GREECE AND ITS FUTURE IN THE EU
Q&A with economics professor and Clifford S. Heinz Chair Stergios Skaperdas
As uncertainty simmers in Greece following the country’s default on its national debt, Stergios Skaperdas, UCI professor of economics and Clifford S. Heinz Chair, continues to be an authoritative voice on how governance and conflict affect the economy. Media and policy professionals seek him out for his solution-driven intervention on the region’s financial crisis.
In fact, in 2010, he offered sobering advice to the Mediterranean nation which proved prudent: “Greece needs to default on its public debt,” which the country did in June 2015. He also advised that they exit the Eurozone, a move that is still potentially on the books.
“Simply said, it is very difficult, if not impossible, for so many heterogeneous countries to have a common currency,” Skaperdas says.
The results of his research are summed up in his paper, “Seven Myths about the Greek Debt Crisis,” which has been cited in more than a dozen publications including The New York Times, The Guardian, National Public Radio and CNN, and is a key referent in the ongoing debate and in policy circles.
In short, it is difficult – if not impossible – for 17 heterogeneous countries to share a currency.
Here, Skaperdas explains what happened in Greece, how a departure from the collective euro currency could affect international markets, and what lessons decision makers worldwide can learn about the relationship between economic policy and politics.
Q. What factors contributed to Greece’s default and debt issues in the larger Eurozone?
A. Greece had high public debt when the worldwide slowdown occurred in 2007, resulting in more public borrowing. By the beginning of 2010, the country could no longer borrow in the international bond markets. Mainly in order to pay bondholders and avoid default, the other Eurozone countries and International Monetary Fund loaned money to Greece in exchange for increasingly draconian budget cuts. This led to a depression that’s made debt even less sustainable than it was at the beginning of the crisis. Other countries got into trouble for different reasons. Ireland, despite having the lowest public debt relative to its income in the Eurozone, suffered from very high private debt, a significant housing bubble, and collapsing banks that the government took over after guaranteeing their deposits. Spain had similar problems, while Portugal had no apparent immediate problem, aside from low growth for the past decade, but the international bond markets decided against funding it. Italy has had low growth and high levels of public debt.
These factors are symptoms of the more general problems with the Eurozone and its institutional structure. In short, it is difficult – if not impossible – for 17 heterogeneous countries to share a currency. The absence of a common fiscal policy (i.e., common taxing and spending), low labor mobility, fragmented bank supervision, and a weak Central Bank, all are institutional holes exposed by the first serious recession. And they are the cause of problems that have cropped up in one country after another.
Q. Is the U.S. economy facing similar problems?
A.The U.S. does not have these deep institutional problems; they have been largely resolved over more than two centuries. The federal government centrally administers fiscal policy, bank supervision is less fragmented (though certainly problematic), and bank deposit insurance and a strong Central Bank has existed since the 1930s.
In the U.S., the main problem is that the financial sector’s inordinate political influence prevented reform of our fragile financial system after the 2008 crisis.
Q. What solutions exist for the Eurozone? What impact will these actions have on international markets?
A. The wider solution to the Eurozone’s problems is establishing a “United States of the Eurozone” and that’s not in the cards. So it makes sense for all Mediterranean countries to exit the Eurozone. Beyond that, there is too much uncertainty to predict what will happen. It is important that the unwinding of the Eurozone is orderly and that care is taken to maintain the European Union and enhance democratic accountability within it.
What happens in the Eurozone will affect international markets and economies because the world financial system is fragile. Many financial institutions – in Europe and in North America – will likely collapse and be taken over by their governments, and recession can be expected in most countries.