Former Greek prime minister and central banker Lucas Papademos explains in an interview with The Globe and Mail why he's still an optimist about his battered country's prospects and the euro's survival.
1. On Greece's unheralded progress
The persistence and severity of the economic crisis have masked the tremendous progress made towards reducing fiscal imbalances and improving competitiveness. Over the past 21/2 years, the primary deficit declined by more than eight percentage points of GDP. This is the largest fiscal adjustment of any EU or OECD country in recent years. The improvement in competitiveness is also impressive.
Moreover, a number of structural reforms have been implemented to improve the viability of the pension system, enhance the functioning of the labour market and promote competition and export-oriented growth. Nevertheless, there have been delays and shortcomings in the introduction of reforms, and it is vital that the reform agenda be implemented more effectively.
Regrettably, the economic adjustment has entailed huge and very visible sacrifices by the Greek people. There is obviously an urgent need to reverse these unfavourable developments and foster economic recovery.
2. On the importance of fiscal austerity
The purpose of fiscal austerity in the short run is sustained growth in the long run. For a country with excessive public debt, fiscal consolidation is necessary for debt sustainability and avoiding a disastrous default, and desirable for establishing conditions fostering durable growth. That is why I do not like the term "austerity policies," because it conveys an incomplete and misleading message.
Indeed, it can reasonably be expected that, as budget deficits are reduced, the short-term adverse effects on income of a restrictive fiscal policy will gradually dissipate and be more than offset by the positive impact on aggregate demand of reduced financing cost, increased confidence and enhanced competitiveness, if appropriate reforms are also implemented. This has not yet happened in Greece and several other euro zone countries.
3. On Greece's major challenge
To complete the fiscal adjustment process and secure debt sustainability, while at the same time accelerating economic recovery and reducing unemployment. Meeting this challenge will not be easy, but it is feasible if we pursue the appropriate strategy and implement the agreed policies effectively. This will require parallel efforts on two fronts: further fiscal consolidation and rapid introduction of structural reforms to improve competition, productive efficiency and export performance.
Reforms are essential for stimulating economic activity and increasing employment. Strengthening the capital and liquidity of banks is also necessary to ease the credit squeeze. But because the positive effects of reforms on growth take time to materialize, it is important that some other actions are taken to catalyze economic recovery.
4. On the future of the euro
The perceived risks to the longer-term viability of the euro have been reflected in the yields of government bonds issued by countries with large fiscal imbalances. Such concerns are unsubstantiated. The European integration process is irreversible. Over the past two years, extraordinary measures and far-reaching decisions have been taken to resolve the crisis and strengthen European integration. These actions are yielding positive results that will become progressively more tangible. Euro zone countries have a strong common interest in overcoming the crisis. And they will act accordingly. The euro is forever. I absolutely believe that.
Dr. Papademos, who is preparing to return to his academic career, was interviewed after a speech at the Toronto Global Forum.
Comments have been condensed and edited.