Read the commentary of Professor Loukas Tsoukalis to the article of Mr. Wolfgang Schäuble, Federal Minister of Finance in Germany, published in the Autumn 2010 issue of Europe’s World and entitled SchaüblesHamlet scenariorisks heavy casualties amongst the actors.

«It’s been a difficult year for Europe, for the euro and the more so for my own country, Greece. The Greek debt crisis sparked-off a crisis of confidence in Europe’s single currency. Of course, most of the blame lay with the Greeks themselves: a large budget deficit, added to an already huge public debt, an unsustainable current account deficit coupled with a credibility deficit when previous governments were found to have been economical with the truth. Markets typically over-reacted, seeing Greece as a precursor of things to come in other vulnerable eurozone countries. And the system of euro governance was found wanting. It took us all rather long to respond, and the delay cost us dearly. As so often, Europeans reacted just a few steps short of the brink, but we are still nowhere near the end of a painful adjustment to the post-bubble world.

Greece is now going through a tough process of budgetary consolidation that aims to reduce budget deficit by almost six percentage points of GDP in 2010, accompanied by ambitious structural reforms. The rescue programme, with strong conditionality, stretches ahead to 2013. The political will is there, and the record so far is encouraging, winning praise from EU institutions and the IMF who are monitoring the programme. Measures that were simply unthinkable only a short time ago are now being implemented. But as there is more to come, it will be a difficult test of Greece’s political, economic and social endurance.

The eurozone crisis is acting as a catalyst for deeper integration, so we are likely to end up with stronger and more effective governance structures for the euro. These will include closer co-ordination of national fiscal policies and broader economic ones too, backed up by the threat of sanctions and by more effective surveillance procedures, greater emphasis on structural reform and, hopefully, with a more permanent mechanism for crisis management. The general direction is good, although divergences persist among member states.

The devil surely lies in the detail of implementation. Provisions for closer co-ordination of national economic policies do not automatically resolve the problem of who actually sets the priorities, both for the eurozone and the EU as a whole. Closely related to it is the old problem of distributing the burden of adjustment between surplus and deficit countries.

What then, in today’s context, would be the correct timing for so-called exit strategies, and what is the appropriate pace of fiscal consolidation for European economies still taking their first, hesitant steps towards recovery? Governments are increasingly constrained because of rising debt, while financial markets are as imperfect and short-sighted as ever. To borrow from an old Greek myth, navigating between Scylla and Charybdis requires skill and determination, but it’s where we find ourselves today. We should also remember that intergovernmental co-ordination has its limits. The role of the EU institutions and their instruments has to be revisited, and the time has also come to think out of the box about the EU budget.

Germany is, of course, absolutely crucial as Europe’s largest economy and with a big current account surplus with the rest. ‘Expansionary fiscal consolidation’, as Wolfgang Schaüble puts it, coupled with the inherent dynamism of the German economy, may indeed help to pull Europe out of the biggest recession we have experienced for decades. But Germany’s senior politician quotes from Hamlet, and we should remember that Hamlet’s story ends up with far too many deaths. We wouldn’t want to repeat the experience, nor wait for a post-mortem to find out whether his prescription is right.»