Interview with Philippe Legrain. In light of the multi-tier Europe prospect raised by EU leaders and officials, political economist and former advisor to the EU Commission president J. M. Barroso, Mr Philippe Legrain, urges that institutional solutions fall short of resolving fundamental issues in the eurozone crisis.
- Recently we witnessed an ambivalent announcement of a multi-tier Europe by four leaders – A. Merkel, M. Rajoy, F. Hollande and P. Gentiloni – in Versailles. Of similar content was the white paper produced by the Commission president Jean-Claude Juncker. The term though is not new, is it? We have seen it in studies made since the late 70s or 80s.
Sure, the idea of a multi speed Europe is an old one, there was certainly a lot of debate about it, in the 1990s in particular, in conjunction with the launch of the euro in some countries; some countries chose not to join. It is an idea which is reflected in the Lisbon treaty through “enhanced cooperation”, so it’s not new in the European direction.
Of course, we obviously already do have a multi-speed Europe; the euro, the Schengen area, there is enhanced cooperation for example on patents. Within each of those groupings there are deep divisions between countries and different classes of membership. For instance, fiscal rules apply differently than they might be to a smaller country. Or in the case of Greece, there the fact it no longer has control over its own affairs.
- Would you agree that the EU leaders’ denotations about Europe come as an admission that the much celebrated acquis communautaire, or the “dream” of a union between equal members, has diminished?
Even long before the meeting in Versailles, the kind of federalist “dream” that we were heading towards a single european state is basically dead. And it’s not just dead because many newer members of the EU didn’t share that objective, but because even within the founding members, neither the leaders of those countries nor indeed the majority of the population favoured such a step. In fact during the crisis what we’ve seen is an erosion, a collapse of support for the EU in general and the EU institutions, much greater divisions between governments and new animosities and resentment between peoples. So, the idea was already dead.
It seems to me that what’s lacking from president Juncker’s report and the subsequent way in which leaders see a multi-speed Europe, it that they are failing to tackle the underlying problems in Europe and are instead seeking institutional sorts of solutions to the economic and political issues. Until we restore growth in Europe that benefits everyone, i.e. rising wages for everyone; until we restore a sense of security and optimism about the future; until we address the collapse of trust in national politicians and EU institutions, the idea that these issues can be tackled with more Europe, less Europe, Europe a la carte, is the wrong approach. The focus needs to be on the underlying issues.
We still don’t have a proper European growth strategy which is based on increased investment, matching wage increases to productivity, instead of depressing demand and holding down wages, in a short-sighted pursuit of so called competitiveness.
- Do you think negligence towards these issues contributed, among others, to the rise of far right-wing, often extremist, forces? Despite their losses in electoral races, their resonance remains considerable.
There is horror at the rise of far right politicians like Marine Le Pen or Geert Wilders. But at the same time there is unwillingness to recognise that terrible mistakes have been made before and during the crisis – in many cases those mistakes endure and need to be corrected. If the existing politicians can’t make those changes then you need fresh voices, alternative voices to argue for those faces without espousing, obviously, the far right.
- How do you think a multi-tier Europe could materialise in the future? Would that, for example, entail a plan for a temporary withdrawal of a country from the eurozone or the introduction of a parallel currency?
There are politicians now campaigning for the introduction of a parallel currency, potentially as a stepping stone towards restoring the national currency. As far as I can understand, the logic of a parallel currency is a way seemingly to reassure markets that this is not a leap into the dark, but a transitional phase, either to smooth the return to a national currency, or put the economy in order and fully rejoin the eurozone. In practice, I think the prospect of leaving the euro would cause a financial panic, in the absence of ECB intervention would result in an exit in any case. So I think it’s not a particularly realistic proposition.
- Is the national currency more realistic per se?
Well there is clearly cost to breaking anything and there are economic costs, political costs. You would want to avoid those as much as possible and therefore the best way forward would be to have orderly debt restructuring and more growth oriented policies, for Greece, for Italy etc., for countries to have not just a sustainable future but actually thrive within the eurozone. But insofar that is not possible, then you have to weigh up the short term undeniable cost of leaving the euro versus the perpetual cost of stagnation. And the latter is huge. Open-ended huge, and surely not politically sustainable. There are safety valves now that exist, like emigration and savings, but ultimately I don’t think a situation like that is sustainable.
- In your book, “European Spring”, but also in your articles, you have criticised Germany and the German economic model, suggesting it exacerbated the crisis. If that is so, then apparently the crisis is the result of collective responsibility…
Oh sure, the German model is certainly dysfunctional. It’s bad for Germans and disastrous for the eurozone as a whole. It’s bad for Germans because German wages have stagnated for more than two decades and those suppressed wages are in part being used to artificially subsidise exports and partly boosting corporate profits. Those artificially enhanced corporate profits are then badly invested abroad by German banks, which is a deep cause of the eurozone crisis and a waste of German savings. What is short-sighted from the German perspective is disastrous from the eurozone perspective because the idea that an economy of the size of the eurozone can grow by relying on demand elsewhere simply is impossible – there isn’t enough demand for that. And trying to pursue that goal, i.e. suppressing wages and demand makes the debt and related bank problems even harder to resolve. Because if there is lower GDP and lower wages the debt burden and bank issues become more unbearable.
- Do you think a wind of change could come to Germany with the SPD on the wheel, under Martin Schulz?
There might be changes at the margin. I find it rather surprising – having worked in Brussels and experienced Martin Schulz first-hand – he’s an unlikely radical, he’s a man of the institutions. He is clearly a fresh face in German politics, since he’s been in Brussels and not in Berlin and he’s benefitting from that, whether that will last or not is another matter. But in any case, it seems to me that the most likely outcome of the elections will be another grand coalition. It’s possible, obviously, if SPD comes first and Martin Schulz becomes chancellor he will have a slightly different orientation to the current grand coalition, like, you know, getting rid of Wolfgang Schauble. But I don’t think that’s going to be a massive shift; hopefully a bit more investment, a bit higher wages, but no massive shift. And in terms of empathy to Greece, surely Martin Schulz has taken a more positive attitude towards Greece at the European Parliament, but German voters as a whole have been told a lie about Greece. Which is that their taxes have been used to bailout reckless Greeks, when in fact their taxes were used to bailout French and German banks. Those who believe that lie aren’t exactly in favour of debt relief for Greece. So, while Martin Schulz, if he becomes chancellor, may have a more constructive attitude on the matter than Wolfgang Schauble, that could strain things. But I don’t think it’s going to be a sea-change.
- Since you mention Greece. You have reprehended in the past the way Greece was treated by the powerful members of the eurozone.
Greece desperately needs debt relief. It’s been promised relief in many occasions and it still hasn’t obtained meaningful debt relief, so that its debt can be sustainable, growth can resume and the misery imposed on the Greek people ends.
- The whole story of how we came to a bailout is now widely known. For example, France and Germany had promised not to get rid of their Greek bonds on the eve of the first Greek bailout agreement, during the board discussion at the IMF. Surely the Greek economy was never in a perfect shape, but there is severe wrongdoing here by the European partners. Would you agree with that?
There was huge wrongdoing on all parts. There was wrongdoing by the PASOK-government at the time, which went along with this and in effect consigned Greece to be equated to a colony for the foreseeable future. There was wrongdoing by the French and German governments and the ECB, who breached the no-bailout rule in order to lend taxpayers’ money to Greece, to bailout those banks, and there was obviously huge wrongdoing by the banks themselves – as you rightly said – who made a promise they were going to hold on to Greek bonds but of course took advantage of the bailout in order to dispose of them and cut their losses. Obviously, added to that, there was wrongdoing by the IMF, which overrode its rules and official doubts to go down with the programme. And the European Commission who blunted into this and decided that, rather than trying to represent the common european interest, it would align itself with the creditors. Pretty much everyone behaved badly in this.
- In an interview you gave in 4 February to the Euractiv blog, you mentioned that Greece’s creditors “are not running Greece in the interests of Greece, but in their own interest” and that “such a situation is unsustainable”. Notwithstanding the dire notion that a country is run by its creditors, is the situation still unsustainable? We have a programme review ahead, the prospect of inclusion in the QE, Germany hindering the negotiation process, threatening with a forced Grexit again and the IMF reluctant to participate. Where do you see Greece, in this context, say in six-months time?
I think it’s pretty clear that the situation in Greece is unsustainable. All that’s happened is that the can is getting kicked down the road, which, if you are a policy maker sounds like a good thing, but if you are an ordinary person suffering from perpetual stagnation it may not be a good thing at all. So, the most likely scenario? We are going to have the can being kicked down the road. I think there’s a possibility the IMF will decline to participate in future support for Greece, not least because the Trump administration has a different view of what the IMF should be doing and because obviously of its differences about the sustainability of Greek debt. In terms of the creditors, well, the Germans have been completely disingenuous about this, they say that a haircut on Greek debt is only possible if the country leaves the eurozone, which is not true. Therefore in effect they are trying to force Greece into a choice between either leaving the euro or continuing living under unsustainable burden of debt and the resulting loss of political autonomy. To my mind, I think that unless the creditors are willing to alleviate the debt level, Greece is not going to recover, and at some point things will break. The Greek people will overcome their fear of leaving the euro.
A policy choice though would be to reform the eurozone to make it work better for everyone and part of that reform to alleviate the Greek debt, to create a mechanism to restructure sovereign debt so that future… Greeces don’t occur, and for either scrapping or greatly watering down the Stability and Growth Pact, so that we don’t continue having deflationary policies in Europe. But insofar that doesn’t happen, if you are Greek and hadn’t the chance to emigrate or aren’t in a privileged position, then at some point you have to wonder, is the alternative really worth?
- Brexit. You have warned against its economic and political consequences. However, would you say that Number 10 is now mature enough to seek a compromising deal that would tradeoff free movement in the UK for free trade with the EU?
Britain has benefitted from the EU without being forced to join a dysfunctional eurozone, with opt-outs to areas of european policy that the government would find unacceptable. Therefore leaving the EU was a mistake, as it can damage trade. Politically it has emboldened nationalists who unleashed an anti-immigrant feeling. Britain is turning inwards and on immigrants and that’s a very nasty situation. In terms of the negotiations, I think the government still thinks it can have the cake and eat it, that while it leaves the single market and the customs union it can still somehow reach an agreement that delivers most the benefits of that, while restricting migration from the EU and escaping from the jurisdiction of the EU Court of Justice. I don’t think it’s realistic. Economically, other countries are keen to take the competitive advantage from Britain. The French for example would love to have some of the car companies based in Britain, every financial centre in Europe wants to take up the London business […].
So far the economy has done better than people expected. British consumers continue to borrowing and spending. But that does not mean leaving the EU would be cost-free as some Brexiters would think. But, there we are.