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Greece should have been granted debt relief in 2010, says Thomas Wieser

TAGS: Economy, EU

What is largely missing in Greece, in contrast to other bailed out European countries like Ireland and Spain, is a frank discussion on its own contribution to its economic predicament, former Eurogroup Working Group (EWG) president Thomas Weiser told Skai TV in an interview aired on Tuesday night.

“The more a country and the people, institutions and media in a country ask themselves how did we get into this mess, the more successful they emerge out of the crisis,” says Wieser, who has been involved in the Greek crisis since the very start, going on to admit that the institutions could have done things differently.

The American-Austrian economist also looks back on Greece’s near-exit from the eurozone in 2015 and on the future, saying that he is confident that “core elements of the programs will remain with us, with you.”

Was Brussels asleep at the wheel in 2009 when the Greek crisis broke?

This is fiscal archaeology. One has to go back even further and ask oneself why the issue of the fiscal problem was not highlighted earlier. One of the reasons is that the member states would fiercely protect their independence and their fiscal independence, and forbade the Commission to go into the capital, into the statistical offices and see if the numbers were being put together correctly. The statistical situation in the years up to 2008-2009 was nοt good but the deterioration in the course of 2009 was extremely rapid. So everyone has to take their part of the blame, first and foremost the Greek government at the time, because they were the ones who spent like hell.

When the real deficit was revealed were people shocked or expecting it?

Well, the Greek government up until the elections was saying that everything will be fine, which was obviously impossible if one looked at the spending trends. People were expecting problems but they were not expecting a catastrophe. And when the new Greek finance minister came in and said we looked at the figures and we have a major problem, people were at the stage thinking total catastrophe is 9 percent. When all things were counted and added up, this amounted to more than 15 percent of GDP, no one was thinking about that.

You are one of the few people who are real experts in the Greek crisis; you were there at the very beginning. Looking back, can you tell us what the root of the crisis was and if it has been cured after all of these years of program?

One thing that strikes me is that the more a country and the people, institutions and media in a country ask themselves how did we get into this mess, the more successful they emerge out of the crisis. This for me is the big difference between Greece on the one hand and Ireland, where there has been very intensive analysis and debate on what we the Irish did wrong in order to get into this mess. This has been quite intensive in Spain and not quite so in Portugal, but it is largely missing in Greece.

That is aspect number one. Aspect number two is that when we first started with the crisis many of us were convinced that it was fiscal and I have come to change my view quite considerably, realizing that the fiscal is the financial external manifestation and visible manifestation of other underlying imbalances and problems. The more I have dealt with crises in member states, I have come to see that indebtedness is always the result of governance problems and Greece has the most challenges into its internal governance system.

In the past you have talked about clientelism. Do you think we have made some progress in this areas or not really?

I would say there has been a certain progress. But is Greece now in a situation where it can be the Switzerland of the eastern Mediterranean? No way. There is still long way to go. Many people in Greece have approached me and said: “you have to change the educational system.” This is democracy and is something a country needs to want. It has to come out of the country and out of the political system of a country by the democratically elected government. And if the democratically elected government of any color changes the system so that institutions are respected, procedures work and people have the same access to the judicial system so that they get irrespective of who they are a fair hearing, so that everyone pays their taxes irrespective of who they know or who they are – these the cornerstones of how you live well in a democratic society.

Many mistakes were made by the Greek side, but what would you say were the mistakes made by the institutions’ side?

One thing that I always say is that if I can rewind history and change it a little, I think we realized in 2010 that what Greece in theory wanted the most was: one, a complete change of economic policies, and two, debt relief. Probably the best and most relevant reason why it did not happen was that we were in the midst of a huge crisis and people were completely unsure of whether such a bail-in of creditors would not be only very detrimental to Greek banks and European banks of course, but also whether it would jolt the Greek financial system. This is the thing that may have changed the course of events. The second problem we had was that the three, then four, institutions were working largely together but not always on the program and that led to the widespread use of the competition between institutions. People could pick whatever they wanted to hear from any institution they wanted. This led to countries being played off against each other that is a very inefficient way to run a program. There were huge number of inefficiencies from the Greek side but quite a number of inefficiencies from the creditors’ and the institutions’ side. I do hope and I’m convinced that from the summer life will get considerably easier.

You have said that you felt we were closer to Grexit in 2015 than 2012. Can you describe the moment when you felt this could happen?

In 2012 people had the feeling that Greece was very close exiting the euro area. In 2012 I was very convinced that this would not come about for a variety of reasons, including the economic environment, as the ramifications and negative repercussions for the European and global economy would have been very significant, and that Greece was firmly committed in staying in the euro area. In mid-2015 there was a very clear message sent out by large parts of the Greek government that they did not want to remain in the euro area as it was. In hindsight, many of the activities of the Greek authorities in 2015 can be interpreted as actively working towards some kind of exit from the monetary union. So when we had these very intense discussions at the end of June in Brussels I was not convinced that Greece would exit, but I saw there was a considerable possibility of Greece exiting the euro area.

You have said that the cost of the negotiating period during the first six or seven months of the SYRIZA government when Yanis Varoufakis was the finance minister cost to Greece about 200 billion euros. Could you break that number down?

There will never be any precise figure available but let me just explain that there is the direct cost associated with the bank recapitalization, the program costs and the others that will be paid over in time – multi billion, two-digit billion figures. But the biggest figure of all is if you consider the huge fall of GDP that occurred, the huge fall in Greek national income, and if such a steep fall in national income is not rectified in the following year. If, for example, you have 20 percent less income in one year and you are back to normal next year, you have lost 20 percent and you will never get it back. If you start growing your income after the first year to 19 percent of what it would have been and the next year 18 percent of what it would have been and then 17 percent of what it would have been, if you add that up over time, then of course the loss is much, much greater. Some people would come up with a significantly higher figure, some with a lower one, but if you consider these losses to Greece as they are, not enshrined in the national debt but their cost for Greece, then they are of course immense.

The German stance has always been something of a mystery to us and especially that of former finance minister Wolfgnag Schaeuble, who in July 2015 proposed a ‘time out’ for Greece from the eurozone. Was that a negotiating tactic or a real belief and to what degree was Chancellor Angela Merkel on his side?

I’m quite sure that what was presented there by the German finance minister had the backing of the whole German government and it was not a thing he did in isolation. I have a very strong sense that in Germany rules are rules and that’s it and you follow them. That is why the very flagrant flouting of the rules by the Greek government of the first half of 2015 especially enraged those who said that rules are there to be followed.

Can you describe that Eurogroup before the summit, how the rest of the countries were feeling about Greece at that moment?

Out of the 19 member states, with Greece, 18 were deeply upset and I would say there were two, maximum three, countries who were like, “let’s have another try, give them one more chance.” But I think virtually all other countries were like, “you cannot go on like this. This is the end.” The Germans had a paper on it, but in different forms and content, and with slightly different terminology I would say that 16-17 member states were joining on this approach. Don’t forget that.

Since the beginning of the program we have had a problem with ownership. Do you feel that when Greece is out of the program without real control, it will stick to the reforms, do what is needed for the economy to recover?

Ηow well a program has functioned is also related to how much a country has engaged in soul-searching and asked itself how it got itself into that mess and not some nasty foreigners. If I may interject, the way the former head of the Greek statistical authority [Andreas Georgiou] has been treated points to a rather complete lack of understanding of what led Greece into the crisis.

So what does make you believe that Greece is going to stick to what it has promised, when it won’t have tight control and won’t need the money?

I’m quite confident that Greece as it is has the possibility to grow strongly, to create employment. It will take some time until the enormous overhang of unemployment and especially youth unemployment is dealt with in a satisfactory manner. I’m not sure that this Greek government, and the next Greek government and the government after, in the next 20 years will be doing the right things. We can only hope for it. But as long as Greece has not repaid 75 percent of its debt there is a commitment to a deeper degree of surveillance by the EU institutions. I fully expect by mid-2018 debt relief to be happening and as part of this debt relief I would believe that for the next couple of years some more discipline and agreements will be necessary and will pertain to fiscal policy and not rolling back core elements of reforms that have been agreed under the programs. I think there is good reason to believe that core elements of the programs will remain with us, with you. I would hope that these are seen as Greek policies and not [imposed] by some external agent and we need to hope that future governments of whatever color will go forward strongly to make Greece a competitive place that will be able to act strongly in a monetary union.

People here feel very strongly that taxation is very high and they won’t be able to continue paying the demands of the Greek state. Is there any room for changing the targets, at least the primary surplus targets which are set for the next years?

The first reason is a very low level of economic activity after the shock, which was inflicted to the Greek economy especially in 2015. If you leave tax rates as they are but economic activity has declined significantly they make a much higher share of national income. As growth picks up that should get easier and easier. The second reason is if everyone pays their taxes as you would expect in a well-functioning democracy then tax rates overall can be considerably lower. The more tax evasion you have due to clientelist behavior or other reasons, the higher the tax bill is for those who do pay their taxes.

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