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Former PM Bajnai at the Atlantic Council Energy and Economic Summit in Istambul

The former Hungarian prime minister, who is also the founder of Patriotism and Progress Public Policy Foundation participated as a key note speaker in Istanbul at Atlantic Council Energy and Economic Summit on November 15-16. The panel he participated in was dealing with financial and economic related issues, with a title of "Navigating the Financial and Economic Storm"

The Euro and the Euro-zone may have survived the worst, but seem like unsafe havens and remain sources of economic risk for Eurasia. The participants of the panel were talking about the implications for energy demand, business growth, and political security, and what strategies by regional governments to mitigate risk and maximize opportunities make the most sense. They also talked about the best fiscal and development policies for the region's economies and about how will decisions taken by the EU, the United States, China, Russia, and other key actors affect one another and the region.

Mr. Bajnai in his speech was also reflecting on what the Kazakh deputy prime minister had mentioned, that the euro is as much a source of risk and instability as it is of financial stability and confidence. The former Hungarian PM said that "if we want explain what is happening in Europe, as for how the solution can be found in Europe, we have to raise four political economic. Number one, if there is a crisis, the first question to ask in politics is who is to blame, who is guilty, right? That's what the electorate wants to get an explanation for at the beginning. If you believe that everybody else is guilty and you are not guilty then you, it will be very difficult to find a solution. And in the case of the eurozone crisis, the simple answer to who is guilty is everybody is guilty. It was Germany and France who broke the rules of Maastricht first; it was the Brussels commission who let it join on false numbers. It was the Greek and Portuguese governments and Spanish government and others who played a part in mismanaging their economies. So everybody has committed a lot of mistakes.

If – and then the answer is, if everybody is guilty, then everybody will have to pay. Those who have access to cash will pay in cash; those who don't are paying in austerity. But everybody is paying in one form or the other for the past mistakes.

The second question to ask from the political economic point of view is can you realistically expect the citizens of Germany or Netherlands and Finland – so the north, the developed north – to sign another blank check without an expiry date for the troubles of the eurozone? They have many, many times in the past during the last 60 years. And the answer is clearly no. Politically it's impossible to ask them to sign a blank check again. They want to get assurances that this sort of crisis cannot happen again. And they are getting those. The new – the six-pack and two-pack and the whole new economic structure that is developing in Europe is developing quite fine, and many things have happened which can really be considered unimaginable. So the northern countries are now getting assurances that such a crisis cannot happen again in the future, but nobody has explained how we can survive the present crisis so that we don't have to face another one. So the answer is, yes, Europe needs more integration on economic policy. That will raise new questions later on – I'll come to that – but many things have been done recently.

The third political economic question is, can you realistically expect the citizens of Greece or Portugal or Spain or others to walk into a tunnel knowing there is no exit at the other end of the tunnel? Because this is what they are being asked at the moment. It is clear that Greece cannot repay 200 percent of the GDP. There was a report a year ago which calculated that if Greece leaves the eurozone they will take a hit on their economy of roughly 40 percent of GDP in one year. That's practically civil war. But there was also a calculation by UBS which said if Germany leaves the eurozone they will take a hit of 15 (percent) to 20 percent on their GDP because of the sudden increase in the value of the new deutschmark, which would again be a disaster. So one can say it was not ideal to create the eurozone 20 years ago and decide about that 20 years ago, but now we are in a situation and the way out of this situation is more integration.

And then my last point is, in the 60-year history of the European Union, this is the first time that the two most important factors of politics, markets and voters, have realized that if they want to find a solution to their problem, they don't need – they cannot go to the local capital; they have to go to Brussels because integration has reached this – half-finished but large-enough level. And therefore, Europe has started first to react to the request of markets and economists. But very quickly we are experiencing now the second reaction, which will be to the demand of voters. You cannot make centralized fiscal policy, which is the heart of any politics. It is about how much money you take from one group of taxpayers and give that money to other groups of taxpayers.

If you put this issue up to the Brussels level, you need to create the democratic mechanisms to control this process at the Brussels level, because without proper legitimation, as you see from the example of the U.S., no taxation without representation. That is true for Europe."

Then Bajnai continued: "I believe that the level of – and not just the level - the speed of austerity that was imposed on Greece are showing the limits of social affordability. Also, Greece's example is showing very quickly this linkage between decisions can only be made in Brussels, but democratic legitimacy still lies with the Greek government. And Greece has changed three prime ministers during less than one year, but the policies have not changed.

And that is showing the democracy deficit and the interdependence of the European economy, and then, as a consequence, European politics. That is why I believe that the next crisis of the European Union, after solving the financial crisis, will be the democratic legitimacy crisis.

Secondly, I was arguing for facing reality. Greece's economy is not able to repay not even close to the current debt level or even the previous debt level. The debt level there was reduced too from a previous level. It's still roughly double of the size that the economy of Greece's development could manage.

There's a great book by Kenneth Rogoff about "This Time Is Different." And there, there's a full chapter explaining that roughly half or more than half of government defaults between 1970 and 2001 happened at the debt-to-GDP rate of below 80 percent. So the conclusion is the quality of institutions in a country are defining the amount of debt that the country can manage.

For example, the tax collection problem in Greece, which is clearly an institutional problem, or the quality of governance previously, are showing that the country cannot afford that level of debt. So I don't – I'm not a great believer of the solution letting Greece out of the eurozone, because Greece at the moment doesn't have the industrial production base that could benefit from a reduced value currency, and consequent increased exports.

First, I think there is a strong development needed in Greece in terms of institutional capacity, structural reforms and industrial capacity. And that will be a longer-term process. There will be - a lot of development tools will be needed with European support.

So I believe that Greece's situation could be dealt with within the eurozone with its special measures, including partial debt relief. But the big question – and on that also we have to be understanding towards Germany and the northern part of Europe.

There is a huge moral hazard. If they just let the debt go from Greece, everybody else who is in debt will be asking for the same, from Ireland to Portugal to Spain. And that would collapse the European economy. So there has to be a proper balance, and we should be much faster in finding the balance between finding a solution to the debt problem and, on the other hand, not letting moral hazard collapse the European economy."

About the two speed Europe the former Hungarian PM said that: "On the two-speed or two-track Europe, this is very tempting and politically the easiest solution to the current problem. And there is a high likelihood that this solution will be chosen. My biggest concern is what will be the second speed. Is it not going to be a reverse gear for those countries who are in the second tier of countries? But also, one has to look at the type of country that may or may not be in the second group. I think the situation of the U.K. is very different from the situation of Hungary, Bulgaria or others.

And I do believe that there are at least four groups of countries in Europe. I think there is the northern group. There is the southern group, which is currently in trouble. France at the moment is facing the choice whether they belong to the north or the south. It's going to be a choice of a lifetime.

The third group is probably the U.K., pretty much alone. U.K. is facing the decision whether it's the most western country in the European Union or the closest western neighbor of Europe. And that's going to be, again, a very – another decision of a lifetime if it goes that far.

And then, interestingly enough, the newly joined, the newer members of the European Union mostly have followed a path which brings them closer to the northern side than to the southern side, because all of these countries has a very strong and developing industrial base. They have become a new manufacturing belt of the eurozone. And despite all the popular discontent, these countries are benefiting still greatly from the European Union.

And if there is one argument that should be more widely understood is that, in this globalizing world, in this post-hegemonic world, as Professor Brzezinski said in the morning, the only chance for all of the countries and each of the countries of the European Union to not only survive but to learn in this new world, is to keep this integration together. Because divided they fall, but united they could stand if they get through this process."


Last Updated on Friday, 30 August 2013 09:11

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