It’s five minutes to midnight for Europe. If Greece leaves the 19-nation eurozone, the after-shock will lead to the unravelling of the almost 60-year-old European project, according to former Italian Prime Minister Enrico Letta.
Speaking exclusively to The Australian Financial Review, Mr Letta foresees a cascading effect if Greeks vote against the latest bail-out terms for their stricken economy offered by the European Union in Sunday’s referendum.
He says the consequences of Grexit will include global financial markets speculating about euro-exits by other beleaguered European economies, and a run of electoral successes by anti EU populist political parties on the right and left in European states like France, Portugal and Spain.
“My feeling is that Grexit will be the beginning of the decline of the European idea. We are at the cross roads. We need to find an agreement, even if it is an agreement at the last minute,” said Mr Letta, 48, who was Italian Prime Minister for 10 months until February last year.
Formal Greek withdrawal from the Eurozone, which could occur later this month, would constitute a message to world opinion that Europe is in serious decline, he says. “The markets will start to think ‘who’s next?’. ”
“So we have to avoid Grexit in any way. I know it is difficult because (Greek Prime Alexis) Tsipras has made a lot of mistakes. The attitude of the (Greek) Government has been intolerable, really. Tsipras and Varoufakis (Greek Finance Minister Yannis Varoufakis, who once lectured in economics at Sydney University) have wasted all the goodwill they had at the beginning.
“If we avoid Grexit I am an optimist. If Grexit happens I am pessimistic. The answer will come in the next three or four days.
‘At the cross-roads of history’
“We are entering Terra Incognita. Nothing is written. I am fearful because it is an unknown situation. We are at the cross-roads of history and history is passing through from Athens to Brussels.”
The sense of history and crisis in Australia over the eurzone and Greece has been blurred by how much it has dragged on. But for Australia with two thirds of its trade in Asia, it could take on a more urgent tone beyond family ties with Europe if a post Grexit contagion spreads.
This threat was illustrated during our interview. Earlier that day Dr Letta had a three-hour briefing on the eurozone crisis at the Reserve Bank building in Martin Place, Sydney. As European finance ministers prepared to meet in emergency session, Dr Letta spoke to the Financial Review in a small office in a neo-Stalinist building on Broadway, on the southern tip of the Sydney CBD, which houses the University of Technology.
He is on a three-week visiting fellowship at UTS arranged by his “very good friend,” former Australian Foreign Minister Bob Carr, who chairs UTS’ Australia-China Relations Institute. “I’m really happy to be here. I have been invited to discuss the European situation. I think we have chosen the perfect timing,” he smiles.
Tall, slim, courtly and urbane, Dr Letta is a cultivated European passionately committed to European integration, with similar views to those of former Italian Prime Minister, and onetime President of the European Commission, Romano Prodi.
He sees the European integration process as necessary to stare down any future Greek-style situations, and so Europe can have a seat at the global table in 20 years’ time alongside the US, China and India.
Wunderkind of Italian politics
On the European integration issue he has form. Holding a doctorate in European Union Law from the School for Advanced Studies in his native Pisa, he was the wunderkind of Italian politics, becoming a minister at 32, and Prime Minister at 46. On the way, he held several portfolios, including European Affairs, and he has also been a member of the European Parliament.
A month ago he resigned from the Italian Chamber of Deputies as an MP from the centrist Democratic Party so he can take up his new post as Dean of the Paris School of International Affairs in September.
He is coy about his future. But his “one, two, or 10 years” of sabbatical from the hothouse, round-robin style of Italian politics, could end with a return to the Italian prime ministership, or even President of the European Council, a relatively new post that is a sort of aspirational Prime Minister of Europe.
Dr Letta’s future, and Europe’s, depend on the outcome of the fast moving eurozone crisis. Hours before we talked, a sense of doom was pervading the EU, as Greece missed a deadline to repay roughly €1.5 billion to the IMF. A couple of hours later, spirits lifted, and Euro-markets surged, after Greek Prime Minister Alexis Tsipras sent a two-page conciliatory letter to the EU, accepting its bail-out offer with some “minor” modifications. But EU finance ministers dismissed the “minor” modifications as major demands, and before long Tsipras was back on television urging voters to reject the proposed bail-out terms in Sunday’s referendum.
If the Greek referendum vote records a no to the bail-out terms, new elections could be held as Greece’s financial situation worsens. A financially desperate Greece could even test the willingness of Russia or China to help, opening up potentially strategic problems for Nato.
Later this month another possible Grexit date looms as it faces repayment of €3.5 billion to the European Central Bank. Another failure could lead the ECB to take Greek banks off emergency financial life support.
The sense of emergency has reached breaking point, but so, too, has tiredness among officials, and their impatience with the prevarications of successive Greek Governments.
Greece first became the focus of Europe’s debt crisis after Wall Street imploded in 2008. The following year Greece announced that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances. In 2010 it was hurtling towards bankruptcy.
Trying to avoid this looming financial train wreck, the IMF, ECB and the European Commission issued the first of two international bailouts for Greece, which would eventually total more than €240 billion. The lenders imposed harsh austerity terms, requiring deep budget cuts, steep tax increases, streamlining the bureaucracy, and ending endemic tax evasion.
IMF’s brand problem
Since then there have been endless crisis meetings, summits, telephone hook-ups, private brow-beatings, and much proverbial hair pulling, with claims and counter claims about who the real bogeymen – Greece, the EU, ECB, or the whole lot – are.
However, Dr Letta does not agree with the harsh criticism voiced against the IMF over the severity of the terms of the Fund’s bail-outs. “The big problem with the IMF was a sort of brand problem.” He says it is seen as “too rigid,” a body “without understanding the real needs of (various national) populations and so on and so forth”.
“This kind of bad branding was used in Greece by those who were against austerity (like the) populists. I don’t blame the IMF,” although he says in almost the same breath that “it would have been better to have avoided having the IMF” in the bail-out negotiations. An ECB-European Commission bail-out, sans the IMF, “would have been presented to the Greek public as a European deal without these people coming from Washington. ”
Warming to his European integration theme, Dr Letta sees the solution lying in what the original 1956 Treaty of Rome which established the European Common Market – later the European Union – envisaged; that is, an “ever closer union”..
“Greece is two per cent of the European GDP. If there is a piece of land in Australia that is two per cent of the Australian GDP and it is failing, Australia has the ability to solve the problem. Our big question mark is how is it possible to take seriously a (European) Union without the possibility to solve the problem of the two per cent.
“So the key problem is the European Union. We have the same virus the US had – the sub-prime crisis, the debt crisis and so on. The US (dealt with) the virus in six months. We didn’t. We are still there and it’s been seven or eight years.
‘Seven years deciding how to decide’
“Why? My answer is because of the lack of united institutions (in the EU). The US solved the problem with an immediate injection of liquidity, rescue of the banks and national decisions. Because our system is too based on egoistic national sovereignty, we were obliged to spend seven years in deciding how to decide. This is the key point.
“And in the last six months, we have had some light at the end of the tunnel. Why? Because the ECB started quantitative easing. For the first time from the end of January the ECB under Mario Draghi was able to (generate) a political consensus to implement this quantitative easing.”
Quantitative easing, or QE, was until the last five years an unconventional form of monetary policy where a central bank creates new money electronically to buy financial assets, like government bonds. This process aims to generate more private sector spending in the economy while keeping inflation within a targeted range.
Before the ECB started its QE campaign, Dr Letta says Europe “had come from a very hard period.” But after QE began, “for the first time we had three perfect macroeconomic conditions. The first two were because of the Quantitative Easing – low interest rates and a (lower) positive level of exchange rate (which was) useful for our exports. The third was the fall in oil prices. ”
“Grexit will waste all these opportunities,” he says. The economic and political turmoil following Grexit would lead to populist parties from the right and left winning elections “in all the southern European countries”. These include Italy, Spain, Portugal and even France.
Rule setters or rule takers
So while the ECB’s QE program has been a “success,” years of delay have proved costly. “We should have started five years ago but we didn’t because of the complicated European architecture.”
“The crisis has demonstrated that there is a different performance between northern countries in Europe and southern countries in Europe. But we have to manage to unite Europe because it’s the only way.
“In 20 years’ time around the table you will have China, India, and America. If Europe is united, Europe will also be at the table. If Europe is divided, it will not be at the table.
“We have two options – to be among the rule setters in the world, or among the rule takers. If we are united in 20 years’ time we will be among the rule setters. If are divided in 20 years’ time we will be among the rule takers.
“This is why I am so pro-European integration, and this is why I am suffering so much today.”
A man of culture, he reflects that a financially beleaguered Europe remains “the centre of the world in terms of culture. Yesterday the two main cultural events in Sydney were the (staging of the Italian Opera) Turandot at the Opera House, and (the musical) Les Miserables, a Franco-British event, at the theatre.”
But could Italy, which accounts for so much of European high culture, including Turandot and other operas composed by Giacomo Puccini, withstand the convulsions of post-Grexit finance markets?
Dr Letta acknowledges that in Italy “there are many problems with security and criminality – Mafia, N’Drangheta.” But fiscal discipline imposed by the EU after Italy entered the eurozone has paid off. “Italy today is a country with its public finances in order.”
He maintains Italy’s debt problems are under control, although the public debt to GDP ratio hovers around 132 per cent. Moreover, he says the current budget deficit of around 2.6 per cent is the second best of the major European economies behind Germany. However, this budget deficit would double in percentage terms if Greece defaults on its EU debts.
At the same time, patience is wearing thin. “The world is running. China is running, the ASEAN countries are running, Korea is running. I would say Australia is running – yes, because of China. Australia is the only western country not suffering from the crisis.”
Relaxing visibly, he rises from his desk with a broad smile, and announces he is taking in some Australian culture later in the week – the AFL game between the Sydney Swans and Port Adelaide at the SCG. “I love Australian football,” Dr Letta, the man of Italian letters and Euro politics, proclaims.