Given the design flaws of the European single currency, which brought economies with diverging economic dynamics under a single monetary policy, less competitive member states may have to resort to austerity in the future even after they return to growth with more public spending, an economist said.
“Returning to sustainable growth for a number of southern countries, is not just a matter of a little less austerity or a little more debt forgiveness,” Bank of Cyprus’s Ioannis Tirkides said in an interview. “It is all a matter of raising productivity which requires structural reform and the capacity to attract and retain investment both domestic and foreign”.
Tirkides comments came after the leaders of seven countries comprising the so called “Club Med” who met in Athens on Friday said in a common declaration that “new steps should be taken” by Europe to boost growth, convergence and stability in the euro area. The meeting was held on an initiative of the Greek prime minister Alexis Tsipras was attended by the leaders of France, Italy, Spain, Greece, Portugal, Cyprus and Malta, days after the European Central Bank admitted that its accommodating policies -which include negative interest rates and a monthly €80bn asset purchase programme- failed to revive the anaemic European economy.
“The global financial crisis of 2008-2009 affected Europe in a very critical manner by bringing to the forefront the euro area’s fundamental flaws,” which had both economic and political implications, Tirkides said.
The crisis forced four of the seven participating member states to resort to international bailout, led to recession as a result of austerity, high unemployment “under varying regimes of austerity,” the economist continued.
On the other hand, northern euro area members “enjoyed faster growth and higher levels of social cohesion,” which in turn slowed down the European integration process and allowed nationalism to rise, he added. “Countries either individually or by sub-regional groupings would seek to promote their national agenda”.
Tirkides said that Germany’s chancellor Angela Merkel, who during the euro crisis had been criticised by politicians and economists for the austerity bailout countries were prescribed, has talked about allowing more fiscal flexibility to help Italy, the euro area’s third largest economy “which threatens to destabilise the euro area” and remained was stagnant over the past decade as it now faces new challenges with its banking system.
The initiative of Greece’s prime minister, who came to power in January 2015 after promising to ditch austerity for the debt-stricken country, “falls within these parameters and the difficult situation in which Italy in particular finds itself in today,” Tirkides said.
“Greece is in the process of another round of tough negotiations and looks to win concessions and flexibility in its own bailout programme, and more promises for future debt relief,” he continued. “More flexibility with Greece’s bailout programme is possible in the context we described and also at this stage when the country struggles to return to positive growth next year”.