Interview with Professor Elias Papaioannou: Understanding Stormy Greek Political Economy

Interview with Professor Elias Papaioannou:
Understanding Stormy Greek Political Economy

Centre for Policy and Research on Turkey (Research Turkey) conducted a crucial interview with Professor Elias Papaioannou on last turbulent economic and political year of Greece. The global financial crisis of the late 2000s hit Greece particularly hard, as the legacy of high public spending and widespread tax evasion combined with the credit crunch and the resulting recession to leave the country with a crippling debt burden. Six years of recession beginning in 2008 reduced the economy by about a quarter of its previous size and drove unemployment to record levels. Between 2010 and 2011, Eurozone countries agreed two bailouts totaling 240 billion euros. As a result of the post-2008 debt crisis and years of austerity undermined confidence in mainstream parties and resulted in the victory of left-wing anti-austerity bloc SYRIZA at the legislative elections of 2015 in January. During the summer, Prime Minister Tsipras and the SYRIZA government accepted the third Memorandum with the European Union on Greece’s debt and 25 MPs from the SYRIZA rejected the bailout and the resignation of these MPs caused the SYRIZA to lose its majority. As a result, Prime Minister Tsipras called a fresh election on 20th September that resulted the consolidation of its power with 35.4%. Professor Papaioannou highlighted the recent issues in Greek political economy in a succinct and clear way.

Professor Elias Papaioannou focuses on international finance; political economy; applied econometrics; macro aspects of regulation; law and finance; and growth and development. His research has been recognised with the inaugural 2013 European Investment Bank Young Economist Award; the European Economic Association’s Young Economist Award, 2005; and the Royal Economic Association’s Austin Robinson Memorial Prize, 2008. He is also a research affiliate of the Centre for Economic Policy Research (CEPR) and the National Bureau of Economic Research (NBER), the leading research institutes in Europe and the United States, respectively.

After the completion of his doctorate in 2005, he worked for two years at the Financial Research Division of the European Central Bank (ECB) in Frankfurt, Germany. From 2007 to 2012, he served as Assistant Professor of Economics at Dartmouth College (NH, USA). Between 2010 and 2012 he was a Visiting Assistant Professor at the Economics Department of Harvard University (MA, USA).

He has published in many leading peer-refereed journals, such as the American Economic Review, the Journal of Political Economy, the Quarterly Journal of Economics, Journal of Finance, Econometrica, the Economic Journal, the Review of Economics and Statistics, Journal of Development Economics, the Journal of the European Economic Association and the Journal of International Economics, among others. His work has also appeared in numerous edited book volumes.

Synopsis of the Interview

The SYRIZA-ANEL government engaged in a catastrophic agenda that occurred in two stages over the past seven months.

The first stage –state of creative ambiguity–, the Greek government thought that delaying would strengthening the bargaining power of the Greek authorities whereas in reality the deterioration of the economic situation together with the withdrawal of deposits from the banks and increasing uncertainty made Greek government’s position worse.

Second, there was an important cost to importing corporations and exporting firms that deteriorated the business climate from February to July 2015.

The Greek government, as of January-February 2015, could have completed the final review of the second economic adjustment programme and would have been a stronger player at the negotiations with the IMF and European Central Bank (ECB).”

Referendum backfired against Prime Minister Tsipras because many circles in Europe interpreted this No as a No to Europe while most of the Greek voters who voted No voted for a No to a further round of economic austerity.

There are three main components of the economic adjustment programme that was agreed in July 2015. The first is fiscal; the second concerns pensions and securities; and the third component is about structural reforms.”

First, the fiscal side, Greece will need another round of fiscal austerity not in order to achieve significant primary fiscal surpluses but simply in order to run a balanced budget.”

The second component regards social security and pension reform. I think that here, overall, this is a positive element that both Prime Minister Tsipras and his allies (ANEL) both argued that early retiring –which is prevalent in Greece– is both inefficient and unfair.

Third, the structural reform entails reforming the justice system which is actually a huge drag on international and domestic investment opportunities and it also involves public administration reforms, opening up product markets which are oligopolistic in nature.

There are four main obstacles behind the realisation of this adjustment programme: first, will of the government; second, the weak state capacity to implement even basic reform; third problem is future opposition from vested interests opposing particular reforms; fourth problem is government’s lack of belief on the vigour of these reforms.

Tsipras’ popularity stems from the lack in popularity of the main opposition party (Nea Dimokratia) and in addition, the people have not yet seen the impact of the forthcoming austerity, the capital controls, or the catastrophic policies of the past six months.

In the winter of 2015 people will feel into their pockets those measures, both the increase in the VAT and also the increases in personal income taxation.

In the case of Grexit, due to currency mismatch, the liabilities of all Greek citizens and banks are all euro-denominated while the assets will be denominated in drachmas so immediately Greece will be insolvent.”

Grimbo: Greece in a limbo. Greece is not out of the euro but just does only the minimum required in order to stay in. Even if this scenario is not as catastrophic as Grexit one, this equilibrium is extremely problematic, and certainly it is not sustainable in the long-run.

The third equilibrium is actually a strong Greek recovery through significant economic and institutional reform which has to be coupled with a sizeable and strong banking sector recapitalisation.

Now, the project of the banking union is vital within the currency union of the 19 Euro-area member countries and a process towards a fiscal union –along the lines we see in the United States should be the next logical step.”

According to revised statistics for Greece that were published by the Eurostat and the new independent Greek statistical authority, Greece has been running a primary fiscal surplus for most of the period from 1995 to 2001.”

Greece played by the rules that existed at the time and it was rightly admitted to the club of Euro-area member countries.

In the case of Greece, the country had to stay in the EU and the Euro-area because if it were to be outside the situation would have deteriorated much more.

Unlike Greece, Britain, is at the other side of the spectrum, British politicians and the public in the UK believe that Britain is too strong and there will not be as bad from exiting the EU.

The Full Text of Interview

Today we are happy to have with us Professor Elias Papaioannou from London Business School (LBS) in order to talk about the current Greek affairs. Professor Papaioannou thank you very much for being with us today, and for agreeing to this interview with the RT.

Thank you for your invitation.

In July the Greek authorities came to an agreement with the EU institutions and the IMF (the so-called Troika) for a third bail-out programme. Do you think this was unavoidable? Could the newly-elect SYRIZA government have done something different to avoid these additional 14 billion euros of austerity measures?

Yes, I actually do think that it could have been avoided. The SYRIZA-ANEL government engaged in a catastrophic agenda over the past seven months. We can distinguish between two stages: In the first stage, which I call the ‘state of creative ambiguity,’ the Greek government thought that delaying was something beneficial, something that was strengthening the negotiating position of the Greek authorities while in practice the deterioration of the economic climate in Greece with the withdrawal of deposits from the banking system and the increased uncertainty actually made the position of the Greek government much worse. During this first period, actually all macroeconomic aggregates deteriorated considerably, just to name a few: in the end of 2014 the projection was for a 2.5% growth rate in 2015 but Greece entered again in recession in the first six months of 2015; there was a 35 billion withdrawal of deposits from the Greek banks; thirdly, there was an increase in the non-performing loans –this has deteriorated considerably the position of Greek banks and now everybody agrees that Greek banks have a liquidity problem; So this was the first stage. The second stage begins with the decision of the Greek authorities and Prime Minister Tsipras to hold a referendum which was accompanied by the closing of Greek banks and the imposition of capital controls. It is a bit premature to fully evaluate the impact of such policies but from what we have seen so far the cost was considerable; the equity of Greek banks has been evaporated and this is a cost not only to the stake-holders but to the Greek state itself because thanks to the bank recapitalisation of 2013 the Greek state is the largest stake-holder of the so-called four systemic banks (the National Bank of Greece, the Eurobank, the Piraeus Bank, the Alpha Bank).

Firstly, the Greek government’s delaying the issue did not improve its negotiating power, instead due to deterioration of the economic climate, it made it even worse

Secondly, there was an important cost to importing corporations and exporting firms. As I stressed before, it is a bit early to assess the full impact of those controls, yet the Greek Institute for Industrial Relations (IOBE) which publishes a business climate indicator found that there was a significant deterioration since February 2015 and there was a free fall in June and July of 2015. And interestingly all other public finance indicators portray a very similar picture on the situation in Greece. For example, a survey of expectations on the future of Greek economy among managers of firms in Greece revealed that they are quite pessimistic regarding the prospects of the Greek economy in the future. Moreover, the decision of Prime Minister Tsipras to hold a referendum and close the banks will also have a cost for 2016. There was a positive growth rate forecast for 2016 at the end of 2014. Now, again, the forecast for 2016 is that the Greek economy will stay into recession. Overall I think that the Greek government could have done way better and many reasonable economists had advocated what I will say right now. The Greek government, as of January-February 2015, could have completed the final review of the second economic adjustment programme which was actually supposed to be completed by September-December 2014 –this was actually a mistake of the previous government. The SYRIZA-ANEL Government could have completed the final review with some minimal austerity measures and then this would have given them something like four or five months to negotiate how things will work out after July-August 2015 when there was a big payment due to the IMF and the European Central Bank (ECB). Bear also in mind that as many have noted, the programme with the IMF runs until spring 2016. This would have given Greece some additional safety in the eyes of foreign international investors. So, to sum up, the Greek government could have done things differently and the toll for the Greek taxpayer and the Greek economy would have been considerably smaller than what it has to be paid today. It is true that the Greek banks needed some recapitalisation. There were 11 billion euros set aside for that purpose. Many senior government figures, while they were in opposition, they were advocating that money could be used to set up an investment bank to revive the Greek economy. Now these 11 billion have been lost and we are talking about a new package that can be up to 25 billion in order to recapitalise the Greek banks.

As a second stage, the business climate from February to July 2015 has deteriorated importing and exporting firms

I want to continue from your last part of your answer. So effectively all these delays in the negotiation culminated with the referendum which led to the capital controls and all those negative consequences that you have described above for the Greek economy. The referendum yielded a NO vote but then the Greek government agreed to the terms of the new bail-out. Then what was all the fuss about the referendum? Did it increase the bargaining position of the Greek authorities or was it simply a stunt for domestic political consumption?

US President Lyndon Johnson has famously said that all politics is local. So I think that at some point Prime Minister Tsipras was cornered at the EU summit, he realised that the strategy of his appointed Finance Minister Mr. Varoufakis to ‘extend and pretend’ and ‘creative ambiguity’ was working against him and when he realised –sometime in the end of May or early June– that his strategy has backfired and because he did not have the political will to make the turnaround himself, he took this quite strange decision to call for a referendum. My reading of the situation is that this referendum was not well planned in advance and that is why the government rushed into doing the referendum in the very last minute after the expiration of the 2nd economic adjustment programme (bail-out). From what I read in the news and what I hear from other colleagues in Europe, it was a decision that was taken quite in a rush and it was an effort by the Prime Minister Tsipras to engage the three pro-EU opposition parties and to engage the Greek people. I think even himself did not expect that the No vote would be victorious but at the end it backfired against him because many conservative circles in Europe interpreted this No vote as a No to Europe while my reading is that most of the Greek voters who voted No in the referendum voted for a No in a further round of economic austerity.

 “The SYRIZA-ANEL Government could have completed the final review with some minimal austerity measures and then this would have given them four or five months to negotiate

So Greece had this referendum which ended up in the imposition of capital controls and closed banks and all this damage caused to the Greek economy for 2015 and 2016. Then the question is, we ended up with this agreement which, if I interpret your position correctly, was better than the other alternative offered to Greece –which was a disorderly default– and Grexit but is it a good agreement? The government promised in January something different and yet we ended up with those additional austerity measures. Will this agreement help Greece overcome the crisis; will it lead back to growth and to more tempest waters for the Greek economy?

As you know, as an economist in order to evaluate whether a policy is good or bad we need first to define the counter-factual. As I said before, for me there was a much better counter-factual which was the completion of the final review of the second adjustment programme early in February –perhaps in March  and such policy would have given the chance for a much milder programme with a safety net –much like the one that the previous government has negotiated. Given the situation that the Greek economy was at the end of June 2015, clearly, it is better to have a third economic adjustment programme, a third memorandum (bail-out) deal rather than having to leave the Euro, either temporarily –which was the proposal of the German Finance Minister Mr. Schauble– or permanently –which was the most likely outcome. So, in this regard it is actually good news that the Prime Minister Tsipras, even in the last minute with the support of the three pro-EU opposition parties (Nea Dimokratia, Potami and PASOK) managed to complete this turnaround and conclude a deal with the EU authorities (Troika). Now, concerning this programme (that was agreed in July 2015) we can think of it as having three components: the first component is fiscal; the second component concerns pensions and securities; and the third component is about structural reforms. So, let me touch upon each of those three issues. The fiscal side, unfortunately Greece will need another round of fiscal austerity not in order to achieve significant primary fiscal surpluses –as was the case according to the original plan– but simply in order to run a balanced budget. Unfortunately, the package of fiscal measures includes a significant increase in the VAT –which is a socially unfair tax because everybody contributes to that both poor and rich and in the case of Greece is even more so because of massive VAT tax evasion. So, the first negative impact is the VAT. Secondly, there is an increased penalty imposed in the private sector which is the increase in the corporate tax rate and many additional tax levies to the most profitable firms –levies which were supposed to be special when they were first imposed back in 2010 but it turned out that they are maintained even eight years afterwards. Undoubtedly the fiscal part of the new programme is going to be recessionary mostly because there is going to be a strong Keynesian effect and the interaction of fiscal austerity with economic uncertainty. This is something that could have been avoided but it did not and in my reading this is one of the bad outcomes of this third bail-out package.

Referendum backfired against Tsipras because many circles in Europe interpreted this No as a No to Europe while Greek voters who voted No voted for a No to a further round of economic austerity

The second component of the adjustment programme regards social security and pension reform. I think that here, overall, this is a positive element that both Prime Minister Tsipras and his allies (ANEL) both argued that early retiring –which is prevalent in Greece– is both inefficient and also unfair and unjust. Of course when we talk about social security reform the devil is always in the details, this is not like a hike in the VAT tax. On the negative side, unfortunately, Prime Minister Tsipras’ social security and pension team is quite weak to design, even more so to implement, such a package and reform the legislation concerning social security. The third part is structural reform, this entails reforming the justice system which is actually a huge drag on international and domestic investment opportunities. It also entails public administration reforms, opening up product markets which are oligopolistic in nature. To be honest there has been some preparatory work done here, there are the toolkits provided by the Organisation for Economic Co-operation and Development (OECD) so there is some know-how, but what is really pathetic in this case is that Prime Minister Tsipras in various of his public appearances in the media and in parliament has argued that this third part (the supply-side reforms part of the third bail-out programme) is neo-liberal and something that is against his doctrine and ideology and he has stressed many times that it is not something he is willing to pursue, that is, he is not willing to resume the ownership of this part of the programme. Again, when we are talking about liberalisation and opening up of professions the devil is in the details and the specificities of the legislative provisions and, hence, I am really worried that we will not see much action. It is one thing to say that I will open up some professions but since there is no such thing as a closed profession, rather there are numerous administrative and bureaucratic rules and restrictions to firms’ expansions, this is something that in order to go through you will have to have a government that is willing to push through such reforms and clash with the vested interests and the bureaucracy in order to be successful.

First problem is the political will of the government; second is the weak state capacity to implement even basic reform; third is future opposition from vested interests opposing particular reforms; fourth is government’s lack of belief on the vigour of these reforms

Coming back to what you have said earlier, Prime Minister Tsipras has publicly renounced the ownership of the programme especially vis-à-vis its third component that contains the structural reforms (the supply-side ones). Given that according to EU authorities previous Greek governments were also not very diligent in implementing structural reforms, how optimistic are you that this time the government will implement them and bring the country back in the track of growth?

I am extremely pessimistic, I am extremely pessimistic and I do not think this can happen –at least with the evidence we have right now. And there are a couple of elements regarding your question. First of all, there is no will [to implement the structural reforms] –openly there is no will. Secondly, the Greek governments suffers from very weak state capacity, which was a considerable drag to previous administrations as well –which I believe that they have tried quite benevolently to liberalise some markets; they were faced with vested interests and the inability of state bureaucracy to carry on with those reforms. So, to sum up, the problems are: number one, the political will of the government, number two is the weak state capacity of the Greek administration to implement even basic reform; thirdly, there is going to be much opposition from vested interests which oppose reforms in particular areas; fourthly, leaving vested interests aside, even the government does not believe that such policies are vital for the recovery of the Greek economy, so there is going to be one more point of opposition –if you like– to these measures. What is missing from the Greek public debate is that understanding that reforms are necessary; both the political and academic elites have failed to communicate to the public that there is a general need for reforming the Greek society and the Greek economy which includes product market reforms, reform in the justice system, and reforms in the public administration. These are all issues that all Greeks tend to agree that they want but when you go to the nitty gritty details everybody opposes them. So to summarise my answer, I am extremely pessimistic, perhaps with the new government if Prime Minister Tsipras moves more towards the centre and teams up with some pro-EU forces, then there might be a way out. But even in this case I remain extremely pessimistic.

Tsipras’ popularity stems from the lack in popularity of the main opposition party and also people have not yet seen the impact of the catastrophic policies of the past six months

So this leads me to my next question about internal party dynamics within the SYRIZA; the SYRIZA won the January 2015 elections with an anti-austerity manifesto, which is not going to be implemented any time soon, but now Prime Minister Tsipras is facing a rebellion from more than 40 of his MPs which are not going to be voting for any of those austerity measures. So, what are Tsipras’s chances of political survival, in your opinion? Will he manage to keep his party together? And what is going to come out from the September 20 early election, what are the good and the bad scenarios?

This a very complicated questions and frankly I do not have any good answer mostly because I have never imagined a political equilibrium where key cabinet ministers themselves plus a fourth of the parliamentary group of the governing party will oppose the submitted government legislation while the major opposition parties (Nea Dimokratia, PASOK and Potami) will vote in favour of it. I am extremely puzzled by the fact that those SYRIZA MPs that disagree with the Prime Minister in such a core issue as the currency of Greece are still in the party. It seems to me that Prime Minister Tsipras is weak and is incapable of expelling those MPs from the party. And again, let me tell you that we are not talking about disagreements in some minor issues but about the most fundamental issues concerning nowadays the Greek economy and the Greek society such as whether Greece will be part of the Euro area or not. I read the news and I follow the news that Prime Minister Tsipras wants to expel them and kick them out of the party but I rather see actions instead of words. In my view, everybody seems to believe that Prime Minister Tsipras is quite powerful at this stage; I am bit unconvinced by that, I think his popularity stems from the lack in popularity of the main opposition party (Nea Dimokratia); and secondly, he is still popular because the people have not yet seen the impact of the forthcoming austerity and the impact of the capital controls, for example, or the catastrophic policies of the past six months. Prime Minister Tsipras, of course, realises that in the fall or in the winter of 2015 people will feel into their pockets those measures, both the increase in the VAT and also the increases in personal income taxation plus the abolishing of all the pre-electoral campaign promises for lowering the tax burden. So I believe he wants to go to an early election because he thinks that if an early election does not take place soon he will be extremely weak six months down the road. But I do not think that early elections are something the Greek economy and society need right now, if anything they will result in a very similar political equilibrium [outcome], perhaps –relatively speaking– Prime Minister Tsipras will strengthen his position not because he will gain more votes but mostly because the main opposition party’s vote share will fall. So I think it is a bit too opportunistic of him to call an early election and that is where we are heading to.

In the winter of 2015 people will feel into their pockets those measures, both the increase in the VAT and also the increases in personal income taxation

So it appears that Greece is locked into a bad political equilibrium, still trying to find its way out of this situation. In your opinion what is the way out of this political and financial mess for Greece? Would the German Finance Minister’s, Mr. Schauble, proposed plan for a five-year time out from the Eurozone be a solution? Would Greece be better off by unilaterally leaving the Eurozone as many liberal economists on the other side of the Atlantic would advocate? Some economists would argue that by devaluing its currency Greece could regain its competitiveness in the export market. Would that be a solution? Or will a Grexit scenario be catastrophic making the prospects of recovery even weaker?

In my view, at an abstract level, there are three avenues. The first one is the so-called Grexit; this could be either permanent or temporary –let’s call this the Schauble plan which, as you have noted, has been advocated by many liberal economists in the US. To me this option is going to be super-catastrophic. First of all, you will have an immense currency mismatch. The liabilities of all Greek citizens and banks are all euro-denominated while the assets will be denominated in drachmas so immediately Greece will be insolvent –not only the banking sector but also the private households. Any potential benefits from a competitive devaluation I think will not going to materialise. First, as research shows, big firms are the ones that engage in international trade; unfortunately, the percentage of small firms in Greece is the largest amongst the Euro-area countries –actually most Greek firms employ less than five employees. Over the past couple of years, we have seen a significant cost reduction in labour inputs in the range of 30 or even 40% yet we have seen no increase on exports whatsoever.  The reason is that there are structural problems that impede the economy to specialise into sectors and industries that can better serve international markets. So any benefits coming from increased competitiveness are not going to be very significant. Moreover, if Greece were to leave the Euro-area there would be a significant institutional cost.

In the case of Grexit, the liabilities of all Greek citizens and banks are all euro-denominated while the assets will be denominated in drachmas so immediately Greece will be insolvent

The second equilibrium, which is actually the most likely one, is what I call Grimbo: Greece in a limbo. Greece is not out of the euro but just does only the minimum required in order to stay in. Needless to say that –even if this scenario is not as catastrophic as Grexit one- this equilibrium is extremely problematic, and certainly it is not sustainable in the long-run. It is really bad that over the past five years Greece has been in such a limbo and it seems that given the political deadlock and the unwillingness of many Eurozone leaders of letting Greece leave the Euro-area this is unfortunately the most likely scenario for the near future: Greece being inside the Euro-area but doing minimal structural reforms in order to just stay in.

Grimbo: Greece in a limbo. Greece is not out of the euro but just does only the minimum required in order to stay in

Now, the third equilibrium, which is what I was hoping for, is actually a strong Greek recovery and the only way that this is going to happen is through significant economic and institutional reform which right now, unfortunately, has to be coupled with a sizeable and strong banking sector recapitalisation. This is something that, as I said earlier, the (SYRIZA-ANEL) Greek government does not seem to believe in it and it is really hard to see how this will happen after the September 20th elections and right now the bank recapitalisation is a very urgent thing to do; it has to be done in a very good and efficient way because at the moment the most important structural reform for Greece is the recapitalisation of the Greek banks simply because of the important role they play in the Greek economy –in any economy for that matter– in financing investment.

The third equilibrium is a strong Greek recovery through significant economic and institutional reform with a sizeable and strong banking sector recapitalisation

So let’s move from the micro or internal dimension of the Greek crisis into its European dimension. Some would argue that apart from Greece’s fiscal wrong-doings and innate structural and institutional problems there is also a problem with the architecture and the initial design of the European Monetary Union (EMU). Do you think that there is a German hegemony in the EMU that tries to push towards more austerity? Do you think there is a democratic deficit in the way that the EMU and the Euro-area functions? Would this ‘perceived hegemony’ be damaging to the prospect of further European integration –perhaps moving towards a more federal structure?

Your question really touches upon many issues. So let me start with the question whether the EMU project was well founded or not. Clearly it was a project that had some flaws but it was also a successful project in many respects. So there is no such thing as certainty in politics and the EMU started as an incremental step towards greater monetary unification (among the EU member-states). A problem with the EMU during the transition in the late 1990s and early 2000s was its focus on nominal targets. For example, low inflation, exchange rate stability, small fiscal deficits and relatively moderate levels of debt and declining as a share of total GDP. While there is nothing inherently wrong with setting nominal targets all of those issues –e.g. whether you have a high debt to GDP ratio or not, whether a country is running consistently large fiscal deficits or not– are outcomes.

So unfortunately the focus was on the outcomes rather than on the inputs. I would have expected much more focus on the institutions and the politics that –in some cases– give rise to such issues and in some others lead to fiscal turbulence. In the years to come I would expect much more focus on the targets to be on the so-called real outcomes related to the functioning of the state, related to the functioning of the product and other markets. It is very easy to be critical on the EMU project so far but the European unification project more generally was also an incremental process. It started as a free trade area in a couple of industries, then it expanded, then it became a Union and then we had the single market in the mid-1980s which was a huge success and the EMU followed as a natural step of this process. Now, we have the project of the banking union which is vital within the currency union of the 19 Euro-area member countries and I think to a certain degree things are moving smoothly especially since the banking union project is set to include a deposit guarantee much like along the lines we see in the United States. To sum up, I concur with many scholars that a fiscal union –or a process towards a fiscal union– should be the next logical step. But again, I do not expect miracles; that one day Europe will decide to be a federation but, for example, I think it is not inconsiderable in the next five to 10 years to see a significant increase of the EU budget which is now a miniscule proportion of the European GDP –way lower than that of the federal government in the USA. In my view, this process is going to be slow, because this is how –if you like– European politics have evolved so far. Going back to our discussion earlier, Greece’s strategic, economic and political interests are to be close to this group of EU countries that will move towards closer integration in those areas.

Now, the project of the banking union is vital within the currency union of the 19 Euro-area member countries and a process towards a fiscal union– should be the next logical step

Now, you raised the questions whether the current system is undemocratic or else if there is some lack of representativeness in European policy-making and the hegemonic role of Germany. While things are not perfect, there are issues of course, but I found the claim that the governance in the EU being undemocratic a bit flawed and actually being far from reality. It is true that Germany plays a central role in European policy making over the past couple of years but this is mostly because of the strength of its economy rather because of its desire to play a more key role. And in practice in many cases the German initial positions turn out not to be the ones that are being implemented. Let me give you an example, in the spring of 2010 the German chancellor said that she does not want to participate in any rescue in a European Union country. Three months later the IMF has asked that Germany participates in the programme for the Greek bail-out. One year afterwards, the German government did not want the ECB to implement a securities market programme and subsequently the LPRO facilities that was implemented. The quantitative easing programme of the ECB is a programme that was opposed by the German Bundesbank president and by public opinion in Germany; and it was implemented as well. So, I consider a bit naïve the position that whatever Germany wants happens in Europe –true Germany is a big country, and population-wise, it is a strong country economic-wise and naturally it plays a role but it is not the case that whatever Germany wants is being implemented in Greece. For example, if I read the news correctly, it seems that the German representative at the board of the ECB was pushing Mario Draghi (the president of the ECB) and the rest of the governing council to cease supporting the Greek banks, which were supported for the last couple of months, because the collateral they were offering was of extremely low quality and the country had officially missed a payment to the IMF. What I am saying is that there are problems but I see that those problems are mostly in the communication rather than on substance.

Greece played by the rules that existed at the time and it was rightly admitted to the club of Euro-area member countries

Let me now move to the last part of this interview. Some people would claim that Greece’s admission into the Euro-zone was a mistake; there were allegations about data fraud –in particular with respect to meeting the Maastricht criteria for entering the Eurozone. Are those claims valid? Was it a mistake for Greece to be admitted into the Eurozone?

No it was not. And actually according to revised statistics for Greece that were published by Eurostat and the new independent Greek statistical authority, Greece has been running a primary fiscal surplus for most of the period from 1995 to 2001; there were some really minor issues regarding the deficit in one year –2003– there are many accounting ways to play with that but there is no ambiguity if one is to look at the numbers that there was a considerable convergence with the rest of EU and fiscal consolidation taking place in Greece in the mid to late-1990s. So Greece played by the rules that existed at the time and it was rightly admitted to the club of Euro-area member countries. Let me give one example to illustrate that Greece followed the rules of the game: a very big issue was how to count privatisation receipts that were considerable in the late 1990s for Greece –as well as in many other European countries– would this count as a reduction of the deficit or not. Actually Germany allowed for privatisation receipts to be included in the estimation of the deficit. So, strictly speaking when you start counting the fiscal position in Greece these were the rules; you can complain about the rules –that those rules and targets were nominal and did not go into the substance, this was a general problem– but all these allegations about fudging the numbers are not reflecting the truth. There was a considerable convergence, Greek fiscal books improved considerably, not because tax collection had improved –to be fair- but mostly because the Greek economy has experienced very strong growth –in real terms something like 3.5 to 4% per year– plus if we were to include inflation which at the time was about 2% this means that the Greek economy grew at a rate of 8 to 9%. This allowed the fiscal position to improve and the high debt to be neutralised and be brought under control. And when the shock happens in 2007 and 2008, then the Greek economy appeared to be very vulnerable to this external shock and the deterioration of the growth prospects.

Unlike Greek case, British politicians and the public in the UK believe that Britain is too strong and there will not be as bad from exiting the EU

As you very well know there is not only a discussion about Grexit but recently there is also a discussion about Brexit as well. Britain is to hold a referendum to decide whether to stay in the EU. So how are the Greek negotiations with the EU institutions going to affect public opinion and politicians here in Britain with respect to Brexit?

I think that the two situations and the two examples are not comparable. In the case of Greece, the country had to stay in the EU and the Euro-area because if it were to be outside the situation would have deteriorated much more. Britain, if you like, is at the other side of the spectrum, British politicians and the public in the UK believe that Britain is too strong and there will not be as bad from exiting the EU. So I do not see many analogies here. My view is that the UK has gained a lot by being a part of the EU and it is going to be a catastrophic policy if the British citizens vote in the referendum in the years to come against Britain’s participation in the EU.

My last question concerns the relationship between Greece and Turkey. Do you think that Turkey can play a positive role and help Greece in order for Greece to overcome this crisis? For example, do you think that Greece and Turkey can work together, perhaps in the form of more close economic cooperation in the tourism or energy fields which are the heavy industry for both countries? Do you see any prospects for increased regional cooperation as was the case in the early and mid-1990s when Greece and other Balkan countries engaged in closer economic cooperation?

I think it was a huge success that the two countries, Turkey and Greece, in the mid to late 1990s came closer and they decided to engage in a constructive dialogue and to steadily overcome the problems of the past. I cannot foresee a form of cooperation but in the years to come I think that we can maintain the current status quo of no animosity no polemic rhetoric and things can start moving forward in that direction for both countries. Also nowadays the economy is much more on the hands of the private sector rather than on the hands of the government. This is not the time, let’s say, for a big industrial cooperative project between the Greek and the Turkish government. We have to let the private sector –for example the hotel entrepreneurs in an island opposite the Turkish coast– we have to let those entrepreneurs to engage in some sort of business cooperation with their colleagues across the Aegean rather than having a command-style economy which pushes those cooperation initiatives. So I think that we have to let this process continue bringing some fruits to the people and the businesses in both sides of the Aegean. And policy makers can very easily screw up things. This was a huge success –what has happened in the late 1990s– let us not intervene with that let us further allow for this process to flourish.

And one final speculative question –if I may. What do you think that the near future holds for Greece? Are we going to have a successful conclusion of the negotiations of the Greek administration with the EU institutions for the third bail-out programme? How damaging early elections will be to the conclusion of this programme? Will the Europeans hold back in anticipation of the September 20 election results and the formation of a new government in Athens?

In Greek politics and according to the Constitution the Prime Minister has almost absolute power on whether to call or not early elections. Clearly Mr. Tsipras’ strategy was to complete the agreement with the Europeans as early as possible and drive the country as soon as possible into an early election, mostly because he believes –correctly–that the economic climate will deteriorate sharply in the following months. He wants to go to elections now [September 20] because relatively speaking he is in a much stronger position, especially because the main opposition party has an interim president and the remaining pro-EU opposition is fragmented. So the plan of Mr. Tsipras was to conclude the negotiations quickly as it happened indeed. Perhaps there might some problems with the board of the IMF [regarding early elections] but there is an ongoing IMF programme going on until the spring of 2016 and in any case the IMF objections are of secondary importance –at this stage– and will become much more important in a couple of months. The elections will entail a further cost to the already fragile Greek economy; they will increase uncertainty and will not accomplish anything but unfortunately this is the chosen strategy of the prime minister [Mr. Tsipras] and, as I said earlier, according to the Greek constitution the prime minister can take the country into an early election whenever he wants. Most of the reforms included in the bail-out programme (e.g. structural reforms) need some time to be implemented and that is why I do not think that the Europeans can do much to convince Mr. Tsipras to avoid early elections.

Professor Papaioannou thank you very much for your time and for agreeing to this interview, and for your detailed and insightful answers to our questions.

Thank you very much.

***

Please cite this publication as follows:

Research Turkey (October, 2015), “Interview with Professor Elias Papaioannou: Understanding Stormy Greek Political Economy” Vol. IV, Issue 10, pp.60-79 Centre for Policy and Research on Turkey (Research Turkey), London, Research Turkey (http://researchturkey.org/?p=9901)

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