Monday, July 18, 2011

A Minute With Kostas Kourtikakis

Kostas Kourtikakis, a political scientist and UIUC visiting lecturer, discusses the causes and effects of Greece's debt crisis. He also talks about possible future defaults in other eurozone nations and urges Americans to take note of Europe's complex financial system. The full interview is posted below, or you can read it here.

Protesters clashed with police in the streets of Athens during the last week of June as the Greek Parliament debated and then passed a set of deeply unpopular austerity measures required for the nation to receive aid and avoid defaulting on its debt. What brought on the crises, and how much does it threaten the 27-nation European Union and the world economy? Political scientist Kostas Kourtikakis, a native of Greece and visiting lecturer at the University of Illinois, is an expert on the EU and its institutions, as well as on the politics of Greece and the region. Kourtikakis [pronounced kor-tee-KAH-kihs] was interviewed by News Bureau social sciences editor Craig Chamberlain.

How did Greece get in this economic mess?

After Greece adopted the euro in 2002, successive governments were unable – many say unwilling – to implement economic reforms, which were necessary for the Greek economy to become competitive. At the same time, their membership in the eurozone (the 17 EU nations using the euro currency) allowed Greece to borrow money with a super low interest rate. The result was a budget with too many expenses and not enough revenue. Then, after markets took notice of the Greek debt problem in October 2009 and the fear of default emerged, other eurozone members, especially France and Germany, did not act swiftly enough to contain the crisis.

Why have Greek citizens reacted so angrily to the austerity program now approved by their government?

When the first austerity measures were introduced in 2010, Greeks accepted them as necessary for avoiding default. In my opinion, two things have happened since then that have caused anger. First, there is a widespread perception in the middle and working classes that they are disproportionately burdened with austerity, because they are easier targets for tax hikes and benefit cuts. At the same time, rich elites, which for many years have engaged in rampant tax evasion, remain untouched by the measures.
The second and more serious reason is that trust between citizens and political elites – the foundation of representative democracy – seems to have seriously eroded. Greek citizens have always suspected that some of their elected representatives were corrupt and untrustworthy, but the crisis has led to a blanket assessment that all politicians are basically liars. Despite all this, most demonstrators were in fact peaceful. Some of the most severe incidents we saw on TV were caused by a minority of extremist youths, a long-time tradition in Greek demonstrations.

The recent measures taken by the Greek government are only the latest news in an ongoing series of debt troubles in various EU countries. Are they all in trouble for the same reasons?

Currently only three eurozone countries have received bailouts: Greece, Ireland and Portugal. Each one got into trouble for a different reason. In Greece the main problem was excessive government borrowing, while in Ireland the problem was originally caused by overexposure of the banking sector. Regardless of the reason these countries got into trouble, however, they all face the same problem: Investors are very reluctant to lend them money because they don’t think they will get it back. We could say that these countries have a credibility problem. The purpose of the austerity measures is to restore credibility, so that Greece, Ireland and Portugal can borrow money in the open market again. Many experts however have doubts that the measures will produce the desired outcome and prevent default.

Can the EU afford to give other nations the same monetary support, or is there a breaking point? 

Many analysts agree that Spain is the breaking point. Spain is the fourth largest economy in the eurozone and, many fear, the next in line for a bailout. It will be extremely difficult but still possible to secure funds and even political support for a Spanish rescue. The next domino to fall after Spain would be Italy, and there is an emerging consensus that the funds for a bailout of the eurozone’s third largest economy can’t be secured.

Who would be the ultimate losers if Greece defaults on its debt?

The potential losers from a default, which many experts see as inevitable, would depend on how it plays out. In the worst-case scenario, the crisis would spread to the entire eurozone and beyond. This could have catastrophic effects for the global economy, including the U.S. In the ensuing panic, lenders would consider all government debt as “toxic” and would refuse to finance it. As a result, many governments – prudent and profligate alike – would start defaulting on their debt. In this case, a Greek default would resemble the collapse of Lehman Brothers in 2008, which had a knock-on effect for the international banking system. Optimists, however, expect that the effects of a Greek default can be limited to Greece. Whether one of the two scenarios, or something in between, will materialize in the future depends on how eurozone governments handle the crisis now.

You’ve found that Americans have trouble understanding the importance of the EU and how it works. What can we learn from these ongoing crises?

What Americans, and indeed anybody, can understand from the European sovereign debt crisis is that after 60 years of integration European economies are so tightly intertwined that they may rise and fall together. Europe remains a continent of nation-states but the common institutions and policies of the EU is a very important variable that we need to keep in mind when we try to understand political and economic developments in Europe.


Post a Comment

Cookie Settings