How the EU started & why Greece was already in debt

Jacques Delors was the president of the European Commission for 10 years, and he was the lead author of the Maastricht Treaty, defining the basic features of the euro.

The governments of Europe notably Germany, France, Spain etc dominated the one Europe policy without regard for the aftermath of small burdened countries like Ireland, Greece, Luxemburg & Portugal who were already over the limit. It was to be a USA EU not matter what by an old school of Europeans without even a Central Bank.

In October 1993, socialist Andreas Papandreou was reelected as prime minister & Papandreou's new administration quickly became convinced that Greece's accession to the monetary union was the only chance to solve the country's financial problems. Greece was already well over its head in debt at the time. The national debt was 114 % of the gross domestic product. with 14 % inflation and the economy was shrinking & Greece was already stuck in the mud. The Greek economy was not competitive, it was corrupt with too many civil servants on the payroll, & the EU was a chance to get easier credit. Gaining accession to the euro zone became Papantoniou's mission. The former Greek finance minister dismisses the charge that his country used falsified figures to cheat its way into the euro zone. "We didn't do anything differently from all the other countries," he says--but in fact he did.

Italy's government debt of 115 % of GDP was higher than the 60 % debt limit agreed to in the Maastricht Treaty. Belgium was also massively in violation of treaty provisions so Governments covered up their debts and their GDPs to get into the EU as a chance to receive better loans etc.

At the time, then-Bundesbank President Tietmeyer THESE TESTS of anticipation were forgotten. They were determined that the euro would be introduced on Jan. 1, 2002. Tietmeyer raised his objections against certain euro candidates -- to no avail. Then-German Chancellor Helmut Kohl, a committed European who belonged to the school of thought that there should never again be a war in Europe, wanted the historic decision.

Numbers and data were constantly being thrown around at the time, in the late 1990s. The gathering of data was left up to each EU country, and Europeans trusted one another. But there was one question that hadn't been clarified: When the figures came together in Luxembourg, what would happen if Eurostat, the organization tasked with assembling the data, discovered mistakes or violations of the rules? What authority or body would implement sanctions, and at what level?

Germany was still preoccupied with other issues. After 16 years under Kohl, a coalition of the center-left Social Democratic Party (SPD) and the Green Party won the German national election in 1998. For the new Chancellor Gerhard Schröder, the euro was no longer a question of war and peace. Schröder flippantly referred to the new currency as a "sickly premature baby." Spain, Portugal and Greece were all former military dictatorships that had only found their way back to democracy in the mid-1970s.

Greece's democracy received the validation it desired in 2000, when the European Commission and the European Central Bank concluded that the country had made great strides in the previous two years. The ECB warned against Greece's high debt levels, and yet the Commission recommended that Athens be admitted to the common currency. Greece became a member of the euro zone.

But that meant that the European treaties weren't worth the paper they were printed on. Greece's public debt wasn't at 60%of GDP, the required maximum, but at over 100 %. And even back then, there were already doubts about the numbers that Athens was officially reporting.

SO WHEN DID EUROPE WAKE UP

In 1992, 62 German professors issued a joint warning against introducing the euro. They feared that the monetary union, the way it was structured, would "expose Western Europe to strong economic fluctuations, which, in the foreseeable future, could lead to a political acid test."

But political will prevailed over the economic objections. In April 1998, the two houses of the German parliament, the Bundestag and the Bundesrat, cleared the way for the last step toward monetary union. After that, whenever a government official spoke out against the euro, it would set off an enormous commotion throughout Europe. Hans Reckers, the president of the central bank in the German state of Hesse, learned that when he dared to voice his concerns publicly.

Reckers was a member of the Bundesbank executive board at the time. In April 2000, he said: "In my view, Greece is by no means ready for the monetary union. Its accession must be postponed by at least a year."

It took about 20 minutes for the first news agency reports to be sent, and another five minutes for prices to begin plunging on the Athens stock exchange, prompting Greece's central bank to buy up drachma to prevent it from declining in value. Eichel, the finance minister, called then-Bundesbank President Ernst Welteke, and Welteke called Reckers, who was promptly muzzled. But today Reckers claims that all 15 of the bankers on the Bundesbank executive board felt that the Greece accession was a mistake.

A mistake, some said, that could be absorbed because Greece is such a small country.

A dramatic mistake, others said, warning against underestimating the power of the financial markets.

The true problems were not addressed in the wake of the Jan. 1, 2002 introduction of the euro. Despite all the declarations of intent in Maastricht, the 12 new euro countries drove up their debt by more than €600 billion in the five years of preparations for the introduction of the euro. By the end of 2002, they had a combined debt of €4.9 trillion, with Italy's debt alone amounting to €1.3 trillion.

The Skepticism of the Americans

Across the Atlantic, American economists were busy examining Europe's plans, which they felt were half-baked and "oversized," in the words of financial economist Kenneth Rogoff, a Harvard professor and adviser to US presidents and governments around the world. His office is in the Littauer Building on the edge of Harvard's manicured campus in Cambridge, Massachusetts.

When the euro became a real currency, Rogoff had just taken the position of chief economist at the International Monetary Fund (IMF), and he was teaching at Princeton when the euro began to take shape in the 1990s. He agreed with his fellow US economists' view that the euro was conceived "on too grand a scale."

Rogoff observed that a trans-Atlantic rift was developing between two groups of economists. The Americans and the Western Europeans, who usually more or less agreed on key macroeconomic issues, were suddenly arguing to the point of insult. The Europeans accused their overseas colleagues of failing to recognize the historic processes, the grand vision and Europe's great leap forward. The Americans, dry and pragmatic, accused their European counterparts of downplaying the risks. Once again, they felt that Old Europe was being overly romantic and blind to reality.

Rogoff did find some good ideas in the work of the EU and the architects of the euro. The Maastricht debt criterion, for example, remains a brilliant and valid idea to this day, says Rogoff. He is still convinced that setting an upper limit for the ratio of government debt to GDP at 60 percent proved to be a great success.

"It was something new at the time," says Rogoff. "It was a great insight."

The only problem, as soon became apparent, was that the Europeans had a tendency to betray their own ideals.

REPORTED BY FERRY BATZOGLOU, MANFRED ERTEL, ULLRICH FICHTNER, HAUKE GOOS, RALF HOPPE, THOMAS HÜETLIN, GUIDO MINGELS, CHRISTIAN REIERMANN, CORDT SCHNIBBEN, CHRISTOPH SCHULT, THOMAS SCHULZ AND ALEXANDER SMOLTCZYK