Greek governor wants surplus countries to recognise ‘toxic’ effect of austerity

Bank of Greece governor Yannis Stournaras today (June 2) called on Europe's surplus countries to recognise the "toxic" effects of the austerity they are imposing on the eurozone periphery.

The eurozone "definitely needs reform", Stournaras said during a panel discussion on the interplay of politics and global economics, hosted by Chatham House.

The governor said those eurozone economies that enjoy a current account surplus ought to bear their fair portion of the burden of correcting Europe's imbalances. Otherwise the full weight of austerity falls on the periphery, and the result is the rise of "extreme populist" parties.

Stournaras cited John Maynard Keynes, who argued during the establishment of the Bretton Woods system that under fixed exchange rates deficit countries would be forced to tighten their belts, while surplus countries would be under no pressure to adjust.

Some economists have argued current account surpluses in the ‘core' eurozone countries – notably Germany – have contributed to depressed aggregate demand in the eurozone, and made the impact of austerity on the periphery all the harsher.

Stournaras also recommended a "deepening" of eurozone institutions and greater efforts to create institutions of a "federal form".

Rebalancing Greece

The central bank governor also recommended reform for the Greek economy, which he said had for too long relied on domestic consumption and should now move to a more "extrovert" growth model, focusing on exports.

"We need to concentrate on a new growth model for Greece," he said, adding the basis for such a shift is already in place, due to the "huge sacrifices" of the Greek people. As wages have plummeted, the country's exports have become more competitive.

As demand returns in the eurozone it offers Greece a chance of recovery. Stournaras argued politicians now need to capitalise on the sacrifices the people have already made. "I think the political system should respect this," he said – although it was unclear whether he was referring to Greek politicians or the country's creditors.

‘Very optimistic'

Greece is widely expected to default on debts to the IMF and European Central Bank this month if a deal cannot be struck with creditors. But talks appear to remain deadlocked.

However, Stournaras cast events in a positive light. "In my view, the compromise is not far away," he said, suggesting Greece has "a lot of space" to tighten areas such as social security, which could create room for agreement.

"Most of the distance to fiscal sustainability has been covered," he said. As Greek minister of finance from 2012–14, Stournaras oversaw many of the deepest cuts himself.

Furthermore, as much as 80% of the population want to keep the euro as their currency, Stournaras said, and people remain steadfast in their opinions even when asked about the prospect of further sacrifices. "I am very optimistic a Grexit will not occur," he said.