Elena Spilioti for TA YP OPSIN – CONSIDER THESE podcast: Dr. Kierkegaard, within your current research, you have written extensively on European economy and reform, and you have foreseen some time ago that Greece among other countries would need a third aid package soon. Now, although Europe was not the focus of this recent summit of G20, there are still questions that make people very, very concerned. It's the third aid package to Greece. It's the talk about the IMF eventually leaving the Troika arrangement some time in the near future, and there are also the German elections.

                        It seems that with all that has been done during the last three years, there's been too much cost for the people, too little gain for the countries involved, and a lot of turmoil among some creditors and investors, and this doesn't really look like a good financial strategy. What is wrong with this picture?

J.K.:                  I think we need to take a step back and recognize that the crisis that we have seen in the Euro Area since 2010 is a crisis that has very deep roots because what it basically shows is that the original design of the Euro common currency itself as it was laid down in the Maastricht Treaty in the early 1990s, where you have a common currenc,y centralized single monetary policy, a single central bank, but no fiscal and political union, is essentially a structure that doesn't work.

                        Therefore, many of the political problems that we have seen in Europe repeatedly in Greece and many other instances, now most recently in Cyprus, of course, are really a reflection of the fact that the crisis itself and the necessity of agreeing bailouts for countries or countries' banking systems in some cases are really issues that require a much closer fiscal policy collaboration and therefore, obviously, also direct political integration than was foreseen in the original Maastricht Treaty.

                        When you, for instance, see right now what Greece need quite likely, whether we call it a third IMF or Troika package, or we simply call it closing the financing gap of the existing one, it's going to be basically a rerun of the same kind of political clashes that we have seen before, although I will say that there is one major difference this time in the case of Greece, precisely because of the lack of a politically-integrated Euro Area.

                        There is always a need, a simple political need, when you give a bailout package to have political conditionality attached to this. This is essentially the same model that the IMF itself has been using for decades when it does financial rescues. The same kind of logic applies in the Euro Area, namely that governments in Germany and any other Euro Area country, for that matter, will not give money to a country without control over how this money is spent. That's essentially, of course, where the political conditionality comes in.

                        Now, the difference this time, the third program for Greece, is that by and large, unlike in previous cases, I would argue that the current Greek government has actually implemented more or less what the Troika has requested it do in terms of reforms in Greece and therefore, I do not believe that there will be particularly large political problems associated with Greece receiving this third round of aid because, so to speak, the Greek government has done its homework in advance.

                        I also do not believe that the German election itself is actually a particular concern for this issue. It is clear that Chancellor Merkel does not necessarily want to have this debate or this decision taken before the elections in Germany in a few weeks' time, but on the other hand, this is not a debate that she and her finance minister, Wolfgang Schaeuble, has shied away from during the debate. In fact, Wolfgang Schaeuble has been quite clear about this, that Greece will need more aid and therefore, I would expect this decision to be taken some time later this year. ( Note: the interview was taken before the German elections)

                        Finally, on this issue of the IMF leaving the Troika arrangement, I think this is inevitable. I think it is actually in some ways potentially a good thing because it partly will reflect the institutional improvements that we have seen in the Euro area since the beginning of the crisis because the Troika itself, this bringing together of the IMF, the European Commission, and the ECB is really sort of a crisis improvisation. It was something that needed to be done in a great haste at the beginning of the crisis when Europe didn't really have any structures.

                        Now, just to give you an example, when the ECB becomes the main regulator for banks in the Euro Area beginning next year, then the ECB will have to leave the Troika because otherwise, the ECB would essentially be negotiating with itself, being now responsible for banking supervision in the Euro area. For that reason alone, the Troika arrangement will have to change.

                        Secondly, it is now that the ESM is a permanent institution with a lot of capital at its disposal, and the relationship between the ESM, which is a Euro area institution, rather than the European Commission, which of course is for the entire EU, I think is something that needs to be resolved as well and therefore, I wouldn't be surprised if we end up with a situation where it is actually some version of the ESM that is actually going to be part of the Troika in the longer run, rather than the European Commission. For the people it may be the same, simply being transferred from the European Commission to the ESM, but I would expect that institutionally, this would be done by a Euro area institution.

                        Finally, from the perspective, of course, of the IMF, what I think now that we're seeing risks of crises in many large emerging markets, India, Brazil, and others, I think it is quite natural that the IMF should want to deploy some of its resources in other parts of the world. The IMF is a global organization. It has global commitments. It has global responsibilities, but it has, of course, in the last number of years been almost exclusively focused on Europe because that's where the main crisis in the global economy has been.

                        That isn't going to be the case much longer, in my opinion and therefore, we shouldn't necessarily be so sad or disturbed or concerned … Some might actually applaud it … that the IMF is potentially also going to exit the Troika structure as we know it today. I think IMF reformed policy and economic advice will still be needed, but I certainly do not believe that any more IMF money is going to be required in the Euro area rescue, and I also therefore do not believe that the IMF will contribute financially to the third round of aid to Greece to be likely decided later this year or early next year ( Note: 2014).

E.S:                  If this is supposed to be a smooth process, why there is talk about disagreement between the IMF and the other two members of the Troika?

J.K:                   There has been some genuine policy disagreement over the years between the IMF, the European Commission, and the ECB. I think that if we go back to 2010, 2011, there were disagreements among the different members on the precise design of, for instance, the program in Greece, how hard to push fiscal austerity versus the need to privatize state assets versus the need to liberalize Labor market [inaudible 14:59] structural reforms.

                        I don't think we should minimize this. This is, in some ways, natural, that there are disagreements among three institutions as different as the European Commission, the ECB, and the IMF, because remember that the European Commission has by designation a responsibility for the stability of the entire European Union.

                        The ECB is, of course, naturally, much more focused on only the Euro Area and particularly the Euro Area banking system, whereas on the one hand, the IMF is a global institution but on the other hand, it basically deals with the member states of the IMF, which means that in the case of Greece, for instance, the IMF has a responsibility for Greece rather than stability of the Euro Area as a whole and therefore, there are these conflicting political areas of policy responsibility, so there has been friction, absolutely, but I don't think that this is a level of friction that has prevented the Troika from functioning.

                        I actually think that everything else being equal, this Troika arrangement has actually worked relatively smoothly because we also have to remember that this is an entirely new process or experience for the European institutions. There has never been a crisis like this in Europe before. The ECB is a new organization. The European Commission is older, but European Commission does not have crisis management experience in the way that, of course, the IMF has had it for many, many years.

                        Everything else being equal, I think that the performance of the Troika has actually been quite good. Conflicts of interest are inevitable, but the way that the Troika is now moving towards probably the end of the Troika as we know is a natural and indeed welcome, in my opinion, development because it reflects in many ways the institutional changes and indeed advancements that have been made in the Euro Area since the beginning of the crisis.

E.S:                  Let's stay on Greece a little bit longer. Since, of course,” new” is an opportunity but it's also a risk, it seems that people in Greece are concerned, especially after the admittance on the part of IMF of specific mistakes. They have a government which indeed has made progress, but on the other hand, the cost, as we said before, on the people has been enormous. Now, some of the parties in Greece are convinced that we should go into unilateral cancellation of the debt, along the precedent of Germany before World War II. What is your take on that?

J.K:                   I think, first of all, that it is very difficult to minimize the economic hardship that Greece has suffered. Greece has now had a cumulative decline of somewhere between 25 and 30% of GDP. Obviously, unemployment is extremely high, so the hardship of the Greek population is very clear and extremely harsh. In that situation, it is not surprising that there are appeals of parties that seemingly presents an easy way out, and in this case, the easy way out is, of course, to just cancel the debt, now that Greece is close to having a primary surplus and indeed, probably actually will achieve it this year (Note: 2013).

                        The problem of doing that, however, are enormous, and I believe that at the end of the day, this will not happen and were it to happen, it would unleash further economic disaster on Greece because we need to think through what would happen if Greece suddenly unilaterally decided to revoke or cancel its debts. Most of this debt is held by the other Euro area governments as well as the ECB. The first result would therefore be that the Greek banking system would lose access to ECB liquidity operations, which is another way of saying that the Greek banking system would close overnight. That would, of course, in among itself, lead to a further disaster for the Greek economy.

                        Secondly, it is very, very unlikely, in my opinion, that such a unilateral cancellation of Greek government debt held by other governments would not lead these other governments to essentially initiate a process that would lead to the expulsion of Greece from the Euro Area, which is another way of saying that then the drachma would, of course, in some way or another have to be reintroduced.

                        That would be a disaster as well for Greece because the value of the drachma, in my opinion, would drop very dramatically, and we should also remember that if you are a Greek business and you have a contract with a foreign company that is denominated in Euros but all of a sudden, you as a Greek company, will need to have this redenominated into Greek drachmas, that is a default event, which means that every private contract that Greek businesses or people have with foreign companies or entities will be in default, which is another way of saying that the vast majority of private businesses in Greece will collapse.

                        Then, finally, there is this issue that if you try to reintroduce the drachma in this way or are forced to do it because the other Euro Area countries are essentially initiating such a process in whatever form that might take, and this will not be easy politically or legally, but as I said, if the Greek government were to cancel all the debt, I am absolutely convinced that would be the outcome. Then, of course, everyone would try to get their Euros out of Greece before conversion of this wealth into drachmas, because that is the way you would maintain the value.

                        You would have an enormous capital flight out of Greece, which again would mean that there will be no investments. Businesses would relocate. Indeed, I would predict a great many Greeks would relocate in this scenario, so I think that at the end of the day, unfortunately, the reality is that Greece at this point does not actually have this opportunity that some parties in Greece may be willing to entertain as a quick fix to the situation in Greece. If they were to do that, then I would predict that the Greek economy would actually completely collapse, and the situation would be far, far worse than anything we have seen in the last couple of years.

E.S:                  In one of your articles, you have written about Greece and Portugal, that they have no choice but to carry on, and you mentioned specifically, "… throughout the Euro Area crisis the previously politically impossible suddenly became possible when the Euro itself was at risk … " Then you go on talking about an eventual fiscal loosening to give some breathing space to the economies.

                        To what extent this entire crisis has been politically motivated to bring about certain structural changes and transfer of sovereignty from the member countries to the main structures of the European Union?

J.K:                   I think, as I said initially, one of the underlying reasons for this crisis beginning in the first place is that when the Euro area was designed, there was a lack of appreciation that you cannot share a currency without sharing at least some fiscal policy or some pooling of sovereignty over fiscal policy because fiscal policy is what is required in a crisis. I think there is a large degree of what the crisis has done is because it has brought Europe to the Euro as a whole on the brink of collapse. Basically, fundamentally leaders in all of the Euro Area has had a choice between economic disaster or agreeing to pool sovereignty over fiscal resources. This is what the ESM really is as well as the new permanent fiscal surveillance mechanisms that the powers that the European Commission have gotten with the Six-Pack and the Two-Pack and the Revised Stability and Growth Pack, etc.

                        All of these measures have been taken because the alternative was worse, the alternative of a collapse of the Euro. Therefore, that is essentially the essence of that the crisis has made what was previously impossible politically possible because, back in the 1990s, when the Maastricht Treaty was written, there were many economists and political scientists who warned politicians in Europe, warned Helmut Kohl and Francois Mitterrand and other political leaders of the time that you cannot have a common currency without a fiscal and political union as well.

                        Of course, there was no political willingness to do that in 1992, 1993, but now, because of the crisis, at least some of that political will has been found because it is necessary, because if you don't do it, you will have to undo the Euro and fundamentally, political leaders have chosen what I regard as the pragmatic and sensible choice of rather than abandoning the Euro, which would be enormously costly for everyone involved … Not just Greece, but Germany, France, everyone.

                        They have chosen to try to fix and reform the institutions of the Euro Area in such a way that actually they are viable in the long run, and I think this is the right approach, but it entails that governments are going to have to hand over considerably more political and economic … especially fiscal …  sovereignty than they were willing to do before the crisis.

Elena:              This was indeed there in the beginning, but we were wondering whether the deepening of the crisis was driven by political motives, and I'm saying this because of the spasmodic measures that seem to have been taken since the beginning, and of course, the European Union was not prepared. There are concerns about that. There are concerns about the sincerity of the efforts, but of course, this is a huge issue. Maybe we can talk about that some other time.

                        Why don't we focus a little bit on Germany and its role in the European Union? My question would be what is  the balance, and what are the limits between exercising leadership and having an authoritarian attitude for which Germany has been accused recently?

J.K:                   First of all, there's no doubt that Germany is the undisputed political and economic leader of Europe at the moment. Absolutely no doubt about that, but I think we should also be clear that that position in Germany is in many ways accidental. Indeed, Germany, if you like, has been very lucky because Germany did a lot of very deep structural reforms in its economy back in 2003, 2004, the harsh reforms and the so-called Agenda 2010 that then Chancellor Gerhard Schroeder implemented.

                        That meant that when the global crisis hit, Germany was, so to speak, prepared. They had already reformed many of their domestic institutions, which means that, combined with the fact that emerging markets have grown very dramatically throughout the crisis up until very recently, and there of course, major export markets fought for Germany, Germany did very well during this crisis, but there was a significant degree of dumb luck involved with that from the perspective of German policy, because when Germany did this, six, seven, eight years ago, it wasn't to prepare for the crisis. It was something they did because the German economy at the time was doing very poorly.

                        Remember that it's only less than 15 years ago that Germany was regarded as the sick man of Europe. German strength is in some ways accidental, and we should not expect it to be a permanent feature in the Euro Area the way it has been during this crisis because at the same time, of course, what the crisis did was that it undermined the political and economic standing of all the other major Euro area countries, noted to be France, Italy and Spain.

                        Therefore, Germany really stood alone, if you like, as the undisputed leader of Europe during this crisis, but I don't believe that is going to last because I believe that as a result of some of the reforms that has been taking place in a number of the crisis countries, they will eventually return to growth, and therefore improve in economic strength and therefore also political standing. We shouldn't assume that what we're seeing now in the Euro area is permanent.

                        Now, with respect to the accusations of Germany for having an authoritarian or dictating nature during this crisis, of making very, very large demands on other countries in this crisis, I think, as I said earlier, there is a very clear and very evident political requirement that when you receive a bailout from another country, then this country or the IMF or anybody else that provides the money is going to want to have control over how this money is spent, and it is in this regard that Germany's demands should be viewed, and I would also say that we can certainly debate whether or not the precise amount of fiscal austerity that has been imposed on, for instance, Greece, Portugal, or some of the other peripheral countries, have been optimal or whether less would have been better.

                        I think there's no doubt that in hindsight, less austerity would probably have been better, but on the other hand, I think there's equally no doubt that more and quicker structural reform in Greece would also have been better. I, for instance, believe that it is very, very strange to realize that it is only now, more than three or four years into the crisis in Greece, that the government is actually beginning to contemplate laying off some public workers.

                        I think that if you compare to some of the measures that were taken in, for instance, the Baltic countries or Ireland, for that matter, where you saw deep structural reforms of the public sectors much earlier in the crisis and therefore, these countries have generally also performed better in recent quarters. It is clear that many of the demands for change that came from Germany and the IMF and the rest of the Euro Area and the ECB for reforms in Greece was related to the fact that Greece needed a lot of reforms, and Greece fundamentally had a, in my opinion, deeply uncompetitive economic system. Greece exports very little, apart from tourism. Some shipping services and others, but it has very little exports of goods.

                        Now part of that has to do with what I regard as exorbitant political influence of Greek labor unions and other institutions.  Partly, it has to do with, in many ways in my opinion, a fundamentally corrupt political system that you have had in Greece in many years where you received a job in exchange for votes. Many of these things needed to be changed, and the fact that Germany demanded that they be changed in return for providing financing is not something that I think is the same as saying that German (sic) had an authoritarian nature.

                        I basically would turn it around and say, I think that in some ways, it represents probably the best chance that Greece has had to reform itself and get rid of many of these uncompetitive and dysfunctional institutional features that its political and economic system has had basically since the end of the dictatorship. It's a great opportunity for Greece. It is only unfortunate that it came as the result of this deep economic crisis rather than as a bottom-up demand for reform politically and economically, demanded by the Greek voters themselves before the crisis.

ES:                   I couldn't agree more with you that Greece has had to have done its homework much, much earlier; however, let me ask you the same question using a different term this time. Could it have been wiser for Germany, in the spirit of European solidarity, to make these reforms -to the extent that it could influence them, of course - less painful in the sense of designed to have less gain? For example, having lower interest rates.  After all, the European Union has struggled for several years to create a European identify for people that have been completely different, although they were on the same continent. In that sense, maybe the German leadership could have been manifested in a more flexible way. What do you think about that?

J.K:                   I think that there's no doubt that the initial rate of interest that was charged on the loans offered to Greece in May 2010, absolutely, they were much too high, and they have subsequently been lowered. That was clearly, in retrospect, a mistake made by Germany. It would have been better, much wiser, to have adopted immediately the model that is now adopted, which is that you give loans at very low rates, similar to the rates that are offered by the IMF on sort of concessionary terms because that would clearly have helped the economic confidence in Greece and elsewhere, and I think that has been acknowledge by the German leadership, certainly by the ECB and other members of the European Commission, Commissioner Rehn and others, that this was a mistake.

                        In that sense, absolutely. Initially, to follow up on what you said, giving these loans at low interest rates would have been precisely an expression of European solidarity from the beginning as you mentioned, and I think in retrospect, that would have been far, far wiser by Germany and other Euro area economies that were pushing for high interest rates at the time.

                        There's no doubt that Germany and other Euro area members clearly have also made mistakes and have learned some valuable lessons during this crisis, and I think it is helpful to see, or it is encouraging, therefore, to see that when you look at the permanent features of the ESM,  it is going to be giving such loans potentially in the future, the rules for those loans are such that they will be given at very low interest rates, similar to those offered by the IMF, which is clearly an indication of much more Euro area solidarity in economic terms than was the case early in this crisis.

E.S:                  For our listeners, we remind them that ESM is the European Stability Mechanism.

                        In Greece, despite the reaction against some European countries, against the IMF, there are still several political parties that are pro European Union. However, they struggle with the numbers in the different polls, and I found very interesting a distinction, actually an observation that you made in another one of your papers about the anger giving its place to fear, and I would appreciate it if you could elaborate for us on that, since we are concerned because the extremist right-wing party, Golden Dawn, is already the third party, according to the polls.

J.K:                   Basically, what I'm arguing is that even in a country like Greece, which has gone through a very traumatic economic crisis and suffered a tremendous economic recession, even in Greece, but certainly also in every other Euro area country, the reality remains that as I laid out earlier, if you choose at this point in time to adopt policies that are advocated by Golden Dawn, canceling all the Greek debt unilaterally and thereby likely exiting the Euro, the outcome of that will be further and much worse economic disaster. Therefore, to put it crudely, the reality is that every one, because most populations in Europe are still relatively well off, they are still also aging in demographic terms, and that makes them naturally more conservative because they have, quite frankly, a lot to lose even if they, as is the case in Greece, have already lost a lot.

                        Therefore, that is what I mean that when you have an economic crisis, initially you are angry at your political leaders for having brought this crisis upon the population. There's no doubt about that. It's exactly the way  democracy should work.

                        That's what you want in some ways, and therefore, you are willing to look at alternatives and perhaps, there is a party like the Golden Dawn or other extremist parties in other European countries that offer a very easy and seductive solution to the problem, but as the economic crisis deepens as has been the case in Greece, and I think we saw this quite clearly in the case of the two elections we had last year in Greece that as we got closer and closer to the edge, if you like, then there was a rethink among quite a lot of people because they were not willing to take quite the risk when it came down to it and the decision had to be made. They were actually not willing to take that risk because they were more fearful in the end about what the prospects of these radical parties would actually be.

                        That is what I mean when I say that in the end, as the crisis grows deeper, eventually in countries that share the characteristics of the Euro area countries, meaning countries that actually still, relative to its neighboring countries, are relatively wealthy and are aging in population, they will vote more conservatively because fear for the future will trump their anger at existing politicians.

ES:                   What do you predict for the next European Parliamentary Elections next about the chances of extreme radical parties absorbing the dissatisfaction?

J.K:                   I certainly would predict that a number of the extremist right-wing parties across Europe, in Greece, certainly in France, maybe also the UK, will do very well, so I would predict that you would have a very unruly European Parliament starting next year ( Note: in 2014). I would not, however, predict that these parties will get the majority of the European Parliament. I would expect that the existing European People's Party and the Socialist groups will still together have a majority, which essentially is the same way as another way of saying that in the end, the European Parliament will still be able to operate as a parliament, which is very important, of course, because it has a lot of influence on a lot of these processes in the Euro area.

                        I would predict that it will be more unruly but ultimately, that the establishment parties … In a way, not dissimilar to what we have seen in Greece, where obviously, the two old parties have joined together in a coalition with a majority and is essentially keeping the ship or the train on the track, so to speak. I would expect some of the relatively same thing to happen in the European Parliament.

E.S:                  Dr. Kierkegaard, thank you very much for this interview.

J.K:                     My pleasure.