What is the basic problem with Eurozone?
I think the basic problem with the Eurozone in general is that it is structurally bizarre because what the founders did - was created a single currency across 17 states which don’t have centralized political system. So we have no system of politically managing the policy of 17 countries that are members of the Eurozone. So it’s like having a government, central government in a state which doesn’t have control over fiscal policy, have no control over raising taxes, spending money. So it has no control over what each individual country does, and that is a major flaw in the system.
Professor, just what was the ultimate purpose of creating a Eurozone?
The ultimate purpose of creating a Eurozone was to create financial stability across the 17 member states, of the single European market because don’t forget since 1986 the European Union has a single market for its members. So the idea was – if you have a single market then you should have a single currency then everybody will be able to grow at the same rate and be prosperous at the same rate. Interest rates would be low, people be able to borrow and invest and there would be a degree of quality across the system.
But anyway still lacked a mechanism that would enable to take unified financial decisions?
Lacks a mechanism to take unified political and financial decisions and of course there are inequalities within the system, there are countries which are economically more powerful like Germany, and there are countries that are economically less powerful or weaker like Greece. And this disparities of course were hidden in a sense by the Eurozone and now it have all come to the fore, they create further political problems because the German taxpayers say – why should I be paying for the Greek pensioner to retire at the age of 50. And so the politics of this comes to the fore again and economics it takes a backseat to the kind of political problems that have ever risen because of the structure of the Eurozone.
Professor but the UK has always been somewhat suspicious in this respect, hasn’t it? I mean the UK never enters the Eurozone. Why was that?
The UK has not entered the single currency of the Eurozone because it felt that it was not appropriate for an economy like the UK’s to enter into a system which it believed would harm its own economic interests. Of course there is a degree, as you know, of Euro- skepticism in the United Kingdom anyway. So any project emanating from the European Union which could perhaps lead to a political union in Europe which could perhaps lead to a Federal State of Europe, a real European Union is something which is viewed very wearily here, in the UK and the Eurozone was just such a project. So all governments in this country whether they are Conservative Government or Labor Government have been very cautious for economic reasons but also for political reasons of being involved in the Eurozone.
And now there’s been another round of heated debates about the future of the Eurozone. And do I get it right that Britain has made some proposal to perhaps review the composition of the Eurozone or is my understanding wrong?
Well, Britain actually has no role in the Eurozone because it’s not a member and so cannot participate in a decision making of the Eurozone, it has to remain outside it but inevitably every single country in the European Union whether it’s a member of the Eurozone or not is caught up in the current debt crisis and financial crisis because its own banking sectors for example have been influenced and in the UK particular. There are British banks which are exposed to Greek debt and the British Government has to step in and pay off those exposures. So even though Britain is not a part of the Eurozone it’s still pressing very hard to make sure that the situation is dealt as promptly as possible.
What are different scenarios that are being discussed now for the future of the Eurozone?
The different scenarios I think are almost black and white in terms of how we can describe them. On the one hand we have a scenario in which the Eurozone breaks apart; this is the scenario that some of those people who are pro-European think will be a disaster. The exit from the Eurozone of countries for example like Greece and perhaps other peripheral countries that cannot maintain the financial stability in the Eurozone and the creation of the Eurozone perhaps of free streams with Germany and France and other members of the core and other states sort of rotating around it. The positive view, a wide outlook in a sense, is one which suggests that in this time of crisis, in this time in which we have very important issues to discuss with respect of the Eurozone, what we have to do is fix those flaws that existed in the Eurozone before, that is to create a centrally manageable financial system which will control revenue generation and spending. That is put in place those political measures which were not put in place when the Eurozone was originally created. So those are the two, I think basic scenarios.
What are the countries which are seem to have benefited, definitely benefited from the Eurozone membership?
I think the paradox is that every country benefited from its Eurozone membership. It’s just that some countries have actually pursued membership of the Eurozone in a more competent and manageable fashion. Of course Germany with its own prudent economic measures has made the most of the Eurozone. Greece made the most of the Eurozone to the extent that for many many years it profited from the system but misused the fund that it was allocated to verity of the mechanism, then now it is resulted in a spray tax. So it’s very difficult to say that some countries have benefited above this and haven’t because there is a management question here and a question of government which is very very important.
How do you see the situation developing?
I think what will happen now, with respect to countries like Greece and Italy, is that we will see the continuation of the affords. To make sure that the bailout packages that have been created, negotiated with the Greeks and now looming for Italy are really pursued with vigor in an attempt to save the Eurozone as it is today, to make sure that no country drops out of the Eurozone because that jeopardizes the whole project, it puts the whole project in danger. But at the same time it could be that in a next few months we see that a country like Greece can no longer pursue the austerity program that it has now, they are politically no longer viable and we may see them having to revert to the original currency – the drachma. So within a next few months we will be able to tell much more clearly whether we will have a Eurozone of 17 or a Eurozone of less than that as countries cannot cope with the pressure of reforming and pursuing the conditions that have been laid down by the European Union.
Greece is a relatively small economy compared to an economy like of Italy for instance and Italy has been one of the founding members of the Eurozone and yet it also risks getting out of the Eurozone. Is my understanding correct?
Yes. To be perfectly on assessing most politicians and economists would tell you that the Greek economy is almost insignificant in terms of the European economy; I think with the latest estimate that Greek debt is less than 2% of the GDP of the European Union. So in fact Greece could be bailed out financially, its debt could be covered completely at largely no effect to the European economy. The problem is that if you bail out Greece completely and utterly then the other countries would think - well if you done it there why didn’t you do it for us as well. The restructuring and then reforming that needs to take place will not take place because countries will simply abuse the privilege and say – well you bailed out Greece, you bail us out as well. And that is impossible to do with respect for example to the economies of Italy or France which is also potentially in danger, or Spain which is also a big economic powerhouse in the European context.
Well Dr. Economides, thank you very much. And just to remind you our guest speaker was Dr. Spyros Economides of the London School of Economics.