Ex Greek FinMin Warns "Europe's North-South Divide Has Become A Time Bomb"

Tyler Durden's picture

Authored by Yannos Papantoniou (Greece's Economy & Finance Minister 1994 to 2001), originally posted at Project Syndicate,

As the eurozone debt crisis has steadily widened the divide between Europe’s stronger northern economies and the weaker, more debt-laden economies in the south (with France a kind of no man’s land economy in between), one question is on everyone’s mind: Can Europe’s monetary union – indeed, the European Union itself – survive?

While the eurozone’s northern members enjoy low borrowing costs and stable growth, its southern members face high borrowing costs, recession, and deep cuts in incomes and social spending. They have also suffered substantial output losses, and have far higher unemployment rates than their northern counterparts. Unemployment in the eurozone as a whole averages about 12%, compared to more than 25% in Spain and Greece (where youth unemployment now stands at 60%). Indeed, while aggregate per capita income in the eurozone remains at 2007 levels, Greece has been pushed back to 2000 levels, and Italy today finds itself somewhere in 1997.

Europe’s southern economies owe their deteriorating circumstances largely to excessive austerity and the absence of measures to compensate for demand losses. Currency devaluation – which would boost the competitiveness of domestic industry by lowering export prices – obviously is not an option in a monetary union.

But Europe’s stronger economies have resisted pressure to undertake more expansionary fiscal policies, which would lift demand for its weaker economies’ exports. The European Central Bank did not follow the lead of other advanced-country central banks, such as the US Federal Reserve, in pursuing a more aggressive monetary policy to cut borrowing costs. And no financing has been offered for public-investment projects in the southern countries.

Moreover, fiscal and financial measures aimed at strengthening eurozone governance have been inadequate to restore confidence in the euro. And Europe’s troubled economies have been slow to undertake structural reforms; improvements in competitiveness reflect wage and salary cuts, rather than productivity gains.

While these policies – or lack thereof – have impeded recovery in the southern countries, they have yielded reasonable growth and very low unemployment rates for the northern economies. In fact, by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors.

As Europe’s north-south divide widens, so will interest-rate differentials; as a result, conducting a single monetary policy will become increasingly difficult. In the recession-afflicted south, continued fiscal consolidation will demand new austerity measures – a prospect that citizens will reject. Such impasses will lead to social tension and political crisis, or to new requests for financial assistance, which the northern countries are certain to resist. Either way, financial and political instability could lead to the common currency’s collapse.

As long as the eurozone establishes a kind of wary equilibrium, with the weaker economies stabilizing at low growth rates, current policies are unlikely to change. Incremental intergovernmental solutions will continue to prevail, and Europe’s economy will soldier on, steadily losing ground to the US and emerging economies like China and India.

For now, Germany is satisfied with the status quo, enjoying stable growth and retaining control over domestic economic policy, while the ECB’s limited powers and strict mandate to maintain price stability ease fears of inflation.

But how will Germany react when the north-south divide becomes large enough to threaten the euro’s survival? The answer depends on how Germans perceive their long-term interests, and on the choices of Chancellor Angela Merkel. Her recent election to a third term offers room for bolder policy choices, while forcing her to focus more on her legacy – specifically, whether she wishes to be associated with the euro’s collapse or with its revival.

Two outcomes now seem possible. One scenario is that the economic and political crisis in the southern countries spreads, inciting fears in Germany that the country faces a long-term threat. This could drive Germany to withdraw from the eurozone and form a smaller currency union with other northern countries.

The second possibility is that the crisis remains relatively contained, leading Germany to pursue closer economic and fiscal union. This would entail the mutualization of some national debt and the transfer of economic-policy sovereignty to supranational European institutions.

Of course, such a move would carry considerable political costs in Germany, where many taxpayers recoil at the notion of assuming the debts of the fiscally profligate southern countries, without considering how much Germany would benefit from a stable and dynamic monetary union. But a new grand coalition between Merkel and the Social Democrats could be sufficient to make this shift possible.

Even so, there could be victims. Indeed, the continued failure of smaller countries like Greece and Cyprus to fulfill their commitments reinforces the impression that they will forever be dependent on financial assistance. The exit of one or two of these “undisciplined” countries could be a requirement for the German public to agree to such a policy shift.

Europe’s north-south divide has become a time bomb lying at the foundations of the currency union. Defusing it will require less austerity, more demand stimulus, greater investment support, deeper reforms, and meaningful progress toward economic and political union. One hopes that modest recovery in the south, aided by strong German leadership in the north, will steer Europe in the right direction.

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moneybots's picture

"In fact, by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors."


Everything is a balance sheet.

moneybots's picture

"Everything is a balance sheet."


What is the U.S. balance sheet with China?


WhyDoesItHurtWhen iPee's picture

Nature dictates that a parasite needs a host.  A (financial) bully needs a weaker victim to rip its lips off.

Stackers's picture

Recognizing all the right problems while pushing for all the same "solutions" that got you in the place you're in in the first place ... classic keynesisn politician nonsense. "If only we had done it MOAR it would work."

odatruf's picture

Talk about recognizing the problem:

"Europe’s southern economies owe their deteriorating circumstances largely to excessive austerity and the absence of measures to compensate for demand losses."

Really Mr. Papantonio? No blame should lay at the feet of the leaders of the sothern economies who took the easy cash from the EU upon entering without any thoughts of how it would ever be repaid? Or how about not having considered the union in the first place in light of your country's actual economic output and what being tied to a currency you can't control might mean?

Sorry asshole, this so called excessive austerity is NOT the problem - it's part of a failing solution.  And what would a measure to compensate for demand losses look like?  Think about those words and what they mean.  You want to be paid because no one wants the shit your contry makes?

Christ on toast, you deserve everything you have coming to you and then some.

Rafferty's picture

Exactly.  The southern countries lived high on the hog for years, anyone who wanted a public sector job with retiremnt at 50 got one.  Now that the chickens have come home to roost they want the productive northerners to pick up the tab.

JohnnyBriefcase's picture

People who live in temperate climates are dumb. They don't have to plan for the winter/future like people in the north do.

It's pretty basic.

A Nanny Moose's picture

Polution, Intellectual Property, Inflation and Personal Identity exports.

How can trade balance be accurately measured against subjective units of account, competing in a race to the bottom?

Greyhat's picture

"In fact, by maintaining large trade surpluses, Germany is exporting unemployment and recession to its weaker neighbors."

Great, we produce unemployment in giant factories, package it and export it... :)

Its a competitive World, they are simply outperformed. This is just economic freedom. Should we punish German companies for beeing successful?

TBT or not TBT's picture

We should punish everyone involved in suddenly, apparently just because the Euro went live, lending massively to historically dodgy southern European companies and governments at rates more appropriate to Germany and German companies. 

The history of the southern european countries is one of competitive currency devaluations and the high interest rates that such a pattern earned them.

Sudden Debt's picture

Well, it's actually because all of europe can't get it's finances in order.
And that's why Europe never really existed and will never exist for real.

All over europe... you have different tax systems, different laws, different everything!

You don't even have to leave a country to see the culural differnces. In Europe you can enter a different world just by driving to the next city.

That's also why Amercian companies almost always fail whent hey come to Europe. They think they can introduce the American way, they pump in millions to try and Europeans will tell the Americans they succeed untill it comes clear it never did.
And there's also a reason why it will never work.
Amercian companies have tried for decades to create "a european" company. And it never worked.
I now see this in teal life where all those Americans try to and we just lie to them about the reusults :)
We don't feel bad when something fails you know, we just start all over. And for Americans it's always a life or death situation :)

GVB's picture

Yes, let's take advice from a greek finance min...

Sudden Debt's picture


vote_libertarian_party's picture

uhhhhh....and by disaster you mean a sign of strength?


(all the TV dudes turn everything into a reason to buy buy buy)

0b1knob's picture

There was a North-South divide in the US at one time.  There were great differences in the culture, economy,  and law (ie slavery) between the two areas.  This was resolved by:

1.)  South seceded and and peacefully went its own way.

2.)  CIVIL WAR!!!!!!

Why do you think the Euros will be any different?


kito's picture

because the north and south of europe are controlled by the same entities. the southern proles have already been subjugated. the masses have done absolutely nothing. they have no spirit, no fight, no will. they do as they are told, because they are told the alternative is worse. and yet things continue to get worse for the greeks, the spainards, the italians, and yet they do nothing....because they are told without their masters, without the euro, without the eu, things will get worse.....so they lie down and accept their fate. they are weak. 

so ob1knob, there will be no european civil war, because the war has already been one by the ones controlling the masses. 

WhyDoesItHurtWhen iPee's picture

southern proles = low hanging fruit as it were.

It gets a little harder from here.  The lies get bigger.

CrashisOptimistic's picture

Not quite correct.

The absence of armed insurrection derives from the complexity.  The cannon fodder faces a situation so complex that they can't understand it well enough for it to generate anger. 

In such a situation there usually has to be someone to tell them in the right terms what is being done to them.  The revolutionary orator hasn't yet appeared.

kito's picture

no Crash. there is nothing complex about whats going on. the icelanders figured it out. the greeks fully understand, the spainards and the italians fully understand. they do nothing because they dont trust themselves to do better. so they take it on the chin fearing the alternative. no difference than an abusive marriage. the woman getting abused would rather subject herself to abuse than leave and face the unknown.

its not that hard Crash. 

Oracle 911's picture

Well I agree with the fact the southerns and lot of northern people figured it out what is going on, BUT they are not in life-or-death situation. When the first bank and/or state bankruptcies comes in accompanied with bail ins, bail outs and property taxes on savings THAT will lit fire not just in south but in north to (bank interconnections), because it will be saw as life-threatening situation.


Look lot of people are fed up with the bullshit from EU and from their own gov. like people from French, Romania, Bulgaria, PIGS etc, if something happens before the EU elections. Well something ugly will happen, and lot of the Eurocrats will be "discarded".

kito's picture

"won by the ones"

Element's picture

The French will save the day, just you watch, pretty soon they'll all be eating geometrically impossible pastries together again.

Calmyourself's picture

Duh,they have essentially no guns..  They will starve to death waiting for their .govs to save them. 

moneybots's picture

"Europe’s north-south divide has become a time bomb lying at the foundations of the currency union. Defusing it will require less austerity..."


Where is the austerity?  Hasn't Greek debt to 

GDP risen?  Austerity is living WITHIN your means.

CrashisOptimistic's picture

Behold what happens when there are 7 billion people walking around.

If you do cuts so that the majority are living within their means and facing some pain, the lower 25% outright die.

BanksterSlayer's picture

Wait, what year is it again, in Germany, right now? 1929?

Offthebeach's picture

Does one go full anarchist, or full Euro double down causing yet more of the full half of the creative destruction cycle, or create something, anything, by destructive anti status-quo anarchisim in hope of a new world order?

0n the plus side, new rules tomorrow. If bad, don't fret, they'll be gone the day after.

falak pema's picture

Mutti has said : this crisis is now not in the state debt but in banking debt. That is now the mantra, aka the Euro crisis is over state side but not banking side.

Hmmm....can those banks resist in the meantime ? Looks like 2014 tests and liquidity swap rates should tell us more. 

So, only one solution for all Euro banks : Bails -in to reduce banking debt. And then ask each state to clean up its own banking mess, Within the limits of ECB LTROs and banking unions down the road. More Hmmmm....

If the Eurozone real growth stays atone  it will make matters worse; but that is now clear whence the QE infinity to pretend that liquidity pump can solve BOTH structural solvency divide and generate real growth.

And for that : Enter Yellen and Krugman and hey presto 2014 is a giant year! 

Hopium is their only addiction. Until WS/ DAx Asset pumping reversal into bubble austerity cannot be denied. 

2017 calling...maybe coming earlier!

The Trilateral of JAP/US/EU/UK looks dicy, except on hopium of shale boom and NEW CAPE P/E to 30 rule !

And debts then become assets for ten more years.

The two triggers of this Trilateral game remain peak cheap money and peak cheap oil.

Hey-ho Silver away.  Mutti as Lone ranger and Obammy as Zorro, what a film that would make.

Lol, Imagine Yellen as Sergeant Garcia.

disabledvet's picture

Hehehe. Like your writing style. "Who knows what the future may bring." It won't be peaceful though that's fer sure. "Who will defend the world now that all it's problems are all about money?" And I would imagine so are the solutions. Many a Federal Program looks in a bad way right here...right now. Interesting form of Keynsianism. "The capitalist way Forward" it would appear.

rlouis's picture

As Hegel once intimated, 'keep your eye on zee big picture - remember zee plan.'

Wolferl's picture

Greeks are so pathetic. As a German i don´t wanna be in a union with such morons anymore. It´s disgusting. GET OUT OF MY UNION, MALAKAS.

Ourrulersknowbest's picture

I assume you ain't joking wolfer.
Humourless fuckers......
Who's gonna buy your shit when you've trampled on your neighbours.
And it ain't your union chum.
It came in to being partly to clean up your wonderful historical fuckups..
Fuck off you cheeky bastard.

DeliciousSteak's picture

The EU is a French attempt at dominating Germany and the continent. But, as it turns out, France hasn't dominated anything since lovely Napoleon, and instead Germany has been dominated by the Zionists ever since their Austrian Napoleon got trampled - by the same people who trampled the French Napoleon. Two centuries of bankster (s)laughter.

Arbysauce's picture

Lovely idea that EU was. Why don't you all march on Brussels and break up the pedo party. Sad if the eu-crats get you at each other's throats.

Z_End's picture

Looks like Sarkozy will live to see the Med Union he was planning. Just not quite what he imagined...

W74's picture

Solution: Don't borrow.

All soverign borrowing (All of it) weakens the country doing the borrowing and only strengthens the jew.  That's the nuts and bolts of it.  I think most posters here on ZH could go far more in depth for the specifics, but that's the crux of the situation. 

One could argue that borrowing for infrastructure improvements (roads, rails, ports, etc.) will actually create more wealth than not having them, and that argument would be correct, we the money from the taxpayer and the treasury not permanantly squandered and the debt actually paid off from time to time and not rolled over (roll over being no different in practice than a default).

And if you make the argument that you need to borrow to finance war, please, you can't argue that war is good for a country.  Diplomacy first please.  The people always lose in war while the bankers financing all sides make out like raccoons; all while supplying weapons and laughing that young gentile men are being wasted only to make them a profit $$$.  What a world 'eh?.

Doña K's picture

<<< Solution: Don't borrow. >>> 

Good advice, but the agitators!! Check the history of Costa Rica their state banks and no army to feed which gave them prosperity. But... CIA, IMF and others did interfere and set them back.

Arbysauce's picture

Wonder what kind of car this guy drives.

smacker's picture


Too bad that Yannos Papantoniou doesn't advocate the best option available for Greece/Spain/Portugal/Italy/Ireland: exit the Eurozone. Recovery begins the following day.

PontifexMaximus's picture

Already started, except in Italy, where it never will.

Joebloinvestor's picture



Yeah it is all the fault of the north Greece is so fucked up.


Greece can't even get property ownership right.


They have only had a few fucking hundred years or so to get that right, but the sun must have been out on those days.

Element's picture



" ... and Greece (where youth unemployment now stands at 60%)...."

Well, yes, there is that, but at least it's not even worse than the great depression ... oh ... wait ... never mind.

Arbysauce's picture

You failed your countrymen Mr. Papantoniou. Only Greece can prevent Greece from becoming a failed state. Leave the EU.

walküre's picture

France has 16% unemployment. Are they North or South or inbetween? Germany has low unemployment because alot of jobs are low pay, no benefits jobs and the domestic economy is already reflecting that. If it wasn't for massive exports to China, the lights would be out for many factories in Germany as well.

Spain pushing 25% unemployment!


odatruf's picture

Same as is wrong with the governments over here, assuming you are in the US.  We only have a resource cushion and reserve currency advantage to burn through before we get there.

virgilcaine's picture

The Papandreu's fled to Swiss with all the Greek $$...... chirping from the Eu.........

jubber's picture

FTSEMIB has lost 1500 points in the last month...politically looks as though it is about to fall apart, pretty mi=uch ignored by the commentators

Iam Yue2's picture

"A new study by Bloomberg found that Germany currently needs an interest rate of 5.1pc under the so-called Taylor Rule to avoid overheating as unemployment hovers at 20-year lows and the housing market booms in Berlin, Munich and other key cities. France needs a rate of 0.15pc, Italy -1.5pc, Ireland -3.95pc and Greece -20.25pc."