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The debt crisis that started in Greece has become a problem of the entire euro area. Today, the Euro leaders focus on how Brussels to cope with the possible financial dominoes in countries that use the same currency, but have different financial and economic policy. The guarantees Finland required from bankrupt Greece in order to take part in the aid would turn the recovery plan upside down.

About this and other problems arising in the European area as a result of the Greek crisis GRReporter talks with the Professor of European Politics and Economics at the University of Athens, George Pagoulatos. In his opinion, if the euro zone is willing to emerge from the current debt crisis with no significant damage and prevent other market blockages, Brussels should give the green light to Eurobonds. This change would significantly bring down the price of total lending to member countries, but they will have to accept a much tighter fiscal policy, dictated by the heart of the zone. Following the principle of interconnected vessels, the states should refrain from both high deficits and disproportionately high primary budget surpluses.

To be continued

What are the benefits for Greece from the agreement with Finland to give guarantees against the involvement of the Scandinavian country in the financial aid?
 
Greece does not benefit from this agreement in any way. A more important question is whether it could be avoided. The truth is that Finland's request for additional guarantees was written in the Eurogroup agreement for European aid of 21 July this year as a condition the state to take part in the rescue program. It was, therefore, very difficult to avoid what followed. What is important is the request of guarantees as a condition for participation in the rescue program for Greece not to spread to other countries such as Austria and the Netherlands, which have made such requests. It seems that this issue will be solved at the euro area level and other countries will not request guarantees, mainly because this request for guarantees renders the logic of the decisions of 21 July this year.

If Greece was able to give certain guarantees it would not need help, right? In this sense, don’t you think that Brussels had to intervene earlier in the debate on the guarantees and put pressure on the states that want money from Greece (Finland in this case) to participate in the bailout?

All this is a very sensitive issue and we are referring to something that is not quite clear yet. There are no clear limits to where the euro area and the European Union could put pressure on a particular Member State, which like many other states has very strong internal political opposition and the government decisions depend on a Euro-skeptic party, as is the case with Finland. Such decisions are taken unanimously. The best that could be achieved within this type of voting is a consensus, but if certain conditions, which have been officially recorded in the consent, protect one state from the consensus, the opportunities for pressure from Brussels are extremely low.

Do you support the idea of ​​issuing Eurobonds, which will serve to fund the entire euro area? Could you explain the positive and negative features of this type of funding?

The most important advantage is that it significantly reduces the cost of lending to all countries in the euro area, because it reduces the market fluctuations in the future of different countries. Eurobonds would stop the vicious circle of doubt which hit several countries one after another and threatens to drag others into this crisis. When the markets doubt the ability of a country to service its foreign debt, the interest on their current loans begin to rise. At some point, this trend is increasing and there comes a time when the rates achieved make the external borrowing impossible for the individual countries. This did not happen only in Greece but also in Portugal and Ireland. The problem does not end there. Spain and Italy also feel some pressure. Therefore, the Eurobonds would immediately solve the problem with this type of pressure.

The euro area is in an extremely favourable position if it decides to issue Eurobonds. It will be able to create a new market of Eurobonds, which will have extremely long duration and high liquidity, which will significantly decrease the price of lending to euro area countries. In other words, the interest on total lending with the new securities will reach even the cost of lending to countries with the highest credit rating, as Germany and France.

Here comes the problem, which some analysts anticipate. The Eurobonds could increase somewhat the cost of lending to blue zone countries. On the other hand, if we calculate the price for the use of all debt crises in the periphery of the euro zone, the Eurobonds could turn out to be a much cheaper way to solve these problems.

The main concerns with this type of utilization of the debt crisis in the euro area are connected with the idea that this decision could encourage the macroeconomic relaxation of countries with financial problems. It is, therefore, extremely important the decision for Eurobonds to be accompanied by a new type of economic and financial governance of the Union. It is possible to introduce legislation and constitutional amendments to establish these new rules in the Member States as provided by Germany and France. In this situation, I would recommend a much closer monitoring of the economic developments across the euro area so that there are no serious deviations.

The strict control over the internal finances of each country will change the way in which the union functioned so far. Does this mean that after the introduction of the Eurobonds the euro zone will never be the same?

Europe has already done much to tighten the economic control in different countries. There has already been adopted a package of measures called the six pack, which legalized the stricter economic control. There are also European mechanisms ffor financial stability as EFSF and EFSM, and the proposal of France and Germany for a permanent president of the European Council at a European Union level. All these actions represent a closer control of the economic decisions of the euro zone countries.

Do you think that this is enough for the present crisis?

Of course, these actions are not enough, but the introduction of Eurobonds will surely transform the euro area. The powers will need to be balanced through a further consolidation of economic policies and objectives in the different countries. In this sense, it is very important that there are no variations in the goals, both upstream and downstream. The key is to maintain close cooperation in economic policy in both the countries with financial deficits, and in the countries with high primary budget surpluses. Large surpluses could be a sign of high competitiveness and great economic successes at the state level, but at the euro area level they bring imbalance that the new conditions can not take.

The periphery of the area already has a very serious problem with the recession, which affects not only the real income of citizens in the troubled countries, jobs and business opportunities, but inexorably weakens the overall financial and economic situation in these countries. This is a vicious circle in the fight with their external deficits and debts. The euro zone has to create new tools that will prevent these problems, which will inevitably lead to change in the current system.

Europe’s reorganization is inevitable. Should not the European leaders take up these reforms earlier?

The leaders have not anticipated exactly those developments in the Union, but let's not forget that there are many other factors that determine the way of the European economy. European banks also have a problem. Many of them are zombie banks, which are directly affected by what happens on the other side of the Atlantic. The debt crisis in the USA also affects Europe. The weakness of the United States to launch a bolder investment policy is also a problem. It only enhances the problems in the euro zone, which depends on the demand in the USA but also in China - countries where Germany exports.

What do you think will be the developments in Spain and Italy, which are walking on the edge of the capital markets too? Do you consider the possibility that these two countries could be isolated from free financing and what would be the consequences for the monetary union?

Spain is far from a possible debt crisis than Italy. In Spain, the main issue is more about banks, not the level of deficit and debt. In Italy, we have a very large foreign debt reaching € 1.8 billion and most of it is contained inside the country. Moreover, Italy has a very low rate of economic development and the markets noticed that. These two countries are too big to be able to fit in the European Financial Stability Facility (EFSF). Its assets should double or even triple in order to take over the financing of one of the two countries. If this happens, however, this means that France is threatened to lose its AAA-rating, which inevitably would force the European leaders to introduce the Eurobonds urgently. Then the problems of the euro zone would be much greater and more serious than the debt crisis of Greece. When the interest rates on lending to Italy reach 6% -7%, which is unprofitable, then the only salvation for Europe would be the Eurobonds.

Let's go back to Greece. Do you think the government will manage to reduce the deficit to 7.5% of GDP by the end of 2011, as specified in the agreement for financial aid? What would be the consequences if it does not happen?

This is the goal of the government but the revaluation of the recession made things more difficult. At the beginning of the year, the Troika and the government had calculated that the recession would not exceed 3.8% and now it appears that its value will be close to 5%. This is much more than last year's recession and the measures set out to reduce the deficit in accordance with the initial calculations could now be insufficient to achieve the objectives. The higher value of the recession reduces the opportunities for revenue collection in the state treasury, while increasing the costs in the budget related to social benefits and state funds. Under the new conditions, the deficit target of 7.5% of GDP by the end of the year is very ambitious, but mainly because of the recession, not because of the government’s behaviour.

Do you think that Greece will not receive the next tranche of the aid if it can not reduce the deficit in the period specified in the agreements within the Memorandum for financial aid?

I think that all factors are taken into account when assessing the activities and progress of Greek reforms. The level of the recession surprised all and it was estimated that some of the warming of the Greek economy would come from increased exports, but the European and global demand, which would have pulled ahead the Greek exports did not happen. From this perspective, the recession in Greece largely is a result of external forces. In this situation, I believe that the objectives of the reforms and the financial aid will have to be revalued to meet the current state of the economic environment. However, I do not think Greece is likely not to receive the next tranche, because the reforms continue in compliance with the agreement, and the difficulties come from the environment in which these reforms develop.

Do you think the government is not doing enough to deal with the internal crises? Will the deviation from the objectives of reducing the deficit bring new measures?

Let's see how things with the new measures set out in the austerity plan will go in September and it will become clear then whether the government should trigger additional forces.

Are you optimistic about the development of the economy? Do you think that all the extra taxes, extra fees and higher claims will solve the problems facing the government?

The measures set out in the austerity plan contribute to the increase of budget revenues. The question is whether they are sufficient, taking into account the financial cost of recession. If the recession had stayed within the values calculated at the beginning of the year, the measures adopted so far would be sufficient. The current situation could require the adoption of additional measures. This will be clear soon.