1st Annual GPPF Forum 2012: Executive Summary

“Unfolding the Layers of the Crisis: the Nation-State, Europe, and the World”

1st Annual GPPF Chania Forum, 21-22 September 2012

Executive Summary

The third event organized by the Greek Public Policy Forum took place on September 21 and 22 at the Kiani Beach Resort in Chania, Greece. It was kindly sponsored by Decidendi Consultants, the Economic Chamber of Western Crete, and the Regional Development Fund of Crete. The Chania Forum tried to build upon the foundations laid by the two previous Fora at Oxford (June 2011) and Nottingham (March 2012). The Oxford Forum focused on Greece’s multifaceted crisis (economic, political, and social). The Nottingham Forum tried to examine the Greek crisis in its European context.

The aim of the Chania Forum was threefold: first, to introduce a comparative dimension by looking at the crisis narratives in various EU countries (both from the European ‘South’ and ‘North’); second, to establish bridges between the parallel narratives/discourses that take place at the national and European level; third, to examine the on-going challenges of EU integration in a global context; and lastly, to synthesise a critical framework of understanding the main challenges to the road ahead.

The First Session, which featured presentations by Dr. Gavin Barrett (UCD), Prof. Manos Matsaganis (AUEB), and Prof. Gustavo Piga (Tor Vergata), consisted of a comparative account of the causes and effects of austerity in the European ‘South’. Each speaker emphasised the endemic features of the multi-faceted crisis in their respective countries. Greece and Portugal have fallen victim to bad governance and fiscal profligacy, Italy has suffered from low growth, and Spain and Ireland have been set off course by housing bubbles and banking crises. If then the root causes are different, why should the remedy be the same? The persistent focus on fiscal retrenchment mainly speaks to the concerns of taxpayers from lender countries. Countries like Greece are asked to perform the Sisyphean task of debt repayment and structural reform in an environment of low growth, high structural unemployment, social alienation, and weakened state capacity. Bailout conditionality, an outcome of interparty negotiations between surplus and deficit countries, may thus be viewed as a future promise of performance by means of regained fiscal sustainability and borrowing credibility. Budget balancing is the only key to true sovereignty in a globalized economy. However, austerity measures may only be socially acceptable if perceived as equitable in distributing of the burden of adjustment among the populace. Restoring the Rule of Law and establishing control mechanisms are both of paramount importance. Yet, they both require time. Last but not least, a key theme shared in this discussion was the need for domestic ownership of reforms, something that in some peripheral Member States (particularly Greece) is often supplanted by the perception of change as inescapable and extraneously imposed.

The Second Session, featuring talks by Prof. David Soskice (LSE), Mr. John Stevens (former UK Conservative MEP), Prof. Martin Trybus (Birmingham), and Prof. Fernando Vallespín (UAM), discussed the general perspective from the European ‘North’ on the future of European integration. There is growing acceptance that the crisis is not a temporary phenomenon but a protracted recession; hence, the French position of 'growth as a precondition for reform' is gaining increasing acceptance over the German belief that austerity and fiscal consolidation will create the necessary conditions for growth. In fact, Angela Merkel’s CDU seems to have shifted its policy outlook from the ‘chain theory’ (Europe being as strong as its weakest link) to the ‘domino theory’ (a Greek exit eventually bringing about the collapse of the Euro). France is bound to play a leading role in terms of reshaping fiscal integration, forcing Germany into a new fiscal framework, and transforming the ECB from a replica of the Bundesbank to a more Fed-like central bank with an activist growth mandate. On the other hand, the British policy of being in Europe but not part of it is coming to its head. The more the Eurocrisis abates in Europe, the more it will intensify in the UK. Overall, economic and political interdependence have broken down the foundations of democratic legitimacy, since most decisions depend on financial markets and global forces that cannot be held accountable. This stark discrepancy between the internationalisation of finance and the nationalisation of politics clearly constitutes the modern front of the ‘battle for democracy’. Even though European institutions have also been criticised in the context of the crisis, people have become much better informed about other countries in the Eurozone and more eager to converse with each other, thus forming the initial vestiges of a parallel European demos under construction. The long-term solution to the crisis and remedy for the systemic weaknesses of the EMU essentially consist of i) more democracy (institutional and participatory) and ii) deeper integration (banking union, fiscal union, common control mechanisms, transfer mechanisms).

The Third Session, featuring presentations by Mr. Jorgo Chatzimarkakis (German MEP, FDP), Prof. Emilios Avgouleas (Edinburgh), and Dr. Olivares-Caminal (QMUL), focused on the economic aspects of the crisis, aptly compared by one speaker to a ‘monster with many heads’. Indebted countries find themselves at the intersection of four interlocking and interconnected crises (banking, competitiveness, external payment imbalances, and sovereign debt). The banking sector, in particular, suffers from massive informational asymmetries and weak market discipline. Price stability in the EMU created asset bubbles in open markets (real estate, goods, financial instruments), with surpluses being continually recycled rather than generated. Given that optimal currency areas are not to be found in practice, monetary unions can only survive as political projects based on fiscal transfers. Internal devaluation is one solution, but it is slow and painful. Europe needs expansionary fiscal policies combined with credible guarantees of long-term repayment and fiscal reconsolidation. Even though the official line is that official sector debt cannot be restructured out of moral hazard concerns, debt sustainability analyses point to the inevitable. Greece - among others - has amassed a lot of debt, keeps borrowing to pay off interest payments, and is in danger of becoming a ‘serial defaulter’ like Argentina. Yet, the country will in all likelihood not be allowed to exit, as the costs of exit are still too uncertain.

The Fourth Session, featuring presentations by Dr. Ugo Panizza (UNCTAD), Dr. Sotiris Georganas (Royal Holloway), and Dr. Vaquer i Fanés (CIDOB), shifted the focus to the global financial and political dimensions of the crisis. Even though the Eurozone as a whole remains competitive, the banking crisis has disrupted the flow of capital from the ‘North’ to the ‘South’, leading to a gradual de facto disintegration of the European financial system through slow but steady bank runs on the deficit countries. As a result, German policies centred around price stability and Exportweltmeister status may soon become unsustainable. Although average Eurozone inflation has been right on target in accordance with ECB rules, inflation divergence as the outcome of asymmetric fiscal policies has had a substantial distributional impact. Internal devaluation then becomes particularly painful for countries with fiscal debt and external balance issues. The Euro has yet to fulfill its potential as a global reserve currency. The crisis came about as a result of failed democratic institutions, not faltering economic fundamentals. However, unlike Asia and Latin America, Europe has very strong and vibrant civil societies, relies on common policies and institutions already in place, and enjoys a disproportionate amount of power in global institutions. A solution to the European crisis has to be exportable and compatible with other governments - not inward-looking and obscure. There needs to be a shift towards equity finance at the global level based on multilateral policy coordination and commonly agreed mechanisms of global governance and financial regulation.

Finally, the Roundtable discussion, chaired by Mr. Pantelis Kapsis (journalist, former Minister of State), revisited some of the recurrent themes of the Chania Forum, namely failures of representation and democratic governance (waste, corruption, time inconsistencies in policy making), fiscal conditionality and debt sustainability, reform fatigue, and the alienating effects of austerity.

The GPPF team.