EU’s political and economic viability is reliant on the bloc’s politicians and opinion-makers being able to redefine what this Union is about.

“For me, the key issue is to give Europe a sense of direction, a sense of purpose,” said Defraigne. “The half-century of effort we have carried out successfully will be legitimized in history if we move to closer political union.”

With just over a month until its leaders meet again for a crucial summit in Brussels, the EU must begin redefining itself. Visions must be reconjured, goals reset and strategies redrawn. In the meantime, the words of Delors, one of the architects of the Europe that is now crumbling like a desiccated sand castle will ring poignantly through the corridors of power. “The problem with a purely collective system,” said the Frenchman, “is not only that it requires economic growth, and the right sort of demographic trends, but that it prevents people thinking about their futures in a responsible way.” A lack of growth and the unfavorable demographic trends have forced Europe to emerge from its cozy collectivity and think about its future. Now we wait to see which Europe will emerge from this process.

Nick Malkoutzis

The wrong battle

Illustration in linocut by Manos Symeonakis

“There is no Greek-German war,” government spokesman Giorgos Petalotis said last week. “Greece and Germany are not on collision course,” said Foreign Minister Dimitris Droutsas. All these statements can only mean one thing: Greece and Germany are very much at loggerheads. But their dispute is not just a bilateral squabble; at its heart it’s about divergent views on how to respond to the crisis threatening the euro and, beyond that, on the very purpose of the European Union.

The frantic attempts by the government to play down any rift between Athens and Berlin came after Greek Prime Minister George Papandreou decided on November 15 to dust himself off, stand on the ruins of the Greek economy and hit back at German Chancellor Angela Merkel with a rebellious passion. Speaking in Paris, Papandreou accused Merkel of driving up bond yields for weaker eurozone members by insisting that private investors should foot part of the bill for a permanent mechanism to support countries with failing economies, like Greece’s. “This could create a self-fulfilling prophecy,” said Papandreou. “This could break backs, this could force some economies into bankruptcy.”

On the face of it, there seems little wrong with Merkel’s insistence that private bondholders should accept losses, or a “haircut,” on their investment as part of a debt crisis mechanism to be adopted by 2013. Most Europeans would accept that this would create a fairer system although, clearly, German taxpayers would benefit the most as they’re the ones who would be called on more often to bail out failing eurozone members. But the self-serving element to Merkel’s position is not what should be of most concern to Europeans. Instead, it’s the way Berlin has tried to steamroller other EU countries into accepting the inclusion of the “haircut” clause ahead of a decisive EU leaders summit in Brussels next month. It’s this lack of consultation and the absence of consideration for struggling eurozone members that is undermining the Union.

Papandreou argued that making such a big fuss about investors having to pay their share simply gave jumpy bondholders a seriously aggravated case of the jitters, pushing up the yields on government bonds for Ireland, Portugal and Spain to dangerous levels. Few EU leaders backed Papandreou openly but there is great concern about Germany’s stubbornness. “When the history of the eurozone is written, last month’s German-driven EU summit agreement to devise a crisis resolution mechanism for countries to service their debts may well be cited as the event that pushed Ireland over a cliff,” Bloxham, Ireland’s oldest stocbrockers, said last week, a few days before Dublin turned to the EU and the International Monetary Fund for emergency loans.

In Germany, though, there is a different view. “If Merkel were to abandon her plans, then it would be paradise for investors and weak governments,” wrote the Suddeutsche Zeitung newspaper last week. “The speculators could charge higher interests on Irish or Greek bonds without any risk of losses. And the Greeks could continue with their record indebtedness because they would have no more pressure from the financial markets and in an emergency would be rescued by their euro partners.” However, this ignores that when Greece tries to go back to the international bond markets in 2013, its borrowing costs will be pushed up anyway, as investors will be wary of having to take a haircut should Athens have to revert to the permanent EU mechanism for further loans.

The Greco-German dispute is symptomatic of the differing views emerging within the EU about how to combat the debt crisis. There is a tendency for the EU to speak with two voices and to pull in two different directions. “The euro, which was supposed to make European integration irreversible, could become its undertaker,” wrote the Frankfurter Allgemeine Zeitung daily last week. Every day the debt crisis gnaws away at the EU’s confidence, making the Union seem an exhausted shadow of its former sprightly self. This dissipation of energy and will is leading to division and, whether through bad luck or design, Merkel is at the forefront of creating ever-deeper rifts.

Speaking at a rally of her Christian Democratic Union (CDU) in Karlsruhe on November 15, the same day that Papandreou challenged her scheme for private investors, Merkel said her predecessor as chancellor, Social Democrat Gerhard Schroeder and his Finance Minister Hans Eichel had blundered when they allowed Greece to join the eurozone. “In 2000, Schroeder and Eichel couldn’t let Greece join the euro fast enough and they ignored all the warnings,” she said. “It was a political decision… political decisions are important but those which ignore the facts are irresponsible.”

It’s now obvious that Greece was not ready in 2000 to stick to the single currency’s fiscal guidelines, as prescribed by Germany. It’s also clear that allowing Greece into the eurozone was a political decision — one aimed at giving the nascent single currency numerical, if not necessarily economic strength, but also the opportunity to encourage economic reform and German-style efficiency in a sluggish European state. A decade ago, it was a convenient political decision for Germany — Greece, after all, became another market in the eurozone for its exports — but now it’s a terrible inconvenience for Berlin. But that’s the thing about political decisions: You take a risk. Sometimes you ignore the facts because you have a conviction that something greater is at stake, even if the numbers don’t back you up.

Merkel might consider, for instance, that the Marshall Plan, which ensured Germany’s post-war reconstruction and helped it become the economic powerhouse it is today, was a political decision. The United States, which led the effort, could have decided that paying to help rebuild Germany did not make economic sense but Washington chose to look at the bigger picture — the opportunity to fight “hunger, poverty, desperation and chaos” as US Secretary of State George C. Marshall said when he unveiled his plan in June 1947. Using words that are eerily relevant to today’s Europe, Marshall said: “The United States should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace.” Peace in Europe is not under threat in 2010 but the EU’s faltering economic health is putting its unity at risk.

While leaders argue over bond yields, haircuts, bailouts, deficit and debt, one very important factor is being overlooked. As was the case in the Europe of 1947 before the Marshall Plan, it’s the people that are suffering. They are the ones that pay the cost of failed economic policies and soaring bond yields — people who have fulfilled the wishes of politicians and bankers by mortgaging their futures to buy houses and cars and who believed the euro would bring the permanent stability they were promised. This is why unity must be restored.

Somewhere between Papandreou’s rebelliousness and Merkel’s intransigence, we’ve forgotten that the EU and its institutions were created to improve people’s lives. Many of these people are now losing their jobs, homes and hope. That’s why, even though Greece and Germany may not be at war, their dispute is confirmation that Europe is fighting battle, but the wrong one.

This commentary was written by Nick Malkoutzis and was published in Athens Plus on November 26, 2010.