The announcement by Greek Prime Minister George Papandreou that he is to put last week’s eurozone rescue plan to a referendum has plunged the euro back into a crisis. Just as markets had reacted positively to the deal reached by eurozone leaders on Greek debt, the European Financial Stability Facility and bank recapitalisation, they tumbled on the shock referendum announcement by Mr Papandreou, causing a new round of uncertainty.
Greece’s decision may make good democratic sense but it is “suicidal” economically- John Cassar White
The doubt and insecurity caused by the news about the referendum could not have come at a worse time. According to the International Labour Organisation the global economy is on the verge of a new and deeper jobs recession that may ignite social unrest, while the Organisation for Economic Co-operation and Development predicted a sharp slowdown in growth in the eurozone. The OECD also warned that some countries in the 17-nation bloc were likely to face negative growth.
Business analyst John Cassar White said Greece’s decision may make good democratic sense but it is “suicidal” economically.
“This unexpected move by the Greek Prime Minister will mean that financial markets will continue to experience destabilising volatility until December or January when the referendum is expected to be held. If, as is likely to happen, the referendum will show that the Greeks disagree with the austerity package, Greece will possibly have just one option: Leave the eurozone and re-adopt the drachma.
“The way this crisis was handled by EU politicians shows that they have lacked leadership in addressing this issue with determination and in a credible way. We are now arguably in a worse position than we were two years ago when it was still possible to come up with a clean, even if painful, solution to the Greek crisis,” Mr Cassar White told The Times Business.
He added, however, that many observers are predicting that the Greek government is likely to fall before the referendum is held as a number of Socialist MPs may vote against their own government.
“This is even a worse scenario as a new government coming in would have its hands tied by the popular vote that is likely to reject the austerity measures. In turn this would mean at least another year of unrest in financial markets.”
Commenting on last week’s eurozone rescue plan Mr Cassar White said that events of this week have shown that last week’s solution could not overcome the test of time.
“I believed it was a first step to resolve the whole issue of the dysfunctional fiscal governance in the eurozone area. Like many operators in the financial markets, I believed that it was a step in the right direction. Its weakness, of course, was that it did not have enough detail to enable one to pass a judgment on whether it was a viable solution.
“Besides this, I believe that the main weakness of the EU Council solution is that there is nothing at all said about how the eurozone, and Greece, Italy and Spain in particular, is going to stimulate economic growth. Austerity measures can only take you so far. What we need is economic growth if the eurozone’s weaker countries are to bounce back from the black hole they are in,” he said.
Mr Cassar White said that as a result of globalisation, major structural changes have taken place in the global economy and western economies have lost most of their competitiveness in major economic activities including manufacturing and even certain services including IT.
“So the centre of gravity of economic activity is now moving fast to the Far East and South America. The slowdown in job creation in western economies started long ago and will continue. Everything could now happen on the social front and social unrest cannot be ruled out. This is possibly the greatest risk being faced by western societies.
“It is unlikely, and even undesirable, that the wave of globalisation is reversed as globalisation has raised the living standards in many countries that so far never experienced any real economic prosperity. What is now needed is that countries like China and India invest more in western economies to help them create more jobs. This is easier said than done as it implies a change in the mindset of most west Europeans who are used to a certain quality of life that may no longer be affordable.”
Regarding this week’s G20 summit in Cannes Mr Cassar White said he was sceptical about the G-20 politicians coming up with a viable solution in the short term.
“There is no magic bullet that can be used to kill the malaise that is affecting western economies. One thing that needs to be done is to engage in serious discussion with the Asian Tigers to ensure that trade between them and the consumer countries in the west are indeed fair. China, for instance, needs to revalue its currency and promote more internal consumption of western products and services. It will be a mistake if we resort to ‘economic patriotism’ which is a nice euphemism for protectionism.
“It is also inevitable that western societies must get used to a quality of life that is lower than the one they are used to having. We need to consume less, work more and for longer, and save more to ensure that our life style is affordable and sustainable in the longer term.
“Then there are a number of micro measures that can be applied to encourage businesses to employ more people: less bureaucracy, lowering the cost of politics, less discrimination against older people, more re-training facilities for those who lose their jobs, and fairer taxation that shifts away from taxing employment to taxing consumption.”
Papandreou wants to show that the real protestors are a minority- Edward Scicluna
Edward Scicluna, a Labour MEP and vice-chairman of the European Parliament’s Committee for Economic and Monetary Affairs, said Greece’s internal social and political problems have so far been kept out of the equation, if not brushed under the carpet.
“The EU and the IMF have considered these to be the Greek government’s own business. Considering that Greeks are being asked to undertake an austerity programme of unprecedented proportions few have an idea what the social outfall will be. The issue is a time-bomb.
“I can understand Papandreou’s strategy very clearly. He wants to show that the real protestors are a minority. If the unthinkable were to happen and the Greeks were to vote ‘No’, there will be no political ambiguity. He does not want to go the Portuguese, Irish and soon Spanish way where the opposition party use these protests to gain power while the austerity programmes stay as they were before,” Prof. Scicluna said.
Regarding last week’s eurozone rescue plan Prof. Scicluna said there was nothing new in the package “which was not known and discussed in our committee in the European Parliament during the last eight months or so”.
He added: “The difference is that Merkel now feels that the position is desperate enough for her to achieve the consent of the electorate and the Parliament, which in fact she got.”
Prof. Scicluna said he hoped this week’s G20 summit will announce an employment package, “a la Obama”, for the EU and pointed out that those countries which are strong enough to contribute should do so.
“It is ridiculous that the strong Nordic countries are trying to undergo austerity programmes themselves, too. The mentality in Germany and the Nordic countries is unfortunately that the imbalance between the strong and weak countries of the EU should be addressed solely by the weak countries.
“Just as the US rightfully asks China to do its part to correct the global imbalances, so should the peripheral EU deficit economies ask Germany and other surplus economies to their part as well. This myopic attitude towards what we here in Brussels refer to as the ‘symmetry principle’ is deepening the recession and endangering the euro and the EU as well,” he said.