London, February 22, 2015/ Independent Balkan News Agency
By Thanasis Gavos
The future of the eurozone looks bleak, warned the Nobel laureate economist Sir Christopher Pissarides during a lecture in north London last Thursday, pointing to the lack of structures to support the proper function of a monetary union.
Speaking in front of an audience made up by fellow British Cypriots at the Greek Cypriot Brotherhood in Finchley, he argued that contrary to what some stakeholders, mainly the Germans, claim, the euro crisis is not down to labour market deficiencies. “It is not a crisis of competitiveness and flexibility, but a crisis of managing a common currency when the criteria for optimality fail.”
As he explained, this monetary union comprises countries that have not similar economic structures, lacks the necessary degree of free labour and capital mobility and bans fiscal transfers.
The Regius Professor of Economics at the London School of Economics explained the current failure of the eurozone to deal with the challenges facing its southern members in Keynesian terms: deflation cannot get you out of a recession, especially if the case is that a country has a large debt. He spoke of a “vicious cycle” as the GDP denominator of the debt fraction keeps shrinking. “Fighting recession with recessionary policy is crazy,” lamented Professor Pissarides.
He said that the obvious alternative is an expansionary monetary policy, calling at the European Central Bank to create more inflation in order for the euro to be depreciated. His view was that the ECB had failed to act for a long time, until the positive but not sufficient step of the QE was adopted a few months ago.
His lecture was given on the same day that he and 17 other renowned economists, including Joseph Stiglitz and Robert Skidelsky, had a joint letter published in the Financial Times asking for Greece to be given a chance to achieve growth, restructure its high debt by linking its repayment to the country’s GDP and implement structural reforms.
All the above were summarised in his comment that for the crisis to be overcome, there needs to be the political will by the member countries to help each other. “Otherwise, we shouldn’t get into partnerships like a monetary union,” he said. He did admit though to have been disillusioned by the tough stance taken by the German Finance Minister, which “makes even Chancellor Merkel seem moderate”.
Prompted by the audience in a Q&A session to comment on the predicament of Greece, on the eve of the crucial euro group meeting of last Friday, Sir Christopher commented that the Greek government shouldn’t have mixed together three different things: the structural reforms, the debt restructuring and its fiscal policy.
He said that he didn’t believe things would be allowed to lead to a Grexit, but accused Germany of enforcing onto its eurozone partners policies that may be good for her economy, but detrimental to the economies of countries such as Greece.
“I think the German leadership demonstrates a lack of European vision,” commented Sir Christopher Pissarides, contrasting the stance of Angela Merkel and Wolfgang Schauble to the vision of Willy Brandt, Helmut Schmidt, Helmut Kohl and Gerhard Schroder.