Κρίση της Ευρωζώνης: Αιτίες και Συνέπειες. Συνέντευξη με τον Συμεών Καραφόλα
The Eurozone Crisis was one of the biggest financial upheavals of the 21st century, affecting several countries in the European Union and causing widespread economic turmoil. The crisis began in late 2009 when it became apparent that several countries in the eurozone, including Greece, were struggling to repay their debt, then it happened once again in 2020 with the COVID pandemic and now with the war happening in Russia and Ukraine. In this interview, we talk to Simeon Karafolas a teacher at the School of Economics at University of Western Macedonia, and an experienced economist in the branches of the Eurozone, to get a better understanding of the causes of the crisis, its impact, and what the future holds for the eurozone itself.
Mr. Karafola, thank you for taking part in this interview and allowing us to have such a discussion, I want to say a special thanks to the students who are part of the Geeconomy team and who came up with these questions, and I hope that everyone who is reading will enjoy this short interview because the topic is really interesting. We are really happy to have a professor like you, who cares about the students, makes them really like the faculty they are studying, and captures the attention of the class by interacting and giving really good examples in the lessons that sometimes even make us think for a while.
1. First, please tell us about your career as an economics teacher. Let’s start from the beginning. Where did you first study economics?
S: I am pleased about this debate and I congratulate you. You remind me of my student days when a group of friends and I formed the Grenoble Economics Students’ Association. My studies were in France when I decided to leave Greece to study abroad. I studied Economics at the University of Grenoble as well as Political Science. I did my Master’s degree at the same University. Then I went to the University of Lyon where I did my PhD in the Internationalization of the Greek banking system.
2. What is the reason that made you study economics?
S: It was the time when I “discovered” Political Economy and the importance it can have for a country and its citizens.
3. Which economist has influenced you the most and why?
S: In my period of study, we referred particularly to Keynes and Marx.
4. Did you have a teacher that influenced you more than the other teachers, and if yes why is that?
S: I was lucky enough to have excellent professors (I think one of them was nominated for a Nobel Prize). Speaking of the Eurozone, I will tell you that in 1981 already in the European Economics course we were talking about the possibilities of creating a common currency.
5. What is your greatest professional achievement so far and why?
S: I chose several career paths, each of which offered many important moments. Perhaps I can mention my contribution as a consultant to the Ministry of Development in the creation of new financial instruments (venture capital, cooperative credit, financial guarantees). In fact, when it comes to “Financial Guarantees” in October 2019, with the collaboration of a professor from the University of Zurich, we organised a meeting of 25 directors of Japan’s leading “Financial Guarantee” agencies that was held in Athens. I should also mention my position as European Representative of the Scientific Committee of the Global Organization of International Cooperative Alliance and the creation of the book on Cooperative Faith in Europe where I coordinated 38 professors from European countries to take part in writing the book.
6. Is the crisis reflected in the same way in all countries or in different ways? And what does it depend on?
S: Every country reacts to crises differently and this depends particularly on its production structure and economic position. Countries with a strong, competitive production structure and significant added value can better withstand a mid- to long-term crisis. Similarly, countries with low economic deficits and debt can also respond easier to a crisis.
7. Where do you think the crisis that had been created in the Eurozone was mostly “shown” and “presented”?
S: First of all, let us clarify which crisis we are referring to. We had the global financial crisis in 2008, which had serious consequences not only for the financial sector but also for the global economy in general. We had the global crisis due to the covid pandemic with serious consequences for the global economy for a period of time and of course we have the consequences of the war in Ukraine.
In the first case, which I think was the result of financial choices, the crisis had multiple layers and I am referring to the Eurozone. Let us look first of all at the two characteristics of the Eurozone, which are the common currency (euro) and the common central bank. As a consequence of this, any serious problem in one member is reflected in the other members because of this link, particularly at the financial and fiscal level. In the 2008 crisis we had at least two main problems in the Eurozone:
– Banks in the Eurozone countries suffered very serious consequences of the financial crisis mainly because they were involved in speculative operations with large losses and a severe problem of capital shortage with the risk of bankruptcy. I should note here that the assets of banks in the Eurozone are 2.4 times the Gross Domestic Product (GDP). One can see the great importance of the banking system and the consequences of its shaking on the economy.
Some countries, especially Greece during the critical period of the crisis, had a very serious problem of financing deficits and servicing public debt. Greece, in particular, at that time had to repay part of its debt and needed immediate financing, which it could not find in the conditions that had been created on the international market. The restriction of international financing and the particularly low rating of Greece, which was by far the country with the largest budget deficits and public debt, prevented Greece from finding the required international financing. Normally investors in a financial crisis avoid financing countries with a high degree of risk, such as Greece, and if they do, it will be at very high, almost prohibitive, interest rates. This was the position Greece found itself in, risking default. The consequences would clearly be borne by the whole eurozone. So it was decided there that Greece would be heavily financed with a mechanism that until then did not exist in the European Union.
The Eurozone as a whole therefore found itself having to respond to situations that in principle would involve a single state. But the specificity of the Eurozone led to a common financing policy.
-The cases of covid pandemic and the war in Ukraine should be seen differently and more in the context of the European Union, where we have a collective reaction in principle. Always, as is the case in the European Union, through a compromise because the interests of states do not necessarily correspond and each state will also be interested in its own interests.
8. In which Eurozone countries the crisis had the greatest impact and why?
Speaking always about the consequences of the 2008 global financial crisis, we can say that four countries suffered the greatest consequences considering that they resorted to the financing mechanism of the European Union (EU) and the International Monetary Fund: Greece, Ireland, Cyprus and Portugal. Greece, first of all, because of its high public debt and large budget deficits. Ireland then with a different basis of the problem which is also extremely interesting. Banks in Ireland were involved in speculative activities with banks that started the financial crisis, (including subprime mortgages, they started rebuying the bounds from the other countries). The losses they suffered were so severe that they were in imminent danger of bankruptcy due to insufficient capital. The Irish Government had to resort to the EU and the IMF to rescue these banks by financing them. It should be noted that Ireland did not initially have the public debt and budget deficit problem like in the case of Greece, but it was more than that. The case of Cyprus is mainly linked to Greece given the link between Greek banks and the Cypriot banking market and economy and the presence of Cypriot banks in Greece. Any consequences for the Greek economy and the Greek banking system have been transmitted to Cyprus. Portugal without having the particular fiscal problems of Greece was caught in the vortex of the crisis and it was considered a high risk country and as a result private financing to the Portuguese state shrunk with the simultaneous increase in the financing rates. The initial measures were not approved by the parties, resulting in a decline in the international private financing which led to a shift towards the EU and the IMF. Both the example of Portugal and particularly that of Greece show us the potential of an economic policy when there is the problem of financing and especially the dependence on international financing.
9. What steps do you think have been taken to address this phenomenon, and what can we keep as good practice examples for the future?
S: Staying with the problem of the global financial crisis that caused the troubles I mentioned before, we have to look at the source of the crisis. Financial institutions, banks and non-banking institutions such as investment companies, insurance companies, were involved in intense speculative operations that at one point got out of classical control. Both the internal control in each institution and the control of the supervisory authorities in each country were unable to control the problem, at least in some large institutions. We would say that they did not particularly want to do so since large activities also brought large profits, in accounting terms, and therefore large bonuses, but also an economic growth, even if fictitious (we often define it by a “bubble”). At the same time, a bad circumstance, such as for example a war engagement, a natural disaster in products traded on the stock exchange, can cause unexpected losses in a financial institution that can have uncontrollable consequences for this institution and then as a domino effect on other institutions as it was in the case of 2008.
The response has been manifold.
First, as is usually the case, the assistance of the state is sought, (e.g. the US government and the Federal Reserve in the case of the US, the EU and the European Central Bank in the case of the Eurozone). In most cases there was intervention by bailing out institutions, in others not. In all cases, however, public intervention has taken place because it was necessary.
However, along with intervention, regulatory control is now being strengthened both at the level of each institution and within the supervisory authorities of each country’s financial system. As an example, after the crisis, banks have been obliged to publish much more detailed information on the riskiness of their portfolio, particularly loans.
And of course one consequence of the crisis has been a restructuring of the financial market with significant mergers and acquisitions of financial institutions. If we stay with the Greek case, bank failures and acquisitions in the 2010s resulted in an unprecedented concentration of the Greek banking market where 4 Greek banks hold about 98% of the market share.
Referring to good practices, as I said, usually after any crisis of this kind, supervisory tools and controls are strengthened. That is what happened here and is certainly a necessary measure. At the same time, ‘greed’ is not a wise compass for any activity, let alone banking, given that the consequences are spread much more widely throughout the economy than in other sectors. On the contrary, financing real production, although risky for any investment, should be the primary objective.
It should also be remembered that a prudent fiscal policy, which is of course linked to a drastic reduction in tax evasion in the Greek case, would not have caused the problems that the Greek economy has encountered in this decade.
10. What was the role of the ECB in the crisis?
S: The ECB had multiple opportunities for action, which it carried out. We can refer to some key ones.
First, supervisory control was now intensified in cooperation with other supervisory mechanisms established during the crisis for this purpose.
The ECB intervened by participating in the trilateral financing (with the European Commission and the IMF) of Greece and other countries.
As part of its policy, the ECB implemented measures to facilitate bank funding, such as very low bank refinancing rates and liquidity facilitation.
Particularly in the case of Greece, and in particular since the beginning of 2015, when we had a very large flight of deposits from Greek banks, the ECB has facilitated the liquidity of Greek banks through the emergency liquidity support programme, exceeding 80 billion euros. The ECB helped the Greek central bank to mobilise more than 80 billion euros when it was necessary. We can imagine the consequences of the absence of such assistance not only for the banks but, more importantly, for the country’s economy.
11. How do you think a country should act to get rid of the crisis starting from the ordinary citizen up to the government , what changes should be made in your opinion?
S: Let’s start with the basic idea of “doing what I do well”. This is valid from the student in school to the professional and public administration. A country’s problems or even its strengths are a given and this is where every initiative should start. Let us not forget that we are in an open economy in a highly competitive era.
Starting with the state, it should give a sense of fairness, equality, solidarity towards citizens with stable standards of legislation. For example, if we have a high level of tax evasion, how can a government encourage citizens’ efforts? If every now and then a legislation changes, whether it concerns, for example, the economy or education, how can citizens’ trust be consolidated? We have seen that many problems started with large debts. An indebted state can hardly impose the policy it wants, depending on the moods of its creditors. Elimination of bureaucracy, another point of the government’s effort. So these are the points where a government can intervene with immediate results.
A sense of duty I would say is a key parameter for each individual citizen. Tax evasion, for example, comes from the citizen, individually or as a business. Everyone’s behaviour at work is important, even more so if they have a position of responsibility. If you give a sense of fairness, of recognition you will get the respect and effort that you would not otherwise get.
When it comes to Greece, I have the feeling that in the previous decades, the 60s and 70s, the individual initiative rather than the state had the main role. Now I see many more young people creating with courage, with ideas, often starting from scratch without waiting for state help. I see this as the most encouraging thing in the country of Greece.
12. And finally, what message would you like to send to students studying economics?
S: It is a science that opens up to many horizons, giving a wide range of professional possibilities. Completing the studies is the beginning with an important qualification. Each and every one of us must take advantage of this asset in order to progress. I always say that you should not be static, search, see the possibilities that open up and grab them. Put in the great energy you have as young people and don’t be afraid if you make mistakes because we all do. We learn from them. If I would add one thing it would be to keep your dignity throughout your life.
