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Belfer Center of Harvard: "Europe at a Crossroads – Greece in Danger"

belfercenterlogoIn a public address on Europe’s imminent choices, former EU Commissioner Anna Diamantopoulou offered a sobering analysis of the origins of Europe’s crisis and sketched a new narrative necessary to ensure European cohesion. She highlighted the lessons her country, Greece, had learned from the crisis and pointed to new opportunities for growth, as part of her Fisher Family Fellow speech on October 23, 2012.

Praising the US for its handling of the 2007-2008 financial crisis, Diamantopoulou pointed to the lack of a banking and fiscal union in Europe, which had made addressing the effects of the crisis in 2008 particularly difficult. The European Union had devised ad hoc mechanisms to bail out those member states that could not borrow at reasonable interest rates: Greece first, then Portugal and Ireland. These mechanisms had been the result of tense bargaining around Brussels’ negotiation tables, which had tested the unity of the Eurozone. The impression that the protracted negotiations had left on the rest of the world was that these responses were overall “too little, too late.” She was optimistic that the more flexible final procedures would ultimately result in greater integration: the creation of a banking and fiscal union and increased efforts to complete the economic and political union.

Dissolution of the European Union now seems all but off the table, she noted. Too great were the implied costs and too threatening the loss for the global economy. She cited a Prognos study, whereby the departure of Greece, Portugal, Spain and Italy from the European Union would result in a $22.3 trillion growth loss for the world economy. Already threatened by demographic decline that would leave the largest European countries at most at 1% of the world population by 2050, the EU’s political leaders needed to define a new vision for Europe to ensure its continued global relevance.

Europe needed new leadership and a new project, she said. This, however, could not be a single-nation enterprise. Germany, the largest economy in the Union and most probable leading country, was an “isolated giant.” She recommended German leadership use its leading position to build consensus and convince governments and European citizens of the necessity of the European enterprise. Germany would need to approach its role at the heart of Europe using a different paradigm: one of solidarity, discipline and vision, instead of dictating rules and engaging in finger-pointing. As of yet, she was unable to detect this necessary shift in the German government: it seemed to be guided more by internal electoral considerations and less by a long-term vision of Europe, which was “essential for Germany itself.”

Key to reinvigorating a European vision of the future was a new narrative. This had to incorporate five elements: advocacy of and pride in peace – the Union’s greatest achievement – and respect for nations and people; the definition of a new geopolitical role that included military strength and soft power; increased internal democracy, with a new treaty and greater democratic legitimacy in its own decision making; greater economic equality and finally, a better mechanisms to increase competitiveness and share the Union’s growth. European governments had to be willing to assume leadership to craft this narrative, but its institutions were similarly responsible. The ECB and the core European institutions had to work together to design a fiscal stimulus project similar to that implemented in the US. Perpetual austerity, she warned, would not produce growth. European leadership had to “inspire citizens with vision and deeds.”

She advocated for a “new kind of global understanding and cooperation,” to avoid a prolonged slump. Global growth would return as confidence in the European markets returned, she noted, echoing a recent article by former UK Prime Minister, Gordon Brown.

Greece in recovery

The crisis had demanded that her own country, Greece, make rapid fiscal adjustments. This had led to high levels of unemployment and an overall rise of poverty, threatening basic aspects of every day life, Diamantopoulou said. This uncertainty was giving rise to opposition movements on the democratic fringe: for example, Golden Dawn, an avowed neo-Nazi party was voted into the country’s parliament at the last election. “I am serious when I talk about a threat to democracy – it is also a threat for the stability in the Balkans and the viability of the European unification process,” she added.

Europe needed to initiate a “New Deal” for growth on its periphery. This would lend additional heft to the measures introduced by the current three-party coalition government in Greece that reformed taxation and the public sector. “Greek society needs relief, reform and recovery – just as was the case in the United States in 1933,” she said.

Lessons from the crisis

In the last part of her presentation, Commissioner Diamantopoulou reflected on lessons learned from the crisis. “The Greek adjustment program had important flaws,” she said. The Troika had set overly ambitious targets, which meant Greece could not but fall short of achieving them. Original predictions by the Troika had assumed that Greece would be able to borrow on the international market at reasonable interest rates by now. “We are far from that,” she noted. Greece could not be compared to a corporate restructuring project. “A whole people cannot be made to follow orders, as if they were employees.”

While European leaders had not facilitated the task of the Greek political elite by speculating on a Greek exit from the Euro, the Greek government had failed to see the depth and breadth of the problem at the outset. “We thus proceeded leisurely at the onset of the crisis and later postponed tough decisions. Most ministers refused to assume ownership of the reform programs they were instituting and measures introduced were often socially unjust, while in some cases failing to fulfill their objectives.”

Four lessons were now obvious: In a crisis of this magnitude one had to act immediately; implement the toughest measures right away; convey ownership to win over the ‘hearts-and-minds’ and communicate openly with the public to sustain this support. “One must pick goals that project national pride and increase social justice,” she said. She hoped the current Greek government had learned these lessons and would be able to – in the long-term – renew a country, which had “immense potential.”

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Anna Diamantopoulou, 2012. Content is distributed with a CC A-NC-ND-Gr-3.0 licence

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