"There is no denying that the prime responsibility for dealing with the Greek problem lies with the Greeks themselves. The government has submitted to the European Commission its stability and growth programme, and a succession of new measures has been added since then. The aim is to reduce budget deficit by ten percentage points of GDP in three years. Surely, it will be hard going: difficult years lie ahead for the Greeks. But there is enormous slack and wastage in the public sector, while the adoption of long delayed structural measures should help to alleviate the pain of adjustment.
Credibility will need to be regained the hard way, and European institutions will (and should) be watching closely. There will be strikes and resistance to liberalisation here and austerity measures there from those expected to lose. The good news is that the government is now shifting fast from rhetoric to action, the main opposition party is backing austerity measures, while the large majority of Greeks, according to opinion polls, seem ready to go along.
Greeks may be at long last ready for big change: crisis is after all the mother of change. Of course, they will need a political leadership that enjoys credibility among citizens and has the capacity to unite and inspire. This will be the crucial test.
The large majority of Greeks appear ready to give the government the necessary breathing space to begin implementing its programme. It has proved more difficult to convince European institutions, while hedge fund managers and others have been betting heavily against Greek government bonds. The Council has endorsed Greece's stability and growth programme, albeit grudgingly knowing full well that the devil lies with implementation: the Greek record is certainly not good. And it has asked for more and specific measures.
Official doubts about the credibility of the Greek stabilisation programme have fed into market speculation – and these are markets that are neither efficient nor transparent. Some European politicians have recognised the problem, others still prefer to ignore it or even pretend to live in an imaginary world in which global financial markets resemble outdated textbook models of the academic world.
When you put together the low credibility of Greece and the state of denial and/or indecision in which several European politicians found themselves in these times of crisis, you end up with something dangerous for Greece and potentially also for the euro and the European system more generally. Responsible leadership has been so far in short supply.
Economic and monetary union was the offspring of the Franco-German couple, President Mitterrand and Chancellor Kohl to be precise. It was about high politics and peace on the continent, much less so about economics. It is up to the same couple, now represented by President Sarkozy and Chancellor Merkel, to lead the transition from innocent childhood to adolescence and beyond.
The euro zone needs stronger and common regulatory mechanisms for financial markets. Some progress has already been made in this direction, but it is still modest and arguably inadequate to prevent another crisis in the future. The euro zone needs single representation in international institutions, such as the IMF. The Europeans have been liberal with words but often unable to put their votes (and policies) where their mouth is. It also needs close and increasingly binding coordination of national economic policies, combining incentives and sanctions, coupled with effective surveillance and conditional assistance. The euro zone can benefit from the long experience and the accumulated expertise of the IMF in these areas. It should not, however, expect the IMF to do the job for it. The credibility of the euro is at stake.
It is a matter of urgency to strengthen the governance of the euro zone and create the necessary mechanisms to deal effectively with centrifugal tendencies and speculative attacks. We needed them yesterday, not in 2020. Admittedly, anything more than soft coordination of national economic policies is easier said than realised. There will be further constraints on economic sovereignty. But we should have known that when we set up the euro.
Surely, coordination of national economic policies should not be a one-way street. While Greeks, Spaniards and others tighten their belts trying to restore some of their lost competitiveness, the Germans need to boost domestic demand. The external deficits of Southern Europeans have their counterparts in the large surpluses of Germany and the Netherlands. Does it remind you a bit of the financial imbalance between the United States and China? The euro cannot simply operate on the principle 'it's good for you if it hurts': it would be very bad economics.
A more effective governance of the euro may constitute a key element in a new grand European bargain, including a renewed commitment to the internal market, measures to ensure the transition to a low-carbon economy, and new taxes on financial transactions as well as on polluting activities. In times of soaring budget deficits, governments are looking for new sources of revenue, while tax competition is being viewed increasingly as an unsocial, and indeed dangerous, sport. Governments that have defended for long tax competition as being compatible with the internal market are now beginning to change their mind. This may prepare the ground for a minimum of tax coordination at the European level. The Germans, among others, might be interested in such a grand bargain.
This is a very tall order indeed, and the political odds are against it. But the stakes are also very high. Those betting against the survival of the euro never understood or cared how much political capital has been invested in it. It is now up to all those involved in this joint enterprise to prove them wrong. We have done it before in difficult circumstances. The European Union and the euro are living proofs of it."
