Former Greek finance minister: Greece’s crisis is far from over

George Papaconstantinou worries the country will grow too slowly to pay off its debt.

PARIS — George Papaconstantinou, 56, was Greece’s finance minister who revealed at the end of 2009 that his predecessors had hidden the true size of the country’s massive budget deficit, triggering the chain reaction setting off the euro crisis.

He negotiated the country’s first two bailouts with other eurozone members, the European Central Bank and European Commission. He left the finance ministry in June 2011 and wrote a best-selling memoir of the crisis years, “Game Over.”

In an interview with POLITICO, Papaconstantinou, now a professor at the European University Institute in Florence, explains why he disagrees with European officials who think the debt relief agreement signed last week marked “the end of the Greek crisis.”

He also says that because it’s a “political creature,” the eurozone isn’t in danger thanks to its member governments’ “iron will” to keep it together.

The Greek debt relief deal last week was hailed by Commissioner Pierre Moscovici as “the end of the eight-year Greek crisis.” Do you share that view?

It was an important moment, but by no means the end of the crisis. It was a compromise solution, within the framework of what was expected. The restructuring only involves the loans extended by the EFSF [the first incarnation of the eurozone bailout fund, now called the European Stability Mechanism]. It doesn’t include the first aid package, made up of bilateral loans, for both political and legal reasons.

Overall, the agreement does buy time for Greece, and the country doesn’t have a debt problem in the short run.

So why then do you think that was not the end of the crisis?

I have two main sources of worry. The first one is that the cash reserves Greece will have, some €24 billion after it receives the last €15 billion tranche of bailout money, are meant to be used. I would have preferred it to serve as a guarantee. Greece’s borrowing rates are still prohibitive, markets are still worried. That’s a short-term issue.

My long-term worry is more serious. No one, no serious analyst or economist sees Greece growing over the long term at an annual rate topping 1.25 percent. That’s very slow and means, by the way, that the debt burden can only shrink very slowly as well.

Can we change that? Can the country attract foreign investment? Can it undergo a productivity revolution and enter a virtuous instead of vicious circle? The long term doesn’t look good at the moment. That will be a big challenge for the next government.

You don’t believe the current government can do it?

I doubt very much that they would engage in the kind of radical supply-side reform needed to trigger a massive movement of inward investment. And on the other side of the spectrum, [conservative party] New Democracy is split between its liberal and populist wings.

Do you think that the type of reforms that Angela Merkel and Emmanuel Macron agreed on last week would have helped Greece and the eurozone to better weather the crisis, if they’d been done 10 years ago?

Whenever you try to reconstruct history with counterfactuals, the risk is to assume that whatever measure would have been perfectly and fully implemented. So this has to be taken with a grain of salt. If you look at last week’s deal, it depends on the yardstick you use. If you judge it against my own wishes, it falls short. If you compare it to where we seemed to be a month ago, it’s a big step.

So a mixed bag?

There are two great positive points: the principle of a eurozone budget and the reform of the ESM, with a backstop for bank resolution. Even if those were not fully detailed, those are important steps.

The big negative in my mind is the missed opportunity to complete the banking union with a joint deposit insurance. In the hierarchy of things to do, I would have put that in first place. What caused the crisis to last as long as it did was the migration of deposits from the south to the north, and the banking system’s instability. There is no way we can pretend we can solve this problem without the European deposit insurance scheme.

But opposition to even the limited Meseberg deal among other eurozone members is already apparent …

True, I’m a bit worried about the reaction of countries such as the Netherlands, but my historical view is that the Dutch can also be pressured by Germany.

And do you think that Germany will abide by the deal?

There may not be much consistency in Germany’s positions — they can change, they can backtrack, they can renege on their promises — but Germany is not immobile, it moves. And I think the strategy of enlarging the field of discussion to encompass other geopolitical topics, like Macron is doing, is the right one.

Do you think that the Franco-German plan, if ever implemented, would indeed make the eurozone more resilient in the next crisis?

If things turn sour, markets will take a hard look and decide for themselves. But they will also remember that when push comes to shove, eurozone governments can act and that there is some iron political will to defend the monetary union when it is in danger. The paradoxical lesson of our own improvising is that no one now can doubt our determination to keep everything together.

That’s what I think American economists, for example, have never quite grasped: They look at the eurozone’s institutional architecture and forget that it is also a political creature.

This interview was edited for length and clarity.

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