Grexit more worrying than Brexit

Economist Thomas Piketty says euro zone is wasting valuable time in the Greek crisis

France's best known economist is more worried about a Grexit than a Brexit. In a wide-ranging discussion with the Anglo-American Press Association in Paris, Thomas Piketty predicted that a Greek exit from the single currency "would probably be the beginning of the end of the eurozone".

Piketty, professor at the Paris School of Economics and the École des Hautes Études en Sciences Sociales, was more sanguine about the possibility that Britain could leave the EU. There are different levels of integration, and Britain would simply join a “different circle of European integration,” similar to Switzerland, he said.

Piketty became what the Financial Times called a "rock star economist" when his book Capital in the Twenty-First Century shot to the top of the New York Times best-seller list last year. Extreme income inequality threatens the survival of western capitalism, Piketty wrote. Among other solutions, he advocates a global wealth tax.

Piketty says David Cameron’s government has aggravated income inequality in Britain.


"The Labour Party in my view is in a better position to promote equitable growth and investment in education and public services, and also to keep Britain in the EU," he said. "Conservative Party policies with respect to the EU strike me as very populist and very dangerous."

Piketty nonetheless said he “can’t blame” Britain for refusing to join the euro zone “because it’s not working very well”.

He is a severe critic of EU economic policies, particularly in the euro zone.

"Initially, the financial crisis came from the US private financial sector, and we managed to transform it into a public debt crisis in Europe, because of our weak institutions and bad policies," he said.

Public debt

“If you go back to 2010,” Piketty continues, “the unemployment rate was the same in the US and the euro zone. Debt and deficit levels were comparable. Five years later, unemployment has declined in the US and increased in the euro zone. With high unemployment and low growth, we cannot reduce public debt. Euro zone countries tried to reduce public deficits too fast and, by doing so, they killed growth.”

The Greek crisis, Piketty says, has laid bare deep flaws in the governance of the euro zone. “The basic political architecture is just not working.

"Euro zone finance ministers have been meeting every other week for the past four months to discuss Greece, and nobody knows what they've done or what they are talking about. We are just losing time."

It would be “catastrophic” for the euro zone if Greece was pushed out, Piketty says, “the beginning of the end of the euro zone, or at least the beginning of a sequence of possible exits. Everyone would ask, ‘Who’s next?’. It would be a terrible historical mistake. Greece represents only 2 per cent of European GDP. It would really be pointless.”

The “real issues” have not been addressed, he argues. “Everyone knows that the 2012 agreement between the euro zone and Greece will have to be renegotiated. According to the official agreement, Greece was supposed to have a primary budget surplus of four per cent of GDP.”

In other words, the Greek people are supposed to pay four per cent more in tax than their government spends, for decades to come. “They should be required to have a small primary surplus that’s reasonable,” Piketty says. “But four per cent would be enormous.”

It's important to remember history, Piketty continues. "France and Germany both had over 200 per cent of GDP in public debt after the second World War – more than Greece today. And they never repaid it."

Historically, “high inflation is the way to get rid of large public debt,” Piketty notes. “Zero inflation in the euro zone is too low. Two per cent would be better, 3 or 4 per cent even better yet.”

There is now “incredible historical amnesia”, the economist says. “France and Germany are telling Greece, Portugal and Italy: ‘You are going to repay everything with zero inflation, until the last euro’.... Nobody has ever done that unless forced by military domination. This makes no sense. It will not happen.”

Single currency

Greek prime minister

Alexis Tsipras

and finance minister

Yanis Varoufakis

have been no more comprehensible than euro zone finance ministers, Piketty concedes.

“Varoufakis has not been effective in communicating what he wants. On the other hand, we cannot expect Tsipras or Varoufakis to redesign the euro zone for us.”

The main problem is institutional, he argues.

“In the long run, it’s just not possible to have a single currency with 18 different public debts, interest rates, and tax systems in competition with one another.

"If the US Federal Reserve had to juggle every morning with the public debts of California, Texas and New York, with different interest rates, it would be a big mess, and it is a big mess [that] we've created in the euro zone."

It’s not a question of left and right, Piketty says. “The reason the US did better in coming out of the crisis was not because the US is more left or right-wing, it’s because you have a common public debt in the US, a common currency, deficit level, and interest rate. Federal institutions in the US don’t always work well, but they are less dysfunctional than in Europe.”

France, Italy and Spain should propose a new treaty to Germany, Piketty says. He believes that, eventually, a euro zone parliamentary chamber will be created to take decisions regarding levels of inflation and deficits. Automatic rules have proven too rigid, he explains.

At the end of 2011, the centrist German council of economic experts, which advises the Berlin government, proposed a euro zone “redemption fund” for public debt. The German government rejected the idea. No one else supported it. Piketty thinks the notion should be resurrected.

The economist spoke on the third anniversary of François Hollande’s election. He said it “would be difficult” for him to endorse Hollande again, if the French leader stands for re-election.

Hollande and his predecessor Nicolas Sarkozy are "co-responsible" for France's economic difficulties, because both raised taxes too far, too fast, in the hope of reducing deficits, but instead killed growth.

Social contributions

“There has been a lot of improvisation,” Piketty commented on Hollande’s administration. “It’s as if the socialist party , for the 10 years it was in opposition, never thought about what they would do when they came to power. For the past three years, there’s been a lot of stop and go, and no clear line in general budgetary and fiscal policy.”

Employers’ social contributions are a case in point, Piketty says. Before he left office, Sarkozy reduced them.

“The first thing Hollande did was to suppress Sarkozy’s measure. Six months later, he came up with this great idea to reimburse companies part of their social contributions a year later. It was the same idea but much more complicated, just because Hollande wanted to look different from Sarkozy . . . The Hollande administration will have spent five years just to reimplement what they suppressed when they came to power.”

France’s complex pension system is also in desperate need of reform, Piketty says.

“The high public spending and high taxation that you have in France, Sweden and Denmark can be sustained in the long run only if you make it as simple and transparent as possible.”