Don’t repeat the mistakes of the Greek bailout

22/4/2020

By George Papaconstantinou*

The EU does not have the luxury of time or compromises anchored in old beliefs

History has a funny way of repeating itself. Ten years ago, at a summit on March 25, eurozone leaders committed to funding Greece after it lost access to international financial markets. We were there. We all collectively took this decision in order “to safeguard financial stability in the euro area as a whole”.

Yet that decision had drawbacks. First, it came late, after six months of hesitation. And the support was meant to be ultima ratio, the last resort, if all else failed.

Second, it came laced with rhetoric about moral hazard. The accompanying austerity became part remedy and part punishment. Greece needed to face its deep-seated problems: clientelism, lack of transparency and inefficient governance. Yet systemic changes were not prioritised.

Third, as the support was limited to “errant” Greece, it proved to be an inadequate and faulty response to a broader systemic problem. The remedy — austerity — failed to address the main cause of the problem in most countries, a malfunctioning financial system.

In the end, the response proved to be too little and too late. The eurozone had to repeatedly revisit its policies, extend support programmes to more countries to contain a spreading contagion of market fear and speculation, and eventually come up with novel institutional arrangements.

It took two years and a radical change of stance by the European Central Bank before the euro area turned the corner. We all suffered unnecessary economic, social and political costs as a result. More importantly, we squandered an opportunity to use this crisis to push for more profound changes in Europe.

Ten years, almost to the day, after Greece formally requested a bailout in April 2010, EU leaders are being called upon to take an equally important decision in even more momentous circumstances.

Recent IMF data make it clear that the economic fallout of the Covid-19 crisis is of a different order of magnitude than that of the financial crisis and the eurozone sovereign crisis that followed. The contraction is more like the Depression of the 1930s; but this one is the first truly global crisis, and also carries within it the extreme uncertainty of the evolution of the pandemic itself.

In such dire circumstances, there is simply no room for the politics of hesitation, incrementalism or finger-pointing.

A decade earlier, it took two years for the fallout from the US subprime crisis to manifest itself in the eurozone’s weakest link, Greece. Today, it has taken only two months for the entire EU economy to grind to a halt. Speed is of the essence. There is no time for a “wait and see” attitude, making new decisions only when the previous ones have proven inadequate.

We are not starting from scratch. This time around, the ECB’s “no limits” strategy has already bought precious time. Last time, two years passed before then president Mario Draghi made his “whatever it takes” statement. National governments have responded vigorously to protect people and economies — each to the level of its available resources. And at the EU level, the decisions announced so far, imperfect as they are, show an understanding of the urgency.

But all this is not enough. While each country has to live up to its own responsibilities, we must understand no one can go this alone.

The economic recovery will require massive funding. The internal market will need to be put together again. The social fabric will need to be protected. And people will need to be convinced that they are part of a European project that works for all and protects the weakest.

Now is the time for a joint, co-ordinated and massively appropriate fiscal response, using existing and new tools. One that is funded by all countries, including by new EU-level resources, but is aimed at helping those most vulnerable, without increasing their debt burdens.

When you move fast and you think big, you inevitably make mistakes. And no doubt, mistakes will be made. But at the very least, let us not repeat the ones of the past. We do not have the luxury of time, nor to craft compromises anchored in old beliefs and prejudices. The European project will suffer enormously as a result.

We are all in this together, and we are so much stronger when we tackle challenges together. Today’s crisis is a unique opportunity to build a stronger union, one built on stable foundations and solidarity between all European citizens.

This article has been amended to make clear that the EU offered Greece support in March 2010 and Greece formally requested a bailout in April of that year.

*The writer was Greek finance minister. This article was co-authored by George Papandreou, former Greek prime minister

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