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17 April 2014

Reuters/Legrain: Did Europe misdiagnose debt crisis and make it worse?


Philippe Legrain, former adviser to Commission President Barroso, argues in his recent book that policy makers misdiagnosed the eurozone crisis and ended up prescribing the wrong medicine to resolve it, thus worsening long term EU integration.

At the height of the eurozone debt crisis, with Portugal's economy nearing collapse, the European Commission told the government in Lisbon that it had to slash wages if it was ever going to boost competitiveness and grow again. Portuguese shoemakers - one of the economy's main export sectors - steadfastly ignored the advice and found a way to bounce back while actually increasing workers' pay.

"The Portuguese basically said, 'We're not going to do that', and they went upmarket instead", argues Legrain his example in "European Spring: Why our Economies and Politics are in a Mess", which was published on 24 April.

The worst of Europe's debt crisis may have passed after four years of turmoil. But Legrain's book makes for withering reading, suggesting that by misunderstanding the problem, EU leaders and policymakers are responsible for the record-high unemployment and rock-bottom growth afflicting the union.

Instead of recognising that the crisis was principally the fault of a banking sector run amok, leaders focused on the excessive debts of Greece, Ireland and Portugal - effectively seeing the problem as fiscal rather than financial.

That led policymakers to enforce a strict regimen of budget cuts, tax increases and lower wages in an effort to improve competitiveness and make exports comparatively cheaper.

"A crisis that could have been a unifying force - Europe acting together to tackle overmighty, dysfunctional cross-border banks - has instead become a divisive one, pitting creditors against debtors", Legrain writes. "Across Europe, fifteen million people below the age of thirty are neither in employment nor education. A lost generation is in the making."

While Legrain acknowledges that Greece, with debts greater than its GDP and a budget deficit of 6.5 per cent of output in 2008, was facing mainly a debt crisis rather than a banking one, he says the solution chosen by Europe was wrong.

Rather than renegotiating or writing down much of that debt, the Commission, the IMF and the ECB pushed through two hard-to-swallow bailout programmes totalling more than €200 billion that left Greece's economy shattered and just as indebted. Unemployment now stands at 26 per cent and debt is expected to peak at 170 per cent of GDP. Social unrest is bubbling.

"Greece's debts should have been restructured in May 2010," said Legrain. "Instead, we have had a lurch towards self-defeating austerity and now have much more centralised fiscal controls, which are inflexible and undermine democracy."

Full article



© Reuters


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