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Interview: Europe's Debt Problems And The Greek Crisis


Josef Joffe says Europe knew Greece "cooked its books" to get into the euro, so can only blame itself.

Josef Joffe says Europe knew Greece "cooked its books" to get into the euro, so can only blame itself.

Prominent European publisher, author, and academic Josef Joffe was an early critic of plans to introduce the euro.

The editor of Germany's "Die Zeit" newspaper, who is also a fellow of the Institute for International Studies and the Hoover Institute at Stanford University, talks to RFE/RL correspondent Ron Synovitz about Europe's debt problems and the Greek crisis.

RFE/RL: Your warnings about future problems for the euro currency -- which you wrote about in the 1990s when the single European currency was still in the planning stages -- went largely unheeded by European policymakers. Now, with the severity and impact of Greece's debt crisis becoming apparent, you are in a position to say, "I told you so." Tell us about that perspective.

Josef Joffe:
The problem is a monetary union without a fiscal union. That's like putting a number of train engines together in a train. Nobody leads and they all have to proceed at the same speed. If they don't, if somebody doesn't -- in this case Greece -- it threatens to derail the whole operation.

The only possibilities? You throw the offending engine out, which we can't under the [Lisbon] Treaty. There is no provision to throw somebody out of monetary union. They would have to do it on their own free will.

Or we [can] tell the engineer to stop throwing that much coal into the fire. In other words, "You're spending too much. You're uncompetitive. Do something." Or we can do what we're doing right now. Since he's kind of using up more coal than he has, we give him more -- and that's where we are.

We now have to finance the effects of Greek profligacy. And we will go on doing this for about three more months before they go into default.

RFE/RL: Some commentators refer to the debt crisis as a "Greek debt crisis." But there are other countries that also are having similar budget-deficit troubles that could cause them to default on their debt payments. Wouldn't it be more accurate to call today's situation a European debt crisis rather than a Greek crisis -- or is there a link between the Greek crisis and other European crises?

Joffe:
You can't just look at the government deficit. The United Kingdom has a very high deficit -- almost the same level as the Greek deficit in relation to its gross domestic product. But nobody worries about a British default because they have a very good rating and they can service their debt, so to speak.

The issue is whether the next [troubled country] in line can service their debt or not. [The troubled countries] are all collectively known as PIIGS. It's Portugal, Ireland, Italy, Greece, and Spain. All of them are spending too much and all of them have to pay off their debts.

The next one in line, Portugal, has interest rates that are one-half of Greek interest rates. In other words, the market is saying they are a risk but they are, by no means, the kind of risk that the Greeks are now posing.

How can it spread? Well, if one goes then maybe the markets might think, "Let's try another" and make a lot of money by selling that particular candidate short.

Will it happen? I don't know. But this is why we talk about the risk. Because out of all of these so-called PIIGS, the Greeks were just the most egregious case. So it may well stop here. But we don't know.

Avoiding Moral Hazard

RFE/RL: If the European Union picks up the tab for Greece, what negative lessons and impact could this have as far as sending signals to other countries on the verge of a debt crisis?

Joffe:
What it could do is it could teach them what we call moral hazard. "Hey, you can go on living the way you do without having to reform your markets, without increasing fiscal discipline, without decreasing spending, without going through a whole number of items that would make them more competitive. Hey, don't worry about it! We'll save you."

The only problem with this logic is that Greece is a very small economy whereas Italy and Spain are very large economies. So if it ever came to that, the European Union would truly, truly suffer. It has to do with size. But they all suffer from the same underlying issues -- which is that they are living a lifestyle they can't afford.

RFE/RL: What has been the impact of European monetary union on the ability of these troubled countries to service their debt?

Joffe:
Their problems have been exacerbated by European monetary union. That's a paradoxical thing to say. The way the Italians have lived in the past has been to devalue [their national currency] just a little bit faster than inflation and the value of their lira. And so they remained kind of competitive.

These nations can no longer devalue [their currency]. That is the problem with monetary union. You can't devalue. So the most important adjustment mechanism is gone. That's why Greece is in such big trouble. They have become totally uncompetitive, but they can't devalue. So if they were smart, they'd get out of monetary union. But this has other problems.

Unforgiving Union

RFE/RL: What steps could Greece take on its own to resolve its problems?

Joffe:
Greece could lower the wage level. It could increase productivity. It could cut spending. In other words, it could do a lot of things which make governments fall and countries explode. So they're not going to do that.

You can do the same thing in an invisible way by devaluation. Devaluation means imports become more expensive. Consumption therefore goes down. Exports go up, which also cuts into consumption because these goods are not available for consumption and home -- and so you hope for a new equilibrium. This is something they cannot do under monetary union. That's why we have to go on paying them.

Greece will not adapt internally because it is too painful. It cannot adapt externally because it is in the monetary union. Therefore, we are going to pay until they go into default. What we are doing now will not go very far unless Greece leaves the monetary union and is allowed to default.

RFE/RL: Some commentators are suggesting different ways to alter the euro that would give countries more space to try devaluation strategies - for example, the idea of splitting the euro and creating a secondary currency for eurozone weaklings.

Joffe:
I think that's silly. I mean, there is nothing more stupid in economics than to have a two-tier currency. You know that's not going to work. The problem with the PIIGS is that they cannot let their currencies float and devalue. So what are we going to do -- should we have a kind of southern euro which is worth half the real euro? I don't understand the concept of a two-tiered currency.

RFE/RL: What about the idea of a euro holiday -- a situation where a debt-ridden member like Greece would temporarily step out of the eurozone and go back to using its own national currency until it manages to resolve its problems?

Joffe:
There's no such thing as a holiday. If you do that, you'd have to go back and print several billions worth of drachmas -- or neo-drachmas. You have to get out of the whole system which defines monetary unions.

Once the Greeks leave, they'll never take them back again. They cooked the books in order to get in, and they messed it up while they were in. Would you think that the eurozone is going to take a country like Greece back in? We knew that they cooked the books. We knew it and we [let Greece into the eurozone]. That's something where we have ourselves to blame.

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