Kathimerini caught up with Barry Eichengreen, an expert in economic history and one of the stars at Berkeley University’s Department of Economics, after he spoke at a recent conference in Athens organized by the Bank of Greece on the subject of central banking in the interwar years.
“The Italian budget does not make sense,” says Eichengreen on the big issue of the day in the eurozone. “The problem in Italy is not insufficient demand. I don’t think the valid arguments from 2008-2010 about the need for the public sector to step in when private spending is collapsing apply to Italy today. The problems of the Italian economy mainly relate to the banking system and the lack of productivity growth.”
Italy, he adds, needs to continue producing primary surpluses, otherwise it “will have a problem of debt sustainability,” which would have “devastating effects” on local banks that hold government bonds. Furthermore, the budget submitted by the coalition government in Rome is based on “unrealistic forecasts about growth.”
For the American economist, there is one obvious honorable compromise that could avert a crisis: “The European Commission grants the Italian government more fiscal space and the government undertakes meaningful supply-side reforms. The more supply-side reforms they do, the more fiscal space they should get.”
From the Italian crisis, our discussion naturally shifts to Greece’s. In 2015, Eichengreen had recommended a similar solution to resolve negotiations between Athens and its creditors. “My most ambitious – some would say harebrained – scheme was that the more structural reforms Greece implemented, the more debt restructuring it would be offered in return,” says the former International Monetary Fund senior policy adviser. He admits, however, that it was hard to assess the degree of implementation that would be required for debt relief to be granted.
After the agreement signed between the two sides on July 13 of that year, in a Project Syndicate article, Eichengreen accused Germany of forcing Greece to “choose between economic collapse and leaving the eurozone. Both options would mean economic disaster; the first, if not both, would be politically disastrous as well,” he wrote. He also predicted that the third program would lead to a deeper recession and failure to reach fiscal targets.
I ask whether he is surprised by the Greek economy’s performance, as it has returned to growth (albeit slow) and has overshot its primary surplus targets.
“Yes, I have been surprised. I think that Greece has benefited from a favorable international environment, in the US and, up until now, in Europe as well. But I would agree that the growth is tepid, given the starting point, and unemployment is still hovering around 20 percent… After the Great Depression, starting in 1933, the US grew by 10 percent a year, at least until the relapse into recession in 1937-1938. One would think Greece could have grown a lot faster,” says Eichengreen, author of “Hall of Mirrors” (published in 2015), in which he compares the global financial crises of the 1930s and 2008.
Are high fiscal targets to blame for Greece’s failure to achieve a more robust economic recovery? “Not entirely. I think there’s also the issue that the economy has to be restructured. Greece started from a position where it exported only a very narrow range of goods or services. The diversification of manufacturing exports and things like that takes time.”
Though progressive, Eichengreen has maintained a much more balanced approach to the Greek crisis of 2015 than his more high-profile colleagues such as Jeffrey Sachs and Nobel laureates Joseph Stiglitz and Paul Krugman. I remind him of their stance that year, almost single-mindedly focused on the issue of austerity, and the encouragement they gave to the more radical members of Alexis Tsipras’s first government, foremost among whom was former finance minister Yanis Varoufakis.
“I think there was an element of populism of the left; economists were subject to letting their populist instincts influence the advice they gave. Leaving aside a handful of very big names that signed up for SYRIZA at the outset, most foreign economists saw the problem as both structural and fiscal, and understood that the bargain would have to be done in ways that did not cross the red lines of the troika,” says Eichengreen.
I observe that it was as if those famous economists were interested in Greece only in the role of martyr in the global war against austerity. “Part of the reason why the crisis was so terrible and so difficult to resolve was that it came to be painted in terms of good and evil. The Germans adopted a very nasty characterization of Greeks and Greeks adopted nasty characterizations of Germans. To the extent that some foreign economists weighed in and reinforced those stereotypes, this was not helpful,” he adds.
Was it all worth it for Greece? “I think both for economic and political reasons it will ultimately prove worthwhile that Greece stayed the course,” he says. “The arguments for abandoning the euro and devaluating the reintroduced drachma constitute interesting hypotheticals but the reality is that it doesn’t run in reverse. A European Union member in good standing has economic value – as the UK is learning, the hard way.”
The ECB and the crisis
As an exper in the role of monetary policy in crisis management, how would he rate the European Central Bank’s performance? “The [Mario] Draghi ECB learned from the mistakes of the [Jean-Claude] Trichet era,” says Eichengreen. Among these mistakes, he mentions the increase in interest rates in early 2011, “when the European economy was still so weak.” He also hails Draghi’s commitment to “do whatever it takes,” and the policy initiatives that have resulted from that.
The ECB, says Eichengreen, “is now a normal central bank with supervisory responsibilities as well as monetary policy responsibilities, that understands that financial stability is part of its purview.” It has also significantly improved its communication with the public, being “much franker and informative,” he says, adding that even though “it could do more,” these moves toward greater transparency haves helped it protect its independence.