Call me a sceptic, but… | Alfred Sant

Labour MEP and former prime minister Alfred Sant interviewed

Alfred Sant is not known locally for mincing his words. And it is a reputation the Harvard-trained economist (and former Prime Minister, and playwright, and novelist, etc.) has since transported with him to Brussels.

An MEP since June 2013, Sant has often vocally criticised the current Commission’s approach to the crisis that still engulfs the eurozone since 2008. Likewise, his opinions on the approach to the Russia/Ukraine impasse seem to be in discord even with those of his own political representation, the European socialists.

But he is certainly not alone in voicing scepticism on either front. Very recently, Greek finance minister Yanis Varoufakis claimed that the EU is “typified by a large democratic deficit that, in combination with the denial of the faulty architecture of its monetary union, has put Europe’s peoples on a path to permanent recession.”

When I meet Sant at his Birkirkara home, Varoufakis’ assessment seems a good point of departure to discuss the current problems facing the eurozone. Does he share the Greek minister’s view that the EU is in a state of denial, and plagued by a democratic deficit?

He begins by inviting me to look at the eurozone as it stands today. “You have countries with a large economic divergence between them that is steadily growing; you have the same rate of exchange, although the economic conditions vary greatly… When it’s plain sailing there is no problem: you can move forward, you can power everything through the soft power that the European Union has, and the euro needs. But when problems strike, as they struck in 2008, there are no federal tools that can compensate for these problems. Europe is a Europe of nations, and there is always resistance to the introduction of federal structures: for instance, an autonomous federal budget, a federal treasury ministry, etc…”

This, he argues, naturally limits the EU’s options when it comes to crisis situations.

“What do countries do, then, to readjust to those problems? The ability to adjust one’s exchange rate to become competitive does not exist anymore; so basically, the only option to rebalance budgets is what they call ‘structural reforms’… which in most cases amount to fiscal consolidation: what the IMF calls ‘internal devaluation’. That is to say, reduction in social services, in employment, in wages…”

In a word, austerity, which is paradoxically what has pushed the Greek electorate to ‘rebel’ (so to speak) by electing an anti-austerity government…

He nods. “And it’s hitting across the European social model. The only way countries on the fringes of the eurozone can adjust, under the present rules, is through erosion of their social model. Poverty has increased; unemployment has increased; and the soft power of Europe is effectively being eroded by this problem. Much of this power rests in fact on the democratic model, the economic model and the social model…”

As we speak, negotiations are still ongoing between the Greek government and the European Commission, and a solution is not yet in sight.

“On one level, I can understand that governments and finance ministers would strongly resist talk of writing off the Greek debt. Obviously, they have to respond to their constituencies, and their constituencies don’t want their tax money flushed down the drain. You can understand this. On the other hand, the bailout plan is simply not working. Not only has it failed to turn the tide, but it has piled up huge austerity on the most vulnerable parts of the Greek population…”

But isn’t it too early to see if it’s working or not? Parts of this plan are only just being implemented now: for instance, the 315 billion euro investment plan announced by Commission president Jean-Claude Juncker…

“That is a completely different ball game. The ball game here is that [the bailout] was supposed to rescue Greece; yet the Greek debt as a percentage of GDP has over the last five years risen from 125 to 170%+. Its economy has shrunk by a quarter. So the ‘rescue’ is making things worse. The question is this: under this bailout plan, will Greece ever be able to deliver? My argument is: no, it’s not going to deliver. Something’s got to give. The Greek government is making the claim, ‘our people have suffered enough. You should give us more leg-space.’ And I think they should.”

At the same time, the Greek demands – supported by an electoral mandate though they are – effectively require creditor countries to forego their rights. Is this a reasonable approach?

“Well, let’s say you lent money to Greece: you gave it a longer grace period, more and more advantageous interest rates… obviously you’re going to say it’s not reasonable. Apart from the fact that Greece has not implemented a lot of the things it had undertaken to implement: privatisation being one example…”

Sant however adds that there are two sides to any coin. “The question is, can you wring milk out of a stone? I don’t think so. Something’s got to give. There has got to be some kind of solution if Greece is to remain within the eurozone. A compromise has to be reached…”

As it happens, a compromise would be reached the following day. But what form of agreement does Sant think could actually solve the problem? He shrugs.

“The real alternative, if it wasn’t for the problem of managing it… and if it wasn’t for the fact that the majority of Greeks, in spite of everything, want to remain in the eurozone… the best solution would be for Greece to exit the eurozone in an orderly manner. This would protect the country’s social and economic model. But it’s not on the cards…”

It may not be on the cards, but many economists now think it’s inevitable anyway…

“Yes, and it doesn’t apply only to Greece. If you look at counties on the periphery in the south and east… their economies are not compatible with the German, Dutch, Finnish economies. What happened is that European soft power went to the heads of the elites of Europe back in the 1990s…”

With hindsight, he goes on, the 2004 EU enlargement was a case of “expanding just across the border in a certain disorderly manner”. Inevitably, problems arose… which Sant argues could have been avoided, had the project been handled differently.

“After all, when Greece entered the eurozone, they later found that there were three, four years where the national accounts had all been falsified. Now, quite frankly… all these bureaucrats… they didn’t realise that something was wrong? Come on…”

Does he share the opinion that the European Commission should also bear responsibility for this oversight?

“Not just the Commission, but all the member states as well. And not just with regard to Greece, either. There was clear use of the hegemonic power of the EU to make the eurozone a beacon of attraction…”

Now that structural problems have belatedly come to light, Sant argues (if I may paraphrase) that the EU has taken remedial action that addresses the symptoms of the crisis, but not its cause.

“One of the things that happened in the last five years was this: the eurozone has put up protective structures to compensate for its own economic and structural imbalances. It has built up a funded stability mechanism to intervene in countries which are about to go belly-up [jaqghu zorba]. It’s never been tested, but it’s there, a very big fund; and under German prodding, they introduced arrangements to oversee and control budgets of member states. You have the Twopack and Sixpack regulations, by which the Commission, on an annual basis, vets and corrects budgets, and insists that budgets are corrected. But if you ask whether they treated larger counties like France the same as Malta and Cyprus, the evidence shows otherwise. France and now Italy are being given more sympathetic treatment than was afforded to smaller countries…”

Meanwhile the third plank has just been introduced: a banking union, which he describes in terms of “an IMF for European banks”.

But the problem, he adds, is that these mechanisms do not amount to a solution to economic stagnation.

“While the United States is back on its feet as an economy, while Japan and BRIC (Brazil, Russia, India and China) have moved forward, the Eurozone economies have stagnated. Internal economic divergences have continued to grow; unemployment has soared, especially among the young. Something’s got to give. The big challenge now is to how to get the economy back on course.

“Internally, especially on the part of the Socialists, there is a lot of (justified) grumbling that too much emphasis has been placed on fiscal consolidation – i.e, balancing budgets – and on structural reforms. Some of these reforms are beneficial: to break down certain monopolies, improve work practices, etc. But overall, under the imperative of balanced budgets, governments found themselves powerless to intervene in order to stimulate their own economies.

“They cannot go beyond budget rules. So everything fell onto the shoulders of the European Central Bank, to somehow keep everything stable. There’s been a debate about quantitative easing, initially resisted by the ECB. They have now crossed the Rubicon and are going to implement quantitative easing. But it’s a case of too little, too late. Effectively, when the Commission changed, the idea of a new investment plan took shape: to stimulate work, projects, and so on…”

Sant breaks into a detailed description of how Juncker intends to raise the sum of 315 billion euros over two years – to be invested in national projects – through schemes which would rope in the private sector to fund 15 euros for every 1 euro put up by EU/EIB guarantees. “This is Project Juncker, which at least attempts to move away from a system which left everything operating only on a basis of fiscal consolidation and structural reforms. That has been the dogma to date. Instead, he [Juncker] introduced a third pillar of investment. There are however big questions regarding whether this is enough, whether it’s too late or not…”

Sant here seems to be voicing widespread criticism that the eurozone itself has been treated as a matter of dogma: that even if it doesn’t work in practice, it must be made to work for political reasons.

“From the start, the eurozone has always been a political project. And all the states are committed to make it irrevocable. But in recent years the question has become, how to make effective the original rules of the Growth and Stability Pact – i.e., maximum deficit at 3% of GDP, 60% national debt, a maximum of 2-3% inflation within the member economies, etc. Basically, what they are trying to do is to put up the props to compensate for not having a federal structure.”

By Sant’s own argument, the cost of this project has been very high in terms of social justice. This inevitably raises the question: is all this worth it just to save the eurozone? There are economists who argue that it might make more sense to let it implode… does he agree?

“Well, I’m called a ‘sceptic’, but… the point is, economically the structure is not in good shape. In Brussels it is considered blasphemy to say such things. People there accept it as a fact of life, not to be changed. So everything’s got to be done to make it work. But the problem remains. We all accept the existence of economic divergences, at least as a challenge. What are the tools to overcome them? To date – and you can call me a sceptic as much as you like – I don’t believe the existing props are sufficient, nor the proposals for investment. I hope I’m wrong.”

What does he propose instead?

“I think we have to talk about a confederal solution. There has to be a central fund to compensate for the disequilibrium that has been created… but it must keep away from any kind of federal structure. This goes back to the debates of the 1960s and 1970s, to be frank: how to have a European monetary union without the centre sucking up resources from the periphery. The only way it can be done is by means of some sort of tool that can retransfer resources back to the periphery. But that is politically problematic. In a word, it’s not popular.”

Nor is it particularly fair, he hints, as some countries have benefitted more than others by the strategy to date.

“Basically, the way things are at the moment, the largest economies – namely Germany – are having the best of both worlds. Germany has very low interest rates on its borrowings; it has the same internal exchange rate in the eurozone as with all other countries. It can still export, even when it’s in a hard position. And when the euro is low, it has a competitive advantage that is not justified by its economic profile. Year after year, Germany had a surplus on its balance of payments. Sooner or later, the question will have to be asked: ‘Cui bono’? Who benefits from all this? And that is quite explosive. The Greek debt crisis has placed this question to the fore once more. We have not reached a point where it’s being said openly. But the question will be asked…”

Meanwhile, questions have also been asked about his own stand in the current impasse between Russia and the EU over Ukraine. Sant surprised many by abstaining in the recent vote to ratify Ukraine’s association agreement with the EU. Some have found his subsequent explanation – i.e., that it would be ‘imprudent’ to support the Ukrainian agreement at this time – to raise more questions than it answered. What did he mean, exactly?

“It’s a question of going back to basics. My problem with this issue is that on both sides – Russia on one hand, the EU on the other – are in bad faith, and have been in bad faith since the beginning. And when two entities are in bad faith, I will not support one or the other. That’s why I abstained. The problem is this, as far as I can tell. It goes back to the ‘soft power’ model: the EU has not managed its soft power well. It has seen it as another tool for expansionism. It felt happy with that approach; but you also have to take into account the realities. The reality is that Russia has a presence in Europe; it has always had. And it needs its own space. Now whether that space is hegemonic or not, that’s a different point.  But Russia has to have its own space. You have to understand the historical context underpinning all this.”

The original Russia nation, he points out, actually originated in Kiev. “Then they expanded towards Moscow. There is a kind of symbiosis there that you can’t just neglect. This is Europe, not the Wild West. So effectively, when you step into that region, you have to bear in mind the historical context. Many of Russia’s classic writers – Gogol, to mention one – were Ukrainians. It’s like taking about Lombardia and Italy. Yet the EU, if you please, developed an association agreement with Ukraine, without having been politically on the ball about it. They were suddenly surprised when the Russians started objecting. Now: whether Russia was right to object or not, that depends on which perspective you look at. But if you can justify expansionism on the part of the EU, through the attractiveness of the EU’s soft power… which is attractive… you have to also appreciate that the Russians have their own perspective.”

Sant admits that this reasoning doesn’t go down well in Europe, least of all among countries like Latvia, Lithuania, etc.

“But these are the realities. You can’t just move into a room, and pretend nothing has changed even though you’ve taken over the room. I refuse to participate in that sort of thing, because both sides are in bad faith.”