The Grecology substack last week highlighted how a stealth fight has emerged over the matter of sustainability of Greece once more. As noted there, an ESM blog pushed out by Rolf Strauch last week, making the case for sustainability, followed a short while after former IMF mission chief and European Department Director Poul Thomsen’s disparaging remarks at an online Economist conference. On that occasion, Thomsen downplayed the prospects for Greece within the euroarea still, lamented the inability of the Greeks to reform and the flaws in the European’s DSA. Indeed, Thomsen claimed the DSA being produced by the ESM is “not only wrong but also irrelevant” and that creditors only hold Greek assets because they believe they will be bailed out.
As previously pointed out here, Thomsen is a sociopath who systematically lies, has shown no sign of introspection as to his own legion failings in Greece (a program which did not add up, making it more of an Enron-style accounting fraud than a reflection of the fecklessness of the Greeks.) We can dispose of Thomsen later, as I will in my book.
But it is perhaps more refreshing to dwell on his online interlocutor on the occasion hosted by The Economist, Thomas Weiser, the former Eurogroup working group President—i.e., the chief technical staff member underpinning euroarea finance minister deliberations. And Weiser gave a much more thoughtful retrospective on the Greek Crisis and lessons to take from the experience. So, I want to elevate these remarks to a wider audience; for posterity, something worth studying.
On Greek sustainability from here, I indeed have a strong view. But that is not for now. But I would remark that there was little clarity on precisely what the challenge facing Greece is still—and the ESM blog was pretty poor also. So, not much has changed since 2010 despite Weiser’s wisdom.
Anyway, here is a faithful transcript of Weiser’s remarks, with minor edits:
I still distinctly remember the day when George Papakonstantinou [Minister of Finance for Greece] entered the Eurogroup meeting room and essentially said: “Brussels, we’ve got a problem.” And the conclusions that other finance ministers drew were that the main problem, or the only problem, was fiscal. And, of course, the more that we delved into the underlying issues the clearer it became to me and quite a number of others that the fiscal side was merely a surface phenomenon of totally different and very severe underlying imbalances and problems.
But, as I said, the situation led very many other actors to believe that the only problem was fiscal. And this had consequences for the programs and also for policy developments at the European level. And even though many of us realised it at the time, I think by now very many are cognizant of the fact that we in Europe more or less collectively stumbled into the situation lacking understanding and instruments and the political ability to solve the situation. That also was reflected in the design of the First [Greek] program; and these instruments and understandings evolved over time not very rapidly.
And that, in a way, also led to the fact that the IMF was involved and how the IMF was involved. And there was quite a discussion at the time amongst European politicians on whether the Fund should be in or the Fund should be out. And interestingly enough, I remember on one occasion [Wolfgang] Schäuble is saying to Jens Weidmann, who at the time was policy advisor to Angela Merkel: “if you honestly remember how the discussion went at the time he [Weidmann] will recall how very much against the involvement of the IMF and how much I was insisting that we in Europe need to deal with this issue all by ourselves, but you successfully persuaded the Chancellor that the Fund should be involved.”
At the same time over there in Washington, the then-Managing Director and quite a number of staff were all gung-ho to be involved because it came after an era when the Fund was laying off people en masse as many outside commentators and member states were reflecting that in the Goldilocks economy of the time, the Fund, as such, in this structure, was not necessary any longer.
So, as we know, there was hardly anybody in Europe who knew how to put together such an adjustment program. And we’ve seen a couple of reasons why the issue of debt sustainability was not solved in a more decisive manner and more upfront. And if I think: what was the largest mistake we made in 2009 and 2018? It is the debt sustainability issue. As others have said before me, the time for haircut in 2010 were absolutely not appropriate, but one could have dealt with it in a different manner.
But what we need to remember is, the whole setting up of the euro area was built on the totally mistaken understanding that there could be no current account crisis. Now, hardly any meaningful imbalances between member states because money was fungible, we had one central bank, and as such, entering EMU, the euro area, the European Union had done away with the so-called balance of payments mechanism which was and is a fund for such adjustment programs. Given the enormity of the Greek problem, it would have been pitifully too weak.
But again, I want to emphasise, there was a complete lack of understanding of what the issues were—and not only amongst prime ministers and finance ministers, but well down into many Chancellories and finance ministries and even central banks. Given this lack of understanding, there was also a total lack of instruments. And if you don’t understand what the issue is then you don’t start building an instrument to solve the problem that you don’t understand.
We, collectively—Europe collectively learned hard way. And we do now have the European Stability Mechanism, we have since people painfully were made aware of the doom loops between sovereigns and banks and banks and sovereigns; we partially solved the problem by setting up the single supervisory mechanism and a couple of other issues.
But were we able to solve the huge structural underlying issues that not only the Greek economy with Greek society was facing? I’m not as pessimistic as Poul [Thomsen]. We have to keep our respective attitudes there. There were significant attempts in the program to solve these distribution issues.
As soon as one does a post mortem on a program, I remembered the post-mortems on IMF programs in Asia that say: “Oh my God, we’ve made this huge mistake, we were much too invasive we were much too granular; we should have trying to define what the outcome should be and not prescribe minutely the liberalisation of taxi services and pharmaceutical issues and shipping industry between Athens and Crete and Athens and Samos and… hundreds and hundreds of pages actions,” but as soon as you’re confronted with the reality on the ground, bingo! there you go you start to liberalise pharmacies, taxis, this that and the other, not by saying to the Greek government you will get an adjustment loan if you liberalise your economy and get rid of clientelism. For some reason it never works that way.
Again and again I was approached by Greek friends who said the programme is not intrusive enough, you have to change our educational system, you’ve got to change our justice system, you’ve got to make sure that the police can enter universities again, you have to make sure that this doesn’t happen this happens and this doesn’t happen. I say: “guys, we’re already under fire because we’re much too invasive and intrusive into the Greek economy and Greek society. This is an issue that ultimately, in the interests of sovereign self-respect and in the interests of the representativeness of Democratic institutions and elections, the Greek society has to want and implement. And if you don’t, you don’t. But don’t want us, the institutions and the other member states, to be so invasive that the last vestiges of government disappear. It can’t work.”
So, this in a way encapsulates for me the huge dilemma that on faces all programmes and with programmes within the euro area very specifically.
Maybe a couple of conclusions there. One, the role of the European institutions. A bunch of geniuses in 1944 set up the Bretton Woods institutions and created the IMF as an institution which had one mission in life. It was financed, with one or two exceptions, with central bank money which is not under the purview of national parliaments. It is the nasty bogeyman sitting in Washington you can be totally pissed off with the IMF and get on with your other business.
The European Commission, on the other hand, is an institution which is the central European institution in dealing with Member States. And out of the 189 issues that the Commission has on its plate in dealing with member states, for 188 it needs of amicable, not antagonistic way of collaboration. Then you expect the Commission to behave as the IMF does as being intrusive and ordering a member state to do something? It doesn’t work. So, asking the Commission to do anything similar to the IMF was a failure right from the beginning. And I’m not quite sure if the ESM, as it is set up under finance ministries and financed by government, is yet fully fit to take over this role.
Secondly, within a monetary union you give up a huge amount of sovereignty and it is well known to prime ministers, finance ministers and others that you give up monetary autonomy. But few people realise or want to realise how much fiscal sovereignty and other sovereignty you give up. That is a dilemma. How do we run fiscal policy which, on the one hand, is under the purview of national sovereign parliaments, but on the other hand is geared in such a manner that it does not create imbalances or instability for other members of the euroarea.
And lots of people writing about it just stop dreaming about a fiscal union, common fiscal policy in our lifetime. No matter how young we are … you will not live to see a fully functional fiscal union. So, as Mario Draghi used to say, either you’ve got institutions, ECB, or you’ve got rules. But how do you structure the rules in a way that they are intelligent, are kept to, and… that respect, by a large, both the issue of sovereignty but [also] solidarity and treating policies as a matter of common concern within a monetary union. It is very difficult, and I think we’re still quite a way away from there.
…In the middle of 2014 I was pretty confident that Greece could be, in a way, on track to having debt relief and exiting the second programme in a fairly recent manner. For those who think that it was only from 2015 onwards that problems emerged, no, the second part of 2014 made one already extremely pessimistic and these were Greek problems not confined to only one government. But in 2015, of course, we came extremely close to the euroarea all of a sudden being made up only of 18 and not only 19 member states. And much of that much of the trouble and grief that Greece went through over the past five six years can be attributed to happenings in the first half of 2015.Thomas Weiser, The Economist SE Europe Event on 200 Years of Greek Economy