The Eurozone crisis and the need for a new vision for Europe

“Ladies & Gentlemen,

Distinguished guests,

Dear fellow alumni,

It is such a great pleasure to be back at Oxford. My wife and I were very much looking forward to a weekend here, to coincide yesterday with our wedding anniversary.

However political developments back home, namely snap General Elections takings place tomorrow have altered our plans. Campaigning ended yesterday night, I came with the morning flights from Greece and need to take the last one out tonight. So I am probably the first ever dinner speaker that would not get to enjoy his dinner.

But that comes with politics, a very unpredictable environment. When I matriculated in 1997, to study Industrial Relations at the SBS, which did not have a dedicated building yet, and joined Templeton College I thought I would stay in business. And to be fair I did so for 12 years post-graduation.

I feel sorry I only stayed one year at Oxford, it has been a remarkable experience. Since graduation I do try to come back regularly. So many memories. And such a vibrant environment, driven people with a sense of mission.

Tonight I wanted to share some thoughts regarding a topic which unfortunately still remains at the headlines, namely “The Eurozone crisis”, arguing for the need for a new vision for Europe.

As you know, Greece was driven out of the markets in 2010, the first Eurozone country to face such a challenge. Both Greece and Europe were unprepared for such development. Greece faced a deficit crisis, as a result of the global financial crunch of the time. But this deficit came on top of an already high level of debt but more importantly on top of a rapidly diminishing credibility.

No one can emphasize enough the impact of perception and psychology in market behavior. For example in the good days, markets underestimate balance sheet issues, focusing rather in flows, meaning annual deficit/surplus in the case of sovereigns and earnings in the case of corporates. While in the bad day, an overstretched balance sheet leads to markets becoming closed.

Europe was not prepared for a sovereign crisis. The founders of the common currency believed that maintaining deficit targets, which were not even calculated cross-cycle, and debt targets was sufficient to prevent what happened.

But even these targets were not properly enforced, with the larger EU countries being the first to violate them. At the time, the European Central Bank had a different understanding of its mandate for handling the situation. While we needed ECB to have all the rights that central banks tend to have. There has been a lot of evolution since as ECB now act in a more accommodating way.

Also, other institutions have been created with a supervisory or a funding capability which are complementary to the central banks.

Greece was asked to follow a program with demanding fiscal and structural reforms. Many long overdue to be fair. The Greek program, in the period of the Antonis Samaras government (2012-15) was based on five policy pillars. First, in regaining immediately credibility by reaching an agreement in a timely manner and demonstrating our determination to do whatever it takes to stay in the Eurozone. Second, in enhancing liquidity in the market through the recapitalization of the banking system and the increased absorption of EU funds. Third, in prioritizing growth enhancing structural reforms. Fourth, in changing the investment incentive law and creating a central licensing authority for larger projects, cutting down on bureaucracy. Finally, in focusing on increasing returns on State assets through privatization and public-private partnerships.

As a result, Greece has had the biggest fiscal consolidation in the history of the OECD. It moved from a deficit of over 15% in 2009 to a primary surplus both in 2013 and 2014, a year ahead of the program’s goal, and were set to achieve a balance budget in 2015, before the January elections. Also in 2013 & 2014, Greece for the first time since 1948 had a positive balance in its trade account.

The adjustment came with severe social costs. Unemployment approached 30% – over 60% for the younger people – and one out of three Greeks live below the line of poverty. It became evident that the initial program, agreed in 2010, had inherent design errors as countries are not corporates. For example state employees are also tax payers, are also consumers. There was a paper by the IMF, confirming the program underestimated the impact of austerity measures, a fact which led to the need for Greece to seek a second package in 2012.

The Eurozone crisis has inevitably harmed the European Union. Despite the fact that Europe has taken unprecedented measures to cope with events, the crisis has led to a divide in the European Union and an increase in populism. The policy response to the crisis, the economic measures taken, did not create growth; it created recession and therefore new debt. Arguably many of the reforms were needed for returning to sustainable economic growth but it remains to be seen.

The negative consequences are however already evident. The European project aimed to foster political and economic cooperation in the continent and maintain peace. And to a great extent, the experience has been positive for the European citizens. But the crisis caused new division, which is unfortunate given the common challenges all of Europe needs to face; namely deteriorating demographics, the high levels of accumulated debt and the evolution in relative competitiveness in favor of the so-called emerging world.

These challenges raise question on whether the next generation can retain the high standards of living that my generation and the previous one enjoys.

Now it is the time to take stock and rethink our policy priorities. The response to the crisis needs to be clear, Europe has to refocus its effort to grow the economy as the mean of retaining its global position and provide for its citizens.

Europe, and Greece, are in urgent need of a new vision, a growth agenda, which can support a viable social net. A growth agenda that can also provide hope to the European people who have been disillusioned by this crisis. The impact of the crisis in our democratic values needs to be discussed.

This growth agenda requires improving education, innovation and competiveness gains. It requires more emphasis in attracting investments, as Europe faces a lot of competition for investments. It requires more growth enhancing structural reforms, which will come at a social cost. It requires however the need to maintain fiscal discipline. It requires more trade. More importantly it requires leadership at a European level. This continues to be a challenge.

Ladies & Gentlemen,

Thank you for listening to these thoughts. It has been a great honor being invited today and please accept my apologies that I have to rush to the airport.

Enjoy your dinner.”