Allgemein, Economics, European integration

International Spillover of EU Disintegration

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations at the University of Wuppertal (EIIW), Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371, Alfred Grosser Professorship 2007/08, Sciences Po, Paris; Research Fellow, IZA, Bonn; Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC; EIIW 2015= 20 years of award-winning economic research ,

EUcrisis2016springEIIWwelfens, February 18, 2016


International Spillover of EU Disintegration

The Western European message of the 1960s, 1970s, 1980s and 1990s was fairly clear: More regional economic integration and the building of joint institutions is good for the European Union and could serve as a model for other regions in the world economy that are interested in higher economic growth and more politico-economic stability. The ASEAN countries in Asia, the Mercosur countries in South America and many other regional integration schemes were interested in EU integration dynamics: A typical question raised at many international economic conferences was about what one could learn from Europe, and in several Asian countries leading universities offered master programs in “European Studies” which attracted many brilliant applicants from which the respective university could choose the best students. Since 2013/2014/2015 the situation has changed considerably: a much lower number of applications and students in this field clearly indicates that the attractiveness of EU integration dynamics has started to lose much of its previous shine.

The EU in 2008-2015 has indeed exhibited large inconsistencies and experienced policy pitfalls – its previous integration dynamics have been lost and it looks increasingly weak; it could even be on the way towards disintegration. What were the key problems in the EU?

  • When the Transatlantic Banking Crisis emerged it took the European Parliament and national parliaments in major EU countries many years to sort out the problems and respond with major reforms – these reforms were so much slower in coming and so much weaker in practice than in the US that the delayed and lacking reaction explains much of the 10% growth gap vis-à-vis the US in 2008-2015: standing for an income gap of € 3000 per capita in the euro zone and the EU, respectively.
  • When the Transatlantic Banking Crisis fully erupted in mid-September 2008 – with the collapse of the US investment bank Lehman Brothers – it was immediately clear that the international risk appetite of investors would dramatically shrink and that the first victims of this regime shift would be countries with high debt-GDP ratios and high deficit-GDP ratios and/or high foreign indebtedness. So this author wrote at the end of October, in the manuscript of a book on the banking crisis, about a scenario in which Greece, Spain and Italy could face a major refinancing crisis for sovereign debt (at that time I was not aware of the incredible problems in Ireland, i.e. the total absence of any serious prudential supervision and massive corruption, so that my book Transatlantische Bankenkrise/Transatlantic Banking Crisis had a small blind spot in terms of the description of the upcoming crisis in Europe).
  • Under the weight of the banking crisis, the EU member countries decided – largely following British pressure – that the EU’s government expenditures should be cut in a period of tightening budget constraints: from 1.24% of GDP to 1%, which is absolutely the wrong decision. While the US, a top political player, spends about 9% on federal government expenditures relative to GDP and another 11% on federal social security expenditures, the EU stands for almost nothing. This implies that the EU fiscal policy is largely inefficient and the IMF has argued that a 1% GDP reduction – a standard shock to the economy – will reduce the EU’s consumption-GDP ratio by roughly three times as much as in the US. Part of this bad result is due to the homeopathic expenditure-GDP ratio in Brussels. Infrastructure expenditures and military expenditures plus short-term unemployment benefits should be financed via Brussels, in doing so the overall tax rate in the EU should reduce by about 1%. Political competition in the European elections would increase massively if the economic and political role of the EU could be reinforced: More intensive political competition – with a stronger European Parliament (and the Commission no longer playing a twin role as both legislative and executive body) – would reinforce the efficiency of the EU and the EU’s spending of taxpayers’ money. The role of radical small populist parties would be strongly reduced and this would bring more stability for Europe.
  • As regards monetary union and the creation of a single EU currency, there is a lack of consistent rules and in this perspective there is the problem of a missing political union. The Eurozone could have major benefits – more than 0.5% of GDP – if the euro remains a strong international reserve currency. The enormous privilege of being a reserve currency is an important benefit of the dollar and the euro. If the euro countries are not willing to establish a political union, the Eurozone will disintegrate.
  • If the EU or the Eurozone should disintegrate, there will be strong economic disadvantages and in Europe military expenditures relative to GDP would rise from about 1.5% of GDP to about 4% – as in the decade before World War I. The risk for economic and political stability and peace would be enormous. Other regional integration schemes in the world economy also could become rather unstable.
  • The problems in the EU, and in Germany and France etc., could certainly be solved, but the current policy of merely muddling-through is poor – better concepts and more professional economic policy are urgently needed. If the EU should disintegrate, this would stimulate the disintegration of regional integration clubs worldwide and thus contribute to international economic instability.

The EU has only a few short years remaining to sort out its problems. So far, the German government – under Chancellor Merkel – has not given many impulses for a strong Europe, rather the poor political management of the refugee wave of 2015 and the euro crisis have served only to destabilize the EU further. The TTIP project (EU-US regional economic integration) offers new prospects for higher economic growth, but again the political management in the EU is rather weak. In a period in which the US political attention increasingly is focusing on Asia – this reduces the relative weight of EU-US economic cooperation – a successful TTIP project would be a crucial for element for better EU-US cooperation.

On the latest EIIW research paper 212 (on TTIP) see



Allgemein, Economics, European integration

BREXIT: Strong Pros and Cons in a Fool’s Debate?


Prof. Dr. Paul J.J. Welfens, President of the European Institute for International Economic Relations (EIIW) at the University of Wuppertal; Professor in Macroeconomics and Jean Monnet Chair in European Economic Integration at the Schumpeter School of Business and Economics, University of Wuppertal and Research Fellow at IZA, Bonn; Non-resident Senior Fellow, AICGS/Johns Hopkins University, Washington DC. EIIW 2015 = 20 years of award-winning research

(    BrexitWelfensEIIW2016, January 24, 2016

BREXIT: Strong Pros and Cons in a Fool’s Debate?

In the UK there is a long-standing debate about the option of leaving the European Union – as announced by Prime Minister Cameron there will be a referendum on BREXIT in 2016. In sections of the British press there is a debate which would seem to suggest that the BREXIT topic is a kind of rational political question (see, for example, the Economist: interview with the pro-BREXIT activist Dominic Cummings on January 21, 2016). The truth, however, is that the BREXIT question has become part of the agenda of the British government – and of that of the Labour Party – as a direct consequence of UKIP’s election victory in the European elections of 2014: only due to UKIP did the BREXIT emerge as a topic for discussion. UKIP’s No. 1 position in that election was as remarkable as that of the Front National in France and the strong showing of the populist right-wing party AfD (Alternative für Deutschland) and all three are reflecting nonsense results related to a European vertical political architecture which stimulates voters to vote for small radical parties at European elections. In Germany the Forschungsgruppe Wahlen – a leading voting analysis think-tank – has analyzed voters’ behavior and finds the following result (axplained by a representative of Forschungsgruppe Wahlen in Düsseldorf at an higl-level meeting of experts from academia):

  • when asked about relevant topics at a local, regional or national government level voters have a clear view about the respective issues. However, when it comes to European elections voters have no clear idea about the relevant topics at EU level – since the EU expenditure-GDP ratio is so ridicously low (1%; 1/9 of that of the US at the federal level). As a consequence voters are inclined to vote on an emotional basis and to actually prefer small radical parties which normally do not enjoy high voters’ shares at the national level. With the financial rewards obtained for every vote received at the European level these radical populist (often right-wing) parties can then invest in national political campaigns. Thus the strange vertical political architecture with the mini-role of supranational government – defended by many German and British politicians under the headline of “subsidiarity” – has contributed to an ever-declining voter turnout at European elections (with a minor exception in 2015) and an ever-increasing share of anti-EU radical populist parties. This is not to say that one cannot find crucial points of inefficiencies and political contradictions in the EU, but the anti-EU sentiments that have grown over decades are largely the artificial result of a contradictory and inefficient political vertical architecture in Europe. Had the supranational EU level – in line with the economic theory of Fiscal Federalism – control over part of infrastructure expenditures, military expenditures and the unemployment insurance, the voter turnout for the European Parliament would be much higher, fiscal policy much more effective, the political competition in Brussels more intensive and the role of UKIP, Front National and AfD effectively negated. Mr. Cameron would never have considered the issue of a referundum on BREXIT the debate over which will largely emphasize the allegedly too large a role played by the EU and that immigration into the UK is a major problem. This is the paradox of the insufficient EU budget and could lead to a truly European political tragedy from which only China, Russia and some other countries will benefit. Is this what people – rational British voters – are really interested in?
  • BREXIT will destabilize the EU, weakening the role of traditional liberal economic countries such as Germany, Denmark and the Netherlands. With Germany increasingly destabilized over time – and struggling to come to terms with the refugee wave that is bound to further reinforce right-wing populist parties in Germany – it will not take many years until there is full EU disintegration plus economic stagnation; and Germany, France, the UK and other countries will return to a stark agressive political rivalry that leads Europe back to the period before 1914. This includes defense-GDP ratios which will increase from below or close to 2% to about 4%, just like in the decade before World War I. Is this what is in the interest of the UK? The artificially strong UKIP has imposed on the British political system an artificial referendum that under normal rational circumstances – in a US-type European Union – would never play any role on the political agenda.

Does it therefore make sense to consider the elegant pros and cons of an artificial, irrational referendum on BREXIT? Not really. There is a lack of political and economic enlightenment in Europe and the potentially rather powerful European Union might face a sad long-term decline and disintegration from which primarily the autocratic and anti-democratic countries worldwide will benefit – with Russia and China to be the leaders in this regard. Disintegration of the EU will clearly undermine the integration prospects of ASEAN and MERCOSUR and the whole concept of regional integration and peaceful economic cooperation. The British people has made the UK a pioneer in democracy, liberal markets and free trade plus the rule of law. An unreflected UK debate on a BREXIT referendum would endanger half a millenium of political progress and rational decision-making. Beyond the UK referendum there are several questions to be analyzed:

  • How can the EU successfully cope with the humanitarian challenge of the refugee crisis? The rather silent role of the UK in this field is strange.
  • How can a more effective and efficient vertical integration generate more benefits for the EU member countries and help to bring about a more intensive political competition process?
  • How can the liberal forces of the EU be reinforced and inconsistent minimum wage policies – as in France and Belgium – be avoided in the future?
  • How EU integration become remain a role model for integration around the world?
  • What is an adequate role for the principle of subsidiarity in the EU?
  • Why are key facts on the success side of immigration – for example the more than 7 million new jobs created by immigrant entrepreneurship – so poorly known in the British public?
Allgemein, Economics, European integration

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris, Research Fellow, IZA, Bonn, Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington D.C.   

2015 = 20 years EIIW/award-winning research in Economics and Economic Policy

01/01/2016 (AntiOilPriceShockEIIWWelfens2016)


Oil price reduction is permanent * Major implications for OECD countries, China and India: economic expansion, low inflation, higher output and employment growth plus lower deficit-GDP ratios; * OPEC countries plus Russia and Brazil to face major new problems in the context of low oil prices; * Adjust investment policy in line with economic logic explained


Anti-Oil Price Shock Sustained

The 1970s witnessed two drastic oil price shocks which caused major recessions and rising inflation rates, plus higher unemployment rates as well as high deficit-GDP ratios in OECD countries. The massive fall of oil prices in 2014/2015 – by about 60% – is viewed by many observers as a transitory oil price decline. However, while some rebound effect is likely the general perception is wrong: Since 2014, there has been a massive regime switch in global oil markets and oil prices should be expected to remain low and to even decline further, to below $30 in the medium term; and it will be quite interesting to analyze the European and global effects the “anti-oil” price shock of 2014/2015 will have. The standard wisdom, maintaining that oil prices will quickly return to circa $80-100, is nonsense and therefore the implication that inflation rates could soon rise considerably is also nonsense.

The regime switch of 2014/2015 is not really well understood and the International Energy Agency is just one of the traditional forecasters who misread the international energy price dynamics. Firstly, 2014 was the first year in which investments in renewable energy in the world economy exceeded those in fossil fuel resources. This tendency should be expected to be reinforced over time and this will contribute to cutting the global oil demand substantially. The global oil and gas demand is, of course, driven by global economic growth, at the same time one should not overlook the massive technological progress in electricity grids – the development of smart grids that merge digital communication with modern electricity in a way that allows major efficiency gains leading to reduced electricity demand during the year is also a crucial element to be considered in energy markets. Moreover, the well-known progress achieved through fracking technology in oil and gas production is the second important technology factor which helps reducing the price dynamics in oil markets.

It is true that there is no symmetry between the oil price shocks of the 1970s and the anti-oil price shock of 2014/2015, as the energy intensity of production of OECD countries in 2014 was hardly half of what it had been in 1974. However, it is still clear that OECD countries, along with China and India, will benefit from the anti-oil price shock in the form of higher employment and output as well as lower inflation rates and smaller deficit-GDP ratios. The output increase in OECD countries in 2016-2020 could be around 2-3% which implies a net increase of global output if one factors in the negative output effects in OPEC countries plus Russia and Brazil – about 5-10% in the same period. Indeed, the OPEC countries, along with Russia and Brazil, are bound to suffer in the form of high exchange rate depreciation rates, rising inflation rates and higher unemployment rates, higher deficit-GDP ratios and possibly also from social and political unrest. Saudi Arabia already recorded a 15% deficit-GDP ratio in 2015 that caused government to cut subsidies for water supply, electricity prices and gas prices at the pump – moreover, they have engaged in privatizations and imposed higher excise taxes as a means to control the deficit. The sustained fall of oil prices will not only destabilize Arab oil-rich countries, but also negatively affect Venezuela and Iran whose budgets had been designed with an obvious overconfidence in stable high oil prices. Political unrest in these countries could potentially be a major problem for the future, and possibly result in new waves of refugee as well. As regards Russia, it is likely that the Russian government might want to adopt a less aggressive policy stance in the wake of low oil prices, however, President Putin might seek out foreign policy “adventures” to compensate for declining popularity in an environment of massive devaluation, recession and rising domestic prices.

The switch to a higher share of renewables in energy generation is a global one, not only because of climate policy concerns but also because the economies of scale in solar energy and wind energy generation have been considerable, and will continue to play a major role. It is not only OECD countries plus China and India which will reinforce the role of renewable energy, rather there are two additional countries with massive benefits to be expected; namely Chile and Argentina – the sustained strong winds of the southern Patagonia region could in the long run allow to produce electricity for the whole of Latin America, once massive investment in grids have been undertaken. The decline of oil prices, however, also implies a new potential problem for measures aimed at combatting climate change as low prices discourage consumers from buying more fuel-efficient cars. In this regard, policymakers should reinforce the tendency to consume energy in a more sustainable way: Subsidies for electric cars and greater support for electric trucks – with the right lane of modernized highways in the future employing an overhead electrical grid system similar to electric trains. Here massive public investment is needed in Europe, North America and China. By 2030, 90% of all transportation could be with electric vehicles powered up to 60% by electricity from renewable sources so that the majority of transportation is from renewable electricity.

The European Commission would be wise to consider such new mobility policies and here Europe could team up with China and the USA such that ambitious innovation and modernization goals could be achieved quickly and at fairly low cost. Saudi Arabia and other countries which have financed radical Islamic missionaries abroad face new constraints for such activities once the oil and gas prices have remained rather low for a number of years. From a Western perspective this is a welcome side-effect of low oil prices.


After the Referendum in Greece – Greek Economic Drama

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202 4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris, Research Fellow, IZA, Bonn,

Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC

July 10, 2015( 2015 = 20 years of award-winning research


File EIIW2015GreekEuropeEIIWwelfensJuly8


After the Referendum in Greece – Greek Economic Drama

The Greek referendum of July 5, 2015, has resulted in the refusal of the latest offer of the creditor euro countries. This was to be anticipated after five years of recession. Greece has experienced a real income decline of 25% in 2010-2014, a slight increase of real income occurred in the third quarter of 2014. However, anticipation of the victory of the left-wing SYRIZA party in the then upcoming elections brought down investment dynamics. Indeed with the Tsipras-led coalition government, established after early elections in January 2015, the investment GDP ratio has further declined. From 25% in 2007 it has reduced to about 12% in 2014 which is a drastic decline. 2015 will witness further reduction of the investment-GDP ratio and of the real GDP. The unemployment rate is also very high – close to 30% in mid-2015. Problems with the banking system will put further pressure on the real economy. The Tsipras government left the negotiation table in Brussels on June 25 and it effectively walked away from some € 17 billion which the country could have obtained as a bridging loan and extension of the second adjustment programme.

The Greek government had suggested that after a referendum a quick compromise would be achieved – within 48 hours; this, however, was illusory. Any agreement will take much longer to be completed since money from the ESM rescue fund would have to be mobilized to give Greece additional loans. The ESM could give new loans to Greece, but this will be possible only if the Greek government adopts more reforms. Tsipras has so far adopted no serious reforms, instead the left-wing rhetoric of the Tsipras government has discouraged investors further and the new recession of 2015 is a politically triggered economic downswing.

Alexis Tsipras has argued that the referendum – with 61% Greek vote No to the euro partner countries’/the Institutions’ proposals – will bring EU integration back to more political cooperation and an approach which would place less emphasis on the role of rules: This, however, is wishful thinking based on an inadequate analysis and similar to the fallacious hypothesis of Mr. Varoufakis, the resigned Greek Minister of Finance, who had argued that Greece would be like Italy, Spain and Portugal. However, the reaction of financial markets with regard to these countries’ interest rates on June 25 and 26 – after the collapse of the talks between Greece and the Eurozone partners – has been very small, so that the Varoufakis hypothesis is not valid.

The creditor countries of the Eurozone negotiated with Greece on June 24 without offering any debt haircut; however, this was not convincing in a situation in which the German government had declared that cooperation with Greece would be based on the involvement of the IMF; the IMF, in turn, had already indicated in a report on Greece in late June that a haircut on Greek debt would be needed to achieve sustainable debt-GDP ratios, which is the basis to keeping the IMF on board. The IMF report, Greece. Preliminary Draft Debt Sustainability Analysis, was published on June 26, however the findings were certainly available a few days in advance for all EU member countries. If all IMF member countries knew about a week before June 26 that there is no debt sustainability, why did the offer of the euro partner countries/the Institutions not suggest at least a small conditional haircut on Greek debt? This strategic mistake fuelled – one could argue – the large No majority of the Greek referendum. The fact that the Maastricht Treaty has a ‘no bail-out’ clause does not exclude the possibility that a technical approach to a haircut could be created; certainly with a strategy to make sure that, from the creditors’ perspective, the remaining debt is ‘safer’.

  • The IMF itself could offer a conditional haircut. As the IMF’s stake is about € 30 bill., one may argue that a haircut of € 15 bill. might be considered – this could be split into two halves so that some conditionality can be attached.
  • The euro countries could decide to transform part of the loans to Greece into a marketable product that would have a market price below 100%. Under very strict conditions, the Greek government could obtain the right to buy back part of this debt at a market price. A formula could be, for example, that for every € 50 bill. translated into an effective debt reduction, Greece must privatize the same amount of government assets, namely in an approach that involves the EBRD, which has broad experience in privatization. A maximum of € 100 bill. could thus be privatized which then would go hand in hand with a debt reduction of almost 1/3rd of the Greek government debt.
  • Greece should definitely avoid the problems associated with failing to make the repayment of € 3.6 bill. to the ECB which is due on July 20. If the Greek government, which has assets of more than € 300 billion at its disposal, would be unwilling to quickly mobilize some of these large assets for privatization in order to make sure that the payments to the ECB scheduled for July 20 and August 20 are made, this would be absolutely irresponsible. It would testify to a lack of economic professionalism and an obsession with ideological goals in a situation in which about 10 million Greek people are facing dramatic economic hardship.

The ECB is likely to extend ELA (Emergency Liquidity Assistance) credits for a short period, in order to allow Greek banks to operate at a minimal level. The European Central Bank is in a critical position, namely that it can give a green light for loans of the national central bank vis-à-vis commercial banks in the country, however, the green light for giving extra liquidity to Greek banks is based on the assumption that the banks have a liquidity problem but are still solvent. Here there is a crucial problem since the bankruptcy of Greece could translate into the bankruptcy of the major banks.

Indeed, on July 20 the ECB is expecting a repayment of loans from Greece. Should this payment not be made, a prolongation of ELA is unlikely, since non-payment to the ECB implies the bankruptcy of Greece; this, in turn, undermines banks’ equity capital – banks would thus face insolvency. More than 1/3rd of the major banks’ equity capital in Greece consists of expected tax refunds from government, but if government is bankrupt, then the value of expected tax refunds will be zero. With the equity capital of banks falling dramatically, the four main Greek banks are likely to be bankrupt within a few days. A strong economic collapse would follow in Summer 201 and output could reduce by about 10% within two years.

There is no investor confidence in the Tsipras government. Hence the investment GDP ratio, having already fallen from 25% in 2007 to 12% in 2014, is likely to decline further and this implies that Greece will face a massive recession in 2015/2016. This reinforces the need for a haircut on Greek government debt. This should have been anticipated by the leading negotiators in Brussels – which was obviously not the case.

GREXIT – Greece leaving the Eurozone – cannot be excluded as the Greek government has shown a lack of cooperation with its partners and its apparent lack of professionalism in economic policy could easily generate a “Grexidant” (involuntary leaving of the Eurozone). Greece’s return to the Drachma would be a drama.

The natural starting point of Eurozone countries/the Institutions in new negotiations with Greece should be to focus on structural reforms, institution building and the issue of debt sustainability: Here, Greece itself has not delivered the promised privatization revenues; Greek government assets were estimated to be more than € 350 bill. in a 2010 IMF Report (Dec. 2010), however, by early 2015, only about 1% had been privatized. Greece could be offered a haircut on its outstanding government debt vis-à-vis public debtors, say of about € 100 billion, strictly conditional on Greece proceeding seriously with privatization and reforms plus a redesign of the Greek constitution.

If Greece should decline to cooperate along a formula of debt relief plus privatization plus structural reforms, the Eurozone countries have no reason to seek any compromise with the Greek government. A country with more than € 300 bill. of sovereign debt which has not privatized more than € 3 bill. within five years is certainly not contributing the minimum effort to solve its own serious economic problems. Such “negative solidarity” in the EU is unacceptable – thus far privatization in Greece lags far behind all the efforts that eastern European post-socialist countries made in the transition period of the 1990s.

The ESM rescue fund could take over the current position of Greek bonds held by the ECB. The ECB’s role in monetary policy should no longer be compromised through the ECB’s holding of Greek government bonds. The political and psychological strategy of Eurozone countries vis-à-vis Greece has been inadequate in Spring 2015: The impression was created that Greece could order its partners to the negotiating table almost at will. The Eurozone countries and the EU, respectively, are, however, not only facing the challenge of contributing to helping Greece sort out its economic problems – rather there are also major challenges in the field of economic globalization, amongst others, the rise of China as an economic power: the global No. 1 since mid-2015 – with income evaluated at purchasing power figures. Moreover, there is the challenge of an expansion of information & communication technology.

A useful option could be to shift all negotiations to the Paris Club, which naturally will involve, as a standard ingredient of negotiations, the IMF; there has never been an agreement in the Paris Club without the IMF. The Paris Club has been active in the debt restructuring of many developing and some eastern European countries.

What could be recommended? Greece should get a first haircut of about € 10 billion upfront on the basis of an international privatization scheme which should involve the EBRD in London, an institution which has great expertise in privatizations in almost 30 countries so far. At the Paris Club, the US, Canada, Japan, Russia and the UK would also sit at the table, in addition to the Eurozone countries. However, if the Greek government is not offering policy reforms in the form of modernizing public administration, reinforcing competition policy and accepting broad privatization, it is highly unlikely that the required political support of creditor countries – from Germany or Ireland for example – will be achieved. Without majority decisions in parliaments in several Eurozone countries, no third loan package for Greece will be possible.

Greece needs a new constitution which gives clear financial autonomy to local and regional authorities plus universities and hospitals. If such autonomy is not guaranteed, the Eurozone countries should not sign any long-term agreement with Greece, since the government in Athens could take these institutions as “hostages”. The Greek government has forced local authorities, hospitals and universities to send liquidity to the central government, however, the main idea behind this move is to organize a maximum bankruptcy case if the Greek government does go bankrupt. Moreover, the main reason that Greece has made so little progress with economic reforms in the period 2010-15 is that the quality of government and the public administration is rather poor; there is massive inefficiency in government and this will not be changed without adopting a new constitution. The quality of institutions in Greece is also rather poor. The modest reforms achieved in some fields should be acknowledged, however the speed of reforms has been rather slow. Privatization has been almost non-existent in 2010-2015.

A haircut of € 100 billion for Greece would be a burden to the taxpayer of about 1% of GDP – here assuming that only public creditors are involved. However, an adequate deal would raise the GDP of the Eurozone by at least 0.1% per year, as Greek instability would be removed, so that after a decade, taxpayers’ costs would be close to zero. The Greek problems could be solved, however, with the strange Tsipras government this will be very difficult. It cannot be excluded that Greece will, in the end, leave the Eurozone and massive chaos would emerge in Greece thereafter. The case of Greece shows that a country which does not manage its public debt in a responsible way could experience a massive economic decline and political and social instability.

The German leadership, in terms of the management of the Greek crisis, has been rather weak in some points. There was no realistic strategy for stabilizing Greece within a few years. The IMF’s forecasts of fast economic recovery in Greece have turned out to be much too optimistic – and thus the disappointment both in Greece and in the euro partner countries was considerable in the second half the crisis period 2010-2015. The key to economic recovery in Greece is higher investment and this in turn requires political stability and a consistent economic policy as well as a stable banking system.

Finally, it is clear that a Eurozone without a political union could be rather unstable; whether or not Germany and France can generate the required political momentum for a future political union remains to be seen. The Greek crisis can be solved within a few years if adequate reforms are adopted. There is no doubt that the Euro monetary union and the EU also require reforms. The picture that the EU has presented to the partners in the world economy between 2010 and 2015 has been dismal. The new Juncker Commission might bring major improvements here provided a broad reform programme is adopted.