euro-fireFollowing on from yesterday’s post on the fiscal compact, we have another post today looking at the EU’s current crisis resolution strategy: i.e. further bail-outs in the form of emergency loans combined with austerity measures and a stricter rule-book for government spending. In our last interview, Frank Engel MEP was highly critical of this approach, though his proposed solution (steps towards a full fiscal union) might be seen as several steps too far by most political leaders.

Earlier this week, we spoke to Estonia’s Minister of Finance, Jürgen Ligi, and put some of your comments and questions to him. On 1st January 2011, his country became the latest EU member-state to join the troubled single currency, so how would he react to the debate?

Firstly, Christos sent in a comment criticising the current approach of bail-outs and austerity packages. He argues that we won’t find a solution to the crisis “with bail-outs to the weakest links of the eurozone! They will never be able to repay their debts! This is not the solution, not a permanent one anyway… unless we make permanent structural reforms we are going to go in circles…

For Greece, I would clearly suggest they seek permanent solutions at home. All countries should remember that the primary responsibility for solving the crisis lies not with the EU but with national governments and voters. I don’t think anyone in Greece should think that these loans cannot be paid back; they will be made to pay them back. How painful this process will be is up to the Greek people. We are giving them these loans to make the situation easier.

Greece is not experiencing anything like the pain Estonia experienced in the 1990s; our social guarantees are much lower, our decrease in GDP in the 1990s was much deeper, but we reacted very quickly and Greece should think in the same way. After the cuts we made, we were the fastest growing economy in Europe. In the 1990s, we lost almost half our GDP, but we can say we made most of the reforms that Greece needs to make now. It is a shame if anyone in Greece thinks they have suffered enough, done enough, and can’t do more. Still the standard of living in Greece in 2010 is much higher than it was in Estonia in the 1990s. Our level was 65% of the European average in the 1990s, and Greece’s was 90% in 2010.

What about the various suggestions for debt-mutualisation as a solution? We had the following comment, for example, sent in from Michael: “If Europe has common problems then Europe has to have common solutions. [Eurobonds are] one of them and many others should follow.

The long-term solution is not to spend more than you earn. A common eurobond is just dealing with symptoms and actually a government shouldn’t spend more than it earns, especially in aging societies. We should save, not borrow, and in the long-run it is the wrong attitude. Of course, I am not totally against this idea, because the EFSF and ESM are a step towards that, but it can’t be a permanent thing.

Germany is very much at the centre of the Eurozone crisis (and, indeed, at the centre of most of the proposed solutions). We also spoke recently to Thomas Silberhorn, a Member of the German Bundestag for the Christian Social Union of Bavaria (the sister party of Chancellor Angela Merkel’s centre-right Christian Democratic Union). We put Michael’s comment about eurobonds to Mr Silberhorn to hear what he thought.

No, I wouldn’t agree. What we had originally agreed on at the birth of the eurozone was the principle of “no bail-outs.”  Only under the auspices of the financial crisis did we allow the eurozone members to grant financial aid to over-indebted countries – but with strict conditions attached.

The solution to this crisis will in no way be a joint approach like eurobonds, because that would merely encourage financial markets to treat all European countries the same. In fact, this has been one of the causes of the crisis. One effect of the common currency zone was that the markets no longer had in mind the different economic situations in different countries. Therefore, we saw a convergence of interest rates for the member-states. Eurobonds would just go back to this initial mistake. To avoid market forces and replace them with an artificial economic framework would not solve the problem. 

We also had the following video comment sent in from Christos, who was worried that the “core” of wealthy Eurozone states were not being asked to compromise as much of their national sovereignty as the weaker “peripheral” states.

How would Mr Silberhorn respond?

My experience in the last months was that member-states like France and, of course, the UK are much more reluctant [in terms of] restrictions of sovereignty than Germany. However, I would concede restrictions of budgetary sovereignty only in those cases where the stability and growth pact is broken or in which financial aid is granted to a member-country. Restrictions in sovereignty of member-states should aim to reestablish the regulation set by the Maastricht treaty.

We also had a comment sent in from Craig that is highly critical of the current approach. He argues that “The policy of half-hearted ECB/Council bailouts has thus far led to recession and concurrently lower revenue/worse debt-to-GDP ratios.” Is the sort of negative spiral Craig is describing not a risk?

It is a risk. Nevertheless, austerity is one of the preconditions for financial aid and for a way out of the crisis. Austerity will not be sufficient on its own; it must come with a recovery program and, from my personal point of view, we have to limit financial aid and, should the conditions not be met by receiving countries, we should prepare for state insolvency (with an option to suspend countries from eurozone regulations). Countries, for example Greece, have just become too expensive. The country itself has to become cheaper. This is demonstrated by the consumption rate in 2011; Greece had a consumption rate of 110%, which means the Greek people consumed more than was generated in the Greek economy. This imbalance can only be tackled by austerity, in combination with a recovery program.

Finally, we had a comment sent in last year from MB who argues that “Greece should be allowed to default, unless Germany, etc. are prepared to take on the debt themselves and form a full political and economic union with the rest of the zone.

I’m in favour of such an option, because continuing financial aid for too long could lead us to a point where the eurozone as a whole could come into danger… The problem is that a country like Greece needs a devaluation in any case. All of the measures implemented so far aim at a devaluation within the eurozone. The problem of such a devaluation is that Greece can only become cheaper by a massive reduction of social benefits, whereas the living costs stay at the European level. So the relation between private income and living costs will increase, and this is a reason for social tensions.

If you enabled Greece to devalue outside the eurozone, then the advantage would be that private incomes and the living cost would remain in balance and, at the same time, the exports would become more competitive and cheaper whilst imports became more expensive. This would enable the Greek economy to produce and deliver more goods.

What do YOU think? Is austerity the only way out of the financial crisis for Greece and other struggling economies? Or does the eurozone need to show greater solidarity and pool its sovereignty to come up with a common solution? Alternatively, perhaps we should prepare for sovereign insolvency and the default of one or more eurozone members? Let us know your thoughts and comments in the form below, and we’ll take them to policy-makers and experts for their reactions.

24 comments Post a commentcomment

  1. avatar
    Alison Rees

    the people should come first but they are the ones suffering and making cuts to live on less than they are able to – and there is no allowance for growth for europe to get out of this mess theyre be back to square one in a year to two years

  2. avatar
    Luciano HaLewi de Lopes

    Banks have been the priority and still are. Solidarity should be also a goal in this crisis, which is a big challenge to EU institutions and citizens who have been just a detail and have no say at all.

    • avatar

      Greece has gold indeed but at the crunert price ? Bah, Not even worth mentionning It’s like the 300 tons left to Britain or the 100 tons to Spain. It would cover a week of interest on the debt. It’s about the same in Greece. Don’t recall how many tons they have ? As for mining in Greece ? The place is rat hole for miners. Wouldn’t invest a dime in mining in Greece. Been burnt there once. The Hellas with them.

  3. avatar
    Sioraf As Na Cillini

    The billionaires ought to pay 49% income tax throughout the EU for one thing. Money must be raised somehow and it’s only fair that those who have the much pay the most so we don’t bankrupt the people who didn’t cause the recession.

  4. avatar
    Andreas Agathokleous

    Nothing is enough as Greece will, sooner or later, become bankrupt. Everybody knows that Greece’s situation is a dead end. The only solution for Greece to see better days is to default and return back to drachmas. How egoistic is it that fellow Europeans want to ”help” Greece with those loans? Let’s be realistic. Are the bail-outs helping in any way Greece? No. Of course not. What they actually do is to merely extend the death of their economy for some more time, until they finally fall into bankruptcy but his time ”officially” (personally i see no difference between an official bankruptcy and what the Greek people are going through nowadays). On the contrary, loans enslave the Greek people who will never get rid of those immense debts and will have to work under the circumstances of the ”austerity” that is imposed on them today (which is degrading) for the remaining of their lives – not excluding their children and grandchildren from this ”slavery”- whilst, considering a scenario of default they will go through bankruptcy for some (few) years working hard again, but then they will be free and in a better situation, as their economy, being unencumbered, will blossom. Furthermore, another suggestion as regards the loans which have now been granted, would seem much more rational than the current bail-out system: ”As EU’s objectives is supposed to help and mutually support its MS, why do they even need interests on the loans? Why don’t they just grant a raw loan to Greece expecting to get back the exact same amount they gave to them?” I know they seemingly ”cut” some debts, but that’s just for the eyes of people. It is very clear that with those high rates of interests they will get them all back in double (maybe more).

  5. avatar
    Linda Knox

    Let’s get to the core of things here….Greece is not being bailed out at all..the people of Greece are not benefiting at all from the loans given by the EU. The only ones who benefit are all the banks who are being paid back interest on the debts. None of the money has gone to help the people on the streets in Greece. No one is helping them pay the extortionate prices that they are subjected to in the supermarkets, their pensions are being cut below subsistance levels and the health service is dying like its patients. I live in Greece and see first hand what is happening to the people. Europe should be ashamed that children in Greece are going to school hungry because their parents have no money for food . What about the children left in churches and at orphanages because their parents cannot keep them any longer. Is the bailout helping them? NO, we have seen none of it and will never see any of it while the banks are bailing themselves out. Please come and visit me and I will take you all to see the truth of the situation…not what the world media report.

  6. avatar
    MandyandPj Leneghan

    Austerity for who though? Of course austerity is not the only choice, another economic and political model is also a choice that is available which may suit the ordinary people more so than social austerity. The people can show the financial system corporates what austerity feels like very easily, in Greece or any other nation, if the people were united enough. If the current economic model does not deliver what people require, then it is that economic model that should change and not the people….pj

    • avatar

      @Theagenthollyhock You dont seem to understand. No-one is impniylg that the Euro Goverments are inncocent (of course they’re not) but which normal bank would loan you money over and over and over again, even though payments are not exactly forthcoming.?It takes two to tango, and you can get all defensive about germany and its banks as much as you want, but something intrinsicly stinks to high heaven.

  7. avatar
    Peter Schellinck

    Greece is our golden opportunity to show the world that the European project can and will work. The framework is in place to take a calculated risk and a courageous step forward towards elevating Europe’s power and reputation. We have a democratic elected parliament, a president (congratulation to Herman Van Rompuy for his reelection!) , a foreign policy representative, a well structured commission hungry to be more efficient and functional, and we have a big crisis or rather “change” on hand which could be the substrate as well as a reason to think and act out of the box.Why not introduce a controlled default of Greece and let the EU parliament take over and manage a reform at the expense of it’s sovereignty and at the benefit of the citizens. Allow weaker countries with high debt and/or regions that want more local autonomy to exchange sovereign debt for the transfer of federal powers to the EU parliament and institutions and hence start the process of sovereign mitigation to a truly European sovereignty. Once this is done we will still only represent less than 9% of the world’s population, however be recognised as a united powerhouse with lots to offer. By creating our truly open internal market we will save over one trillion Euro! Organize Europe in regional clusters for the day to day management of the area and introduce a one for all tax regime. After conducting a thorough SWAT analysis one can concentrate on the development of Europe’s strengths by focusing on education, culture and innovation. Like this we can prove to the rest of the world that we have progress tools to offer and can be instrumental in their development, rather then begging for dependency. One currency, one set of common rules and regulations, one EU monetary fund grouping all sovereign debt, a Eurobond, one security and defence policy and mechanism, etc. but dozens of cultures, languages, political platforms, freedom and internal peace.

    • avatar
      Stephen Pockley

      The EU will never work the UK for one will never go for centrally controlled government ,the United States of Europe idea is dead in the water it’s time for everyone to leave before everyone gets dragged down like Greece.Most countries have little in common and e in omits vastly different .Imagine

  8. avatar
    Michael Tsikalakis

    I would not agree with Mr Thomas Silberhorn. Of course Eurobond is not the final solution but it’s a start. The main problem in the EU though is not the debt or the weak economies. The main problem is the relationship between the member states of the EU. Now it is a time to ask ourselves why we became member states of a union which is not really a union. This is what the markets really see and not the rest. If European Union has no intention to become a real Union then it is better to declare it and give the chance to weak economies to devaluate by going back to their previous currencies. That will be fair to the people. There is one and only definition to the word “UNION”. If Germany and the rest of the “strong” economies of the Euro Zone do not want Greece or the other “weak” economies of the Zone IN they should say so and proceed with the necessary actions to exclude these countries from the Euro Zone. Otherwise they should fully support these member states by all means, until they reach a corresponding level. Once this happens then the financial markets will respond accordingly. Consequently, as I always say, we need a political solution prior to a financial solution.

  9. avatar
    Christos Mouzeviris

    Well thank you Mr Ligi for your comment, but allow me to disagree with you.. I respect and realize that your nation went through great hardships too and you came out of it, and so will Greece..But that is not the point… Why keep doing this to the people, instead of trying to better their conditions of living and wealth, we put them through misery and poverty..Either in Estonia or Greece…

    We are all in the eurozone we should be harmonizing the salaries, as harmonized are the prices and the cost of living…there are no differences in the prices for food, clothing, socializing and cost of living in the instead of bringing the salaries up, we slash them? and not in all countries, just the “peripheral ones”…just because Estonia went through this in the ’90s, that is 20 years back Mr Jiri, should we allow Greece, Ireland and Portugal go back 20 years, instead of moving forward?

    There are many Estonians living here in Ireland, and when I visited your country last month, I did see the great development and well done to all of you in Estonia..But the salaries are really low and most locals that I spoke to, told me that “whoever can leave and work abroad, leaves”..notably in Finland, but also other countries like Sweden, Germany, and the UK..So is that the progress you want to see for the Greek people too..?? slash their salaries so even though there are investments in Greece, the pay is below of what other countries are getting, thus forcing the young Greek generation to migrate like the Estonians?

    I am sorry, but I do not think it is right…We should start harmonizing the salaries within the eurozone, that means a German earns the same as a Greek, as an Estonian, as a Portuguese, as an Irishman, as a Slovakian,as a Frenchman..

    Are the citizens of USA earn so different salaries while they all use the dollar, in their different states? NO..!! then why this discrimination in Europe..?? instead of slashing salaries bring them up with the level of Germany, Luxembourg and so on…

    sorry, but that’s me..!!

  10. avatar
    Angry Viking

    Greece should let go bankrupt, then those arrogant greeks will understand what hard life means. Now they just think it’s everybody elses fault, but actually its the fault of greek people.

  11. avatar
    Debating Europe

    @AngryViking – Please do keep your comments focused on the economic and political arguments + avoid making generalisations about the political attitudes of an entire nation.

  12. avatar
    Christos Mouzeviris

    It is nice to make silly comments behind the anonymity of a nick name and an Avatar.. Say those things with your real name and I am sure you one will be very embarrassed about about his ignorance….

    • avatar
      Michael Tsikalakis

      People rely on information, Christos, given from various media. Many people do not know exactly what is going on, so you should forgive them for being unfair. For all of us:There is no country that has only saints or only devils; there is a mixture of these two. The proportion of each side is totally depended on Government’s policies on education and/ or on media’s influence, religion, trusts etc. We do not like this proportion and we are trying to change it with a Roman spirit, Greek spirit, Viking spirit (not the angry one), Saxon spirit etc. because Europe is the spirit of the world.

    • avatar
      Christos Mouzeviris

      I just hate stereotypes Michael…I was the same when I was living in Greece and people gave out about the Bulgarians or the Albanians, and now that I live abroad, when I listen nonsense about the Polish, the Romanians or the Africans…Or the Greeks in this case…It gives me itch to my skin, how can I explain it…!!

  13. avatar
    Matt Matthew

    I`m really sick of this subject called Greece. Greece needs to take some urgent measures to get out of this situation. They need to work more, maybe some bigger taxes and yes, I believe that austerity needs to be the most important word in Greece now.

  14. avatar

    The current policy of the EU is a doomed undertaking. It will sooner or later parallyse Europe’s economies and lead to social unrest, if not complete disintegration. It is the greates threat European people have been confronted with since WWII.
    If Europe wants to survive with its EU, the latter needs a complete reorginization in which, first of all, the democratic control of decisions made on top is secured. EU leadership, beginning with Maastricht, has simply failed to understand the impact of its institutional “machinery”. This given, the call for “more Europe” is lacking any reasonable justification.

  15. avatar
    Austerity versus end EU

    As the Euro currency has caused so much economic trouble world-wide should that currency cease immediately and individual currencies that can find their own levels return?

    Taxation is not helping the most vulnerable in society and bringing European countries into African like economies, in the midst of a global recession, therefore should we end the experiment of the EEC and the EU government in its entirety and go back to individual national governments, saving huge sums in taxation for that political class and unnecessary layer of civil service at the European level.

    After all, what is the point of extra layers of political class, if most of the population is starving.

    Europe is not a good business trading partner.

    Many other nations in the world are worth far more to business and finance.

    By closing down ‘Fortress Europe’, we gain from worldwide trade with nations not in recession any more.

    So the core reason for the EEC has ceased because of Europe’s poverty and its failed currency, the Euro.

    One day all the rioters in the streets in each European nation will realise they have a common enemy that is living in luxury and privilege, whilst austerity brings them Third World poverty and starvation. That enemy is the EU government that brought ruin on Europe and individual nations and the banking sector, far more than the recession.

    So the debate is the end of the EU government before the rioters come to EU parliament’s door instead of wasting time burning their own national cities of peoples homes and little shops barely scratching out a living against huge tax burdens with no profit from retail sales.

    The MEPs and EU governance have made their money and now is the time to gracefully leave and go back to their national governments, quietly and peacefully.

    Then might all the rioting cease throughout Europe and national government can look after the poor and elderly, instead of them being left on the street and starving.

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