By Lisa Schaefer (JTW)

Journal of Turkish Wekly conducted and exclusive interview with Mustafa Kutlay, political economy reseracher at the USAK Centre for EU Studies on the Euro Crisis and the Future of Eurozone.

Q: In the light of the eurozone's debt crisis some members appeared to be intrinsically reluctant to help their partners in terms of financial support. Do you think this should be traced back solely to a lack of appropriate legal regulations within the common currency bloc (as these were first-time events) or should one consider the member's behavior as evidence for their unwillingness to cooperate comprehensively, what therefore reveals that national interests are still predominant within the European context?

A: This is a first-time event for the European Union; it's unique and unprecedented from this point of view. Yet we cannot just reduce the discussions to this peculiarity. It is true that the legal foundations are not adequate so the Europeans are not prepared to this shockwave. But what we can predict is that "if there is will there is way". The more important problem is the coordination problem, not the legal aspect of the story. There is a coordination problem in the European Union mainly due to the solidarity lack. This makes the crisis worse than the actual impact was.

Let's summarize the chain of events we witnessed within the last year. The crisis first started in the United States and in a short time period it spread to the other side of the Atlantic. While Europe has turned out to be the center of the crisis we started to speak about the eurozone crisis. First Greece was hit very hard by the effects of the crisis and at the first stage especially Germans did not show sympathy to rescue Greece and they came very close to say "this is the Greeks' problem because in the first decade of the 2000s they spent more than their economic capacity allowed. During these heydays of world economy they tried to cheat the other EU members as they manipulated their data and faced the crisis accordingly. This result is their own fault and Germany is not willed to pay it hence they have to pay the bill by themselves."

So a very nationalist and very narrow perspective dominated the discussions at that time. However what we have witnessed in a short time is that the Greek financial crisis was not limited to Greece as other southern European countries like Spain, Portugal, Italy started to be effected as well and Ireland came also very close to collapse. The European leaders especially those of Germany and France came about to realize that the crisis is not limited to Greece and that they have to help Greece in order to save the entire eurozone.

I agree with the German leadership that they concluded many structural reforms during the first decade of the 2000s for example regarding labor and productivity while especially the southern European countries did not undertake relevant reforms. Greece did for example never succeed in fulfilling the Maastricht criteria: every single year its budget deficit was above 3%, its public debt about 60% so that they recorded manipulated data.
The question that comes to my mind is now: did the European leaders and the European institutions like the European Commission really not recognize what is going on in Greece or did they actually tend to overlook those manipulations? This is an important question that needs to be answered. The possibilities are: either Europe did not recognize the Greek's problems because they were cheated by them what may lead to a very serious sincerity and solidarity problem. The alternative to this is that the European Commission, the other supervisory mechanisms did detect Greece's manipulations and overlooked them. So here arises another important problem: if they saw these manipulations, why didn't they act? Most probably they urged Greek authorities to correct their mistakes or they just preferred to postpone the problems to the later years because the world economy was performing significantly well in terms of growth rates at that time and the European countries benefited from that. Everything on paper was going well so nobody wanted to spoil the party could be the other explanation.

However, the party ended with the Greek crisis. The subsequent formation of a rescue package to be used in the southern European context was a result of necessity and I think if the Germans would have agreed that it is important to keep solidarity alive starting from the early onset the eurozone crisis would have been much less severe than it is today and its impacts would not be as hazardous.

To summarize your question, there are legal problems but these are not the real problems. It was possible to find ways to amend legal regulations in a very short time period if there was will so the pressing problem was actually a lack of solidarity and that the issues were treated from a nationalist point of view what seems understandable as well. If you look at the picture you will see that Greece used others' money in order to improve its welfare during the last decade. For this reason the German point of view is reasonable as they are financing the EU budget with their citizen's taxes which are the sources being used to finance the Greek debt. This is not understandable for ordinary citizens nor easily explainable by politicians but the structural problem needs to be resolved or otherwise it is not possible to keep the eurozone alive. Europe had to face that and in my opinion necessity not the will created a kind of solidarity mechanism in the aftermath.

Q: During the last convention of the German chancellor's party, Angela Merkel stated that "if the Euro will fail, Europe will fail". Would you agree with that and if (not) so, why?

A: Yes, I agree with Merkel on this point because as I tried to mention in the previous question Germany benefited significantly from the emergence of Euro as a single currency due to significantly decreasing transaction costs after the establishment of the Euro. As we know from empirical studies the implementation of the single currency improved the intra-trade between the European Union countries and it even brought the "currency wars' to an end.
This was quite important from Germany's point of view because exports are of vital importance in the overall economic performance for Germany and many countries use exchange rates as a manipulative instrument to support their exporters. After the introduction of the Euro, all currencies were transferred into a single currency within the eurozone and under the condition that the currency became visible or predictable for the exporters it became much easier to sell and buy products from other parties. As a major exporter within the eurozone economy Germany took advantage of this development and its exports improved significantly because manipulating the economy via increasing or decreasing the value of the currency was not a policy option anymore. For example, consider that Greece was not a member of the eurozone. The first thing they would have done is to reduce the value of their currency in order to search Greek exporter's products and discourage imports. In this case, the Greek national currency's value would decrease vis-Ã -vis the German currency and under this condition it would be much more difficult for the Germans to export to the Greek economy.

One further important issue concerns the financial transactions because the intra-investments both in terms of portfolio investments and foreign direct investments increased after the establishment of the eurozone and German banks had turned out to be the financers of southern European countries and other European countries as well. The transaction between banks, between private funds and transactions improved importantly to a significant degree. So Germany took advantage of this process as well but every advantage creates at the same time possible pitfalls and what we are witnessing today are these pitfalls. For example the money sent to southern European countries, the funds, debts are the problems of these countries. Greek banks are in a dangerous position not to pay their debts which are mainly owned by German banks. The increasing interdependence creates therefore important problems especially in the crisis conjuncture what brings us to the first question: solidarity is a necessity for the European Union nowadays in order to defend national interests. The common currency bloc is not rescuing Greece just because Greece is a member of the European Union or just for the sake of Greek people's wealth or Greek people's goodwill. Solidarity is of vital importance because these countries will also take advantage of this solidarity because if Greece fails for example German banks may fail as well. When we turn back to Merkel again, if eurozone fails, Germany also fails. From this point of view Merkel is right but the important problem is what can be done in order to make the eurozone to survive? This is the most important question and the answer to this question is not an easy one.

Q: Actually I understood Merkel more in a way as if she was referring to the idea behind or about Europe or the European Union in terms of an idealistic perspective so to say. You also mentioned the issue of cooperation and I think that she was referring to this broader European context. Don't you think so?

A: Actually yes. I think it's not possible to reduce all these issues to narrow economic interests. There is also an idea and this idea is that the European Union is a solidarity-based union and if they stand together, they will become stronger. From this point of view it is not just about narrow interests, but about an idea. And if the eurozone fails the idea of Europe will significantly deteriorate. Under normal conditions the rhetoric is good: "we are cooperating with each other, we are strong because we share the same principles with each other". But when the crisis hits and everybody goes his or her own way the rhetoric will lose its magic.

Q: This brings us to my last question. Which measures should be adopted in order to stabilize the current situation and make the Union's future safer?

A: I would like to mention that we, as the Turks, do not feel ourselves completely as observers because we are a negotiating country and I think Turkey should be careful about the developments in the European Union and should take part in the debates from a constructive angle. The future of Europe is closely linked to the future of Turkey. Furthermore, what I see is that the European Union has to revitalize itself significantly both on structural platforms and at ideal platforms. There are important things that have to be done. Regarding the economic side of the story the structural reforms are inescapable because in terms of monetary policy there is a centralized monetary conduct, the European Central Bank as authority of all kinds of monetary affairs, but on the fiscal side there is a de-centralized structure which creates important policy problems as we witness in the recent financial crisis. By one way or another, the Europeans should narrow the gap between monetary policies and fiscal policies. The institutional design is of vital importance and the existing institutional design is not adequate to safe the eurozone from further financial turmoil. Even more important is that we understood in the context of the recent financial crisis that the supervision mechanisms are not functioning adequately. I gave you the Greek example and I said that regarding the Maastricht criteria and the Stability and Growth Pact criteria the Greek authorities did not oblige the necessities. Yes, they did not pay the bill for their breach of rules but this is just one side of the story. Let us take the Spanish example. If you examine the records of Spain's economic performance you will see that in every single year Spanish authorities obeyed the principles of Maastricht criteria and Growth and Stability Pact and you can not see that the Spanish budget debt was more than 3% of or the public debt more than 60% of its GDP. So from a Maastricht criteria and Stability and Growth Pact point of view there was no problem in Spain but at the end Spain was another country that was severely hit by the financial crisis. Why this was the case? Because there were problems within their economy that were not recognized or were not taken account of by the existing supervision mechanisms. In summary, the existing rules should be revised and should be improved because the Growth and Stability Pact and Maastricht criteria are not capable of assessing what is going on in European economies.

Regarding the monetary policies and fiscal policies the gap should be narrowed and regarding the supervision mechanisms the institutional setting should be improved. This is the sine qua non for a better eurozone or for the eurozone to survive in fact. From an ideal point of view the European idea is in a crisis situation because every party or every country tries to maximize its own national interests and to some extent follow beggar-thy-neighbor policies. For example the Germans did hesitate to help Greece or the Irish banks immediately after the crisis pursued a blanked coverage strategy that exacerbated the anxiety of the British authorities. In crisis situations policy entrepreneurship is of vital importance and a window of opportunity is opened but by just narrowing down the discussions into mere nationalist understanding nobody will gain. The Europeans should understand that their destinies are linked closely to each other so they need to take the other countries into consideration and they need to act together in order to improve the wealth of a country. Of course this is not an easy task. Everybody is saying that and you are speaking about half a billion people within 27 different sovereign countries so the difficulty of and for the European Union is multilateral governance and policy entrepreneurship and regional leadership become much more important. This is the main problem of the European Union and I am not very optimistic but we will see what will happen in the future time.