Will Greece's New PM Save the Eurozone?
Lucas Papademos, named today to be interim prime minister of Greece, steered the country into the euro region as central bank governor more than a decade ago. Now the former European Central Bank vice president will have to secure the country’s euro membership for a second time.
Papademos, who has never held elected office, helped foster economic growth rates that surpassed Germany’s and France’s in his eight years at Greece’s central bank before moving to the ECB in 2002. Most recently a visiting professor at Harvard University in Cambridge, Massachusetts, and an adviser to departing Prime Minister George Papandreou, Papademos takes over a country weeks from being unable to meet its debt obligations.
“He’s a leader who can temporarily see Greece through troubled times but keep in mind that he has no political base,” Spyros Economides, a senior lecturer at the London School of Economics, said in a phone interview. “A cross-party coalition will put up with him for a defined, temporary period only.”
Papademos, 64, will assume office after a week that saw Germany and France warn Greece they will cut all aid to the country until it signs up to a bailout plan agreed to in Brussels on Oct. 26. Failure to do so could call Greece’s membership of the euro into question after the two countries’ leaders ordered Papandreou to decide once and for all whether his nation can stay in the currency.
Papademos’s task will be to navigate parliament, the focus of a wave of street protests in recent months, through the legislation needed to secure the next rounds of emergency funding.
Even before his appointment was announced after three days of squabbling among parties, Papademos was the top choice to lead a national unity administration, a Kapa Research poll of 1,009 people for To Vima newspaper showed on Oct. 29.
Papademos earned a Bachelor of Science in physics, a Master of Science in electrical engineering and a doctorate in economics, all from the Massachusetts Institute of Technology in Cambridge, Massachusetts, according to a biography on Harvard’s Kennedy School website. He received his doctorate in 1977, one year after Mario Draghi, now president of the ECB, earned the same degree there.
Papademos’s appointment will take him away from the course he had planned to teach in the spring semester: “The Global Financial Crisis: Policy Responses and Challenges.”
He taught economics at Columbia University in New York from 1975 to 1984 and at the University of Athens from 1988 to 1993. He also worked as an economist at the U.S. Federal Reserve Bank of Boston.
“He’s a skilled and thoughtful banker,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “And he’s got sufficient distance from Greek politics to be seen as someone standing above Greek party political corruption.”
Papademos will now have to deal with an issue that he acknowledged a year ago. Last Nov. 10 he said that while fears Greece would restructure its debt were overestimated, they couldn’t entirely be ruled out. In May, he told the Wall Street Journal that “haircuts” for holders of Greek debt should not be part of a rescue package. The accord agreed to on Oct. 26 by European leaders includes a 50 percent writedown of Greek debt.
Papademos will seek guarantees that Greece’s political parties won’t interfere in his work, said George Prokopakis, an Athens-based management consultant, former adviser to the stock exchange and a former faculty member at Columbia, where he overlapped with Papademos in 1982.
“He has more chances than others to succeed,” Prokopakis said in an e-mail. “He won’t water his wine just for the chair or the throne.”
Appointed Greek central bank chief in 1994, Papademos presided over an economy lagging behind its European counterparts. Growth had averaged 1.3 percent in the previous decade, almost half the average of the other 11 countries preparing to join the euro.
Papademos, who described his monetary strategy as “eclectic” in a 2001 interview with Institutional Investor magazine, stabilized the drachma and inflation in his early years at the Greek central bank.
In March 1998, Greece devalued the drachma by 14 percent against a basket of European currencies to join the EU’s exchange-rate mechanism. Papademos then kept the bank’s main rate above 10 percent for the next two years to curb consumer prices following the devaluation. By 2000, inflation, which had been 14.2 percent in 1993, slowed to 3.2 percent.
Papademos’s legacy as central bank governor was blown apart by the debt crisis that’s ricocheting through world markets. As Papandreou’s government, elected two years ago, revealed that the country’s budget deficit was more than double the previous administration’s effort, investors dumped the country’s bonds, forcing the country to seek a European Union-led bailout.
The previous Greek government also had tried to hide the extent of its debt burden by using off-market swaps arranged by Goldman Sachs Group Inc. They were signed in 2000 and 2001.
It was a “mistake” for Greece to enter the euro region, French President Nicolas Sarkozy said in a televised interview on TF1 and France 2 on Oct.27. “Greece entered with fake figures.”
Greek 10-year bond yields, which averaged about 6.2 percent in the second half of Papademos’s term as central bank governor, today reached a euro-area record of 28.4 percent.
During his time as ECB vice president, Papademos reined in his support for the publication of ECB Governing Council voting records and minutes. In April 2002 he had told the European Parliament at his confirmation hearings that publishing votes could be helpful in communicating policy and wouldn’t impinge the bank’s independence. A year later, he said that releasing minutes and voting records “would likely not be helpful at present.”
Papademos’s professional activities extended beyond central banking. Between 1996 and 1997 he sat on the committee that successfully bid for the 2004 Athens Olympics and he headed the jury that chose the winning design for the ECB’s new Frankfurt headquarters in January 2005.
“He’s inexperienced on the political side,” said Tobias Blattner, European economist at Daiwa Capital Markets in London, who knows Papademos from his time at the ECB. “He’s really just a nice guy. In this situation where you need to push through draconian reforms, it requires a tough guy with political weight and skills.”
Those 2004 Athens Olympics were beautiful but they ended up being the kiss of death for Greece. What do I think of Papademos? He's smart as hell, has international and domestic credibility, knows exactly what's at stake, will implement the October 26th deal, but he's a technocrat who will have to navigate the Greek political jungle where knives are constantly being sharpened to stab any leader in the back.
But Papademos knows this. He will trust very few and will put the country's interests ahead of anything else:
“He is a wise person. It is important that he has dealt with substantial issues in the past,” political analyst Antonis Karakousis said of Papademos in an interview with Skai radio on Thursday.
Foreign observers also appeared to welcome the deal.
The Athens stock market general index index was up 3.17 percent on Thursday on the prospect of a deal, with Greece's troubled banks gaining 10.2 percent.
But in a sign of the daunting tasks ahead, the national statistics agency ELSTAT on Thursday reported that the unemployment rate increased to 18.4 percent in August from 16.5 percent in July and 12.2 percent a year earlier.
Daunting task doesn't begin to describe the challenges Papademos faces. The reality is that he doesn't have much time and will have to work fast to move ahead implementing the structural reforms that Greece so desperately needs.
But will Papademos' nomination be enough to save the world from a market meltdown? With Italy facing its crisis, stoking fears of a eurozone breakup, that remains to be seen.:
As the crisis accelerated, European Commission President Jose Manuel Barroso issued a stark warning of the dangers of a split in the European Union.
"There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East," Barroso said in a speech in Berlin.
The European Central Bank's hardline chief economist told governments not to expect the bank to rescue them with unlimited funds, despite its efforts to stabilize runaway bond markets.
"We are not the lender of last resort and I do not advise European governments to ask the ECB to become lender of last resort," Juergen Stark, who will quit his post in protest at continued bond-buying told a conference in Frankfurt.
"This will mean that the ECB immediately will lose its independence."
It was not clear to what extent he spoke for new ECB President Mario Draghi, but the central bank has so far opposed any role in helping to leverage the euro zone's rescue fund.
The ECB, the only effective bulwark against market attacks, intervened to buy Italian bonds in large amounts on Wednesday and was back in on Thursday but Italy's 10-year bond yields have shot above 7 percent, a level widely deemed unsustainable.
One euro zone official said the bloc was not making any plans to bail out Italy, which is deemed too big to save with the 440-billion-euro European Financial Stability Facility.
"Financial assistance is not in the cards," the official said, adding that the bloc was not even considering extending a precautionary credit line to Rome.
A second official said: "The ECB will be drawn like every one else by the weight of gravity (to act)."
German Chancellor Angela Merkel said on Wednesday that Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly, warning the rest of the world would not wait. "That will mean more Europe, not less Europe," she told a conference in Berlin.
She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stays more loosely connected -- a signal that some members may have to quit the euro.
With Italy replacing Greece at the center of the crisis, politicians in outgoing Prime Minister Silvio Berlusconi's party appeared to be having second thoughts about his insistence on elections instead of an interim government.
Having lost his majority in a parliamentary vote, Berlusconi confirmed he would resign after implementing economic reforms demanded by the EU, and said Italy must then hold an election in which he would not stand.
But Fabrizio Cicchitto, parliamentary floor leader of Berlusconi's PDL party, said the group was now considering supporting a unity government led by former European Commissioner Mario Monti as well as the option of early elections.
The head of the International Monetary Fund called for political clarity in efforts to tackle Italy's debt crisis, warning that the world could face a "lost decade" if Europe's problems were not tackled boldly.
Uncertainty around who would succeed Berlusconi was fuelling market volatility, Christine Lagarde said on a visit to China.
"No one exactly understands who is going to come out as the leader. That confusion is particularly conducive to volatility," she told a news conference in Beijing.
"Political clarity is conducive to more stability and my objective from the Fund's point of view is better and more stability."
An early election would probably not happen until February, leaving a three-month policy vacuum in which markets could create havoc.
Even with the exit of a man who came to symbolize scandal and empty promises, it will not be easy for Italy to convince markets it can cut its huge debt, liberalize the labor market, attack tax evasion and boost productivity.
Euro zone finance ministers agreed on Monday on a road map for leveraging the 17-nation currency bloc's rescue fund to shield larger economies like Italy and Spain from a possible Greek default.
But markets are running faster than policy and there are serious doubts about the efficacy of those complex plans, and with Italy's debt totaling around 1.9 trillion euros even a larger bailout fund could struggle to cope.
There are big stakes involved but one thing is for sure, Greece, Italy, Spain and even France need more debt relief and the ECB is not going to be able to stop the onslaught of speculative attacks. Only a more comprehensive solution to this debt crisis can do that. Below, listen carefully to Bloomberg interviews with Philip Angelides, chairman of the Financial Crisis Inquiry Commission, and Nicholas Economides, a professor at New York University, discussing the outlook for Greece's political leadership and the European sovereign debt crisis.