Nobel laureate: Europe would be better off with split currency, euro-South & euro-North

Terror, the refugee influx and the unstable economies of its members are plaguing the European Union. The crisis, brought by the war in the Middle East is straining already weakened infrastructure in many countries across Europe. The first stop on the immigration route is Greece, which is struggling to maintain itself even without millions of refugees coming through. However, other nations of Europe are still unable to produce a solution, or even decide about helping Athens. What will it take for this solution to come about? Should the Union be truly united on its decisions over refugees, or it would be better off with each member-state following its own course? We ask a Nobel Laureate in economic sciences - Sir Christopher Pissarides is on Sophie&Co today.

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Sophie Shevardnadze: Professor, Sir Christopher Pissarides, it's really great to have you with us today, welcome.

Christopher Pissarides: Good morning.

SS: So, the Euro-Turkish deal to manage the refugee crisis actually implies sending refugees back to Turkey. Now, EU prefers to pay money to an outsider to keep these refugees at bay, instead of trying to resettle them itself, within its borders. Is it money well-spent? I mean, it's kinda clear that the refugees who will end up in Turkey aren't going to be content with being in Turkey, and they eventually will make their way back into Europe...

CP: I think that's the key question in the agreements as I see them. There's no guarantee that it's a final solution in the sense that once they deal with the problem now, then the problem will not come back. That's a very big issue, I don't know - I mean, I'm not saying that I have all the answers, but it gives me an impression that the EU rushed to do this agreement a little bit too quickly, without thinking through all the implications.

SS: You are good with numbers, I assume, so, is settling refugees really that expensive? Especially taking into consideration, you know, some of the affluence of some of the European countries?

CP: The way I see it, it's not the financial cost of settling them into the economies, normally that wouldn't be much. Of course, Europe is struggling to recover and imposing another big cost on them, which is to resettle these refugees, would be... it would be difficult to bring it into the economy, but it's not something insurmountable. But the main thing is, we live in democracies, the voters are always expressing opposition to having more refugees coming in, more immigrants generally coming in to settle, and the politicians are responding accordingly. Then, we also have to bear in mind that a lot of the terrorism that is going on in Europe now, it's coming from immigrant communities of the past, second-generation immigrants who haven't settled into the European culture and economy, and they don't feel Europeans. I'm not saying this is their fault, it might be the fault of the Europeans for not doing it. But that's the fact, and there's also concern about that, I suspect, in the minds of voters, that Europe may be taking on too much...

SS: So it's more of a socio-cultural problem rather than money problem?

CP: I think it's socio-cultural as reflected in voting, intentions and preferences of the voters and what politicians can do. I don't think it's a money problem, it's not an economic problem.

SS: I'm thinking, yeah, EU has an overall population of 740 million and then, refugees that arrived to Europe last year is 1.5 million - I mean, it's really not that much?

CP: No, it's not, that could be incorporated. But remember, also, that refugees, they are not evenly spread and, you know, Greece, obviously cannot cope with that influx of refugees, Greece is a country of 10 million, it's going through very difficult times, the most difficult times it had since 1940s, and it cannot cope with that without a lot of help, in fact, it cannot even cope post-crisis with having so many people resettled into the country. Now, when its partners are putting fences and are saying: "We are not going to take anyone coming from you", then what does the EU do? You cannot force countries to take people...

SS: When you hear countries like Poland say: "We're not going to accept any refugees, because we just cannot afford it" - what do you think of that? I mean, should the individual will of individual members be respected? And should the refugees be settled only in those countries where they are welcome?

CP: Well, we do live in democracies and this should be up to the discretion of the government of each country. Obviously, we cannot tell Poland what to do, I'm talking more generally, about how the European Union operates... And the way that the EU should operate is to respect the wishes of the voters of individual countries, because we don't have democracy at the European level, we don't vote for European politicians, we vote for our own politicians in our own countries - now, don't get me wrong, I'm in favor of the EU, but if individual voters of a country like Poland don't want more refugees - we have to respect it.

SS: What about a consolidated EU policy? Isn't that what EU is all about? Can it come up with a common immediate, effective policy to deal with the refugee crisis?

CP: I wish they would. There should be common European policies on many things, starting with economics, starting with banking union, and suddenly the refugee crisis comes along, and there should be a common European policy: if we want to push Europe forward as one, you need union of nations. But, when you have individual countries saying that they cannot afford it, they've done their sums, their voters don't want it, what do you do? During the Greek crisis there were countries saying: "We'd love to help Greece, but our voters don't allow us". So, again, you always fall back into what your voters require, because that's your powerbase, those are the ones who put you into power. So as much as I'd like to see common European policies on many things, I do realize that before we have common European politicians elected and given more power than the EU parliament has now, we cannot push for those common policies against the wishes of individual countries.

SS: You say you live in Britain, right? So, according to British press, the migrant camp in Calais is a major frontline for the European migrant crisis. But, I mean, the migrant camp in Calais only accounts for 1% of all refugees who came to Europe last year. I mean, would it be really such a big deal if they went to Britain, would it be such a strain for British economy?

CP: No, British economy can obviously cope with that. The decision is political. It's the fact the British voters have made it very clear that they do not wish to see more refugees coming in, and, despite the fact that David Cameron is in favor of remaining in the EU, at the same time he's saying "We cannot take on more immigrants because we've taken enough, we've taken as many as we could". Now, another politician might say something else, but it's obviously what is reflecting the views of the people who put him into power, and you have to respect it.

SS: I spoke to Romano Prodi not long ago, he's a former head of the European Commission. He actually told me that Europe needs refugees, EU needs refugees, it needs migrants, to be more precise, because it has an aging and shrinking population. What do you think? Could these refugees that then turned into migrants actually benefit the economy of the EU?

CP: I wouldn't say that it "needs" refugees, because of the aging population. Europe can cope with the aging population if it follows correct policies. If there's an immigrant population that is younger and comes in, it will certainly help in the economics of dealing with demographics problems that we have. It's an aspect, I'm not against immigration by any means, I'm myself an immigrant, in some sense, moving around Europe. But, there are things that are good and things that are not good, because of other problems, and you have to balance them one against the other. On the demographic issue, it will certainly help to have more young workers. But, it's not that we cannot deal with demographic trends, with aging of the population. People call it a "crisis" - I don't think it's fair to say that it's a crisis, it's a problem like any other economic problems and we can deal with it. If we had more younger workers, then it would be even easier to deal with it, for sure.

SS: But you've also said that this migrant crisis, you don't see it as a Europe-wide crisis, but there could be problems and implications for smaller states, separate states, like Greece, for instance. Do you think wealthier states should provide others with additional funds in this case?

CP: Now when I say that it's not a European problem, I don't mean that it's not a problem for Europe to solve - it is a problem for Europe to solve. What I meant is that if you look at the numbers of the refugees and compare their numbers with the numbers of the whole EU, they are a very small number. The wealthy country like the EU... wealthy set of countries, I should say, like the EU, should be able to absorb that number without any problem. However, once you have several countries saying that they cannot accept any refugees or any immigrants of any kind because of the structure of their economy and society, then the countries at the frontier, like Greece, inevitably, take most of the burden, and then it becomes a very serious Greek problem, for example, but it should be left to Greece to solve the problem, because the reason these immigrants and asylum-seekers are crossing Turkish border and coming to Greece is not that they want to live in Greece, they want to go to Germany, and Scandinavia, and so on. Therefore, Europe should be dealing with this problem. Now, how do you deal with the problem? Obviously, in the very short term, Greece needs financial and logistical assistance, otherwise its economy will collapse - it came very close to the collapse a few months ago. Now it will be pushed over the precipice.

SS: So let's go step by step with what problems Greece is facing apart from austerity measures, with the new refugee crisis, because, like you've said, it's the first stop after Turkey for the refugees to make their way to Europe. Partly the problem is that the Greek officials can't process the huge number of arrivals as quickly as Europe expects them to do that, but that's just part of the problem, another part is that the Europe expects Greece to cut spending, lay off government workers, that's all part of the austerity program, but how is Greece supposed to manage all this flow of refugees if the public sector is being forcedly shrunk by the creditor's demands?

CP: It cannot do, it simply cannot deal with it. I mean, it is getting some help, but it needs more, because what's urgent now for Greece is for the economy to pick up again. You cannot have youth unemployment of 50% for so many years -  you know, half of young people leaving schools and universities because they're unemployed - because then they themselves will become immigrants into some other countries, so you end up with most unsatisfactory situation of all, where you get qualified Greeks who lived for generations in Greece, leaving the country, and then non-Greek, completely foreign to Greek culture and politics and everything, is moving into Greece to take any jobs that are available. It's not a sustainable situation. So, something needs to be done, and all this is happening because Greece is in the European Union, therefore it's up to the EU, it should help Greece, one of the smallest countries in the Union.

SS: If we talk concretely about the refugee crisis - on one hand, European demand is to cut spending and lay off government workers, and on the other hand the demand is to cope with this flow as quickly as possible - between those kind of contradictory demands, which of them should actually be a priority as of now? Cope with the refugees or cut spending, lay off government workers?

CP: In fact, cutting spending and laying off government workers, I think, was a wrong economic policy to begin with, even without refugees. With refugees now it's becoming totally wrong policy. You don't deal with recession by imposing cuts on spending and laying off people. It's a recession that was not caused by Greece or any other individual country in Europe. It started in the U.S., let's not forget, and then the U.S. exported it to Europe and other countries and we've been following a policy in Europe which pushed us deeper and deeper into recession, and now the refugee crisis comes along, and they are not giving up on that policy at all, because the more powerful, stronger countries in the North are insisting that policy should be continued. It's just not sustainable.

SS: So do you think creditors cut a slack right now, because, like you've said, refugee crisis, not coping with the arrivals, tourism industry is taking a hit in Greece as well - all that in the midst of the austerity program... Shouldn't European creditors actually soften their stance right now?

CP: I think they should, and, let me repeat, they shouldn't have taken this stance in the first place, but now there's another reason why they should soften and they should help more countries that are most affected by this crisis. You mentioned tourism - now we are entering into a tourist season, tourist bookings are usually the heaviest at this time. The Greek economy depends... I mean, it's a life-and-death situation of what happens to the islands, because it is the Greek Islands that will attract all the tourism that will bring their venue in the summer months, to help the country through the next year. Well, if now the pictures you see of the islands - children of refugee families drowning in the Aegean, where the tourists are supposed to be going to relax - they are not going to go there, are they? They are not going to go there and have a refugee camp behind them, and go and find dead bodies of small children on the beach, on isolated beaches as they go looking for a place to relax. So, that's a very-very serious problem for the country.

SS: So you've said that you can't actually impose austerity in time of recession - why keep doing it if it's not working?

CP: Well, it's working for some countries, I guess, in the north - for Germany in particular, and it, being the most influential country, chose this policy, but I do think it's a very wrong policy for the EU as a whole and for the Eurozone, in fact, it's a wrong policy. It's not doing much good to the Euro and it's only thanks to Mario Draghi and his team that the Euro is still there, and I should say, the European Central Bank has been doing an excellent job in these circumstances. But, fiscal policies are not helping and the European Central Bank needs more help from fiscal policy - every now and then the president of the Bank is hinting that they need more help, but they're not forthcoming.

SS: You know, when I am thinking about Greece, I'm thinking to myself that it just had the biggest debt restructuring in history - three bailouts. I still cannot understand why the Greek economy isn't back on track?

CP: The way the bailout was worked out increased the sovereign debt of Greece to an unsustainable levels, now, 170%. Admittedly, they were given very favorable terms of repayment, so it will not be a problem over the next 5 years, but it's coming, and the expectation is that problem that is coming needs a solution now. That's why you can blame the the partners in the EU for imposing that on Greece, but at the same time, you can blame Greece for not reforming its economy fast enough. So, there are two wrong policies complimenting each other, and reinforcing each other, and they’re pulled into a vicious circle that the former Finance Minister is emphasizing.

SS: Can I ask you something - would Greece leaving the EU be such a bad thing at the end of the day? Why not just let Greece deal with the consequences, settle in and see how its market recovers itself?

CP: I don't know if you meant "the EU" or "the Eurozone" when you said "leave"?

SS: Eurozone.

CP: The problem is that if you left the Eurozone then you'll have to adopt your own currency. No one will have any confidence in it at all, so the currency will just disappear in value. Greece has no reserves, whatsoever. In fact, it owes money to foreigners, it doesn't have foreign currency. So, how does it pay for its imports? The country depends on imports. It produces very little in terms of manufacturing goods. Its main export is tourism and shipping. By the time it waits for these services to bring in money to pay for imports, the country will starve, basically. That's the immediate problem. Then you have the longer-term problem, the economy needs to be reformed. There's no doubt that Greece will not be able to grow unless it reforms its economy, it modernizes the economy, it frees up the professions - it's completely dominated by the big monopolies in each sector of the economy. These monopolies needs to break up, the professions need to break up. Negotiations need to be done in more modern lines, not in old-fashioned heavy-industry type lines. And to do that, it needs to be within the EU to have a pressure to do it. If it came out of the Eurozone, it will say: "I can print our way out of recession by printing our own money, why worry, we are free of Germany and everyone else!" - and there will be no incentive to do anything.

SS: Okay, but if you look at the Europe as a whole, its economies within Europe, they are so diverse, that bonding them all together under one currency, eventually, and inevitably is and will be even more problematic, probably. So, former head of the Bank of England actually says that it's not the Greece that should leave the currency, it's an economy like Germany should be leaving the currency and that would be actually great help for the Europe. I mean, it is a very bold idea - do you think it's a sensible argument?

CP: It's not a crazy idea, actually. It's the words that you used - I don't know if you used exactly the same words that make it sound like that - because you're saying that Germany should leave the Euro. In fact, it's not quite like that.

SS: The Germany should have a stronger Euro, another country should have a weaker Euro, but basically the Euro will be different in Germany than in other countries.

CP: Well, in fact, even I suggested that at the World Economic Forum in Davos at a sort of an informal meeting, we had one of that where we were discussing that, and I thought it would be better for Europe if we had two types of Euro. In fact, that was partly tongue-in-cheek when I said it, but imagine a situation where the Euros that are in Southern Europe are stamped as Euro-South, and the others are Euro-North and they are allowed to fluctuate between them until they settle on some new value, some value between them, and then, if you want, in the future, you could tie them in again. They key problem is that the German economy in particular, but also the smaller economies around similar area - take Austria, Finland, even countries like Slovakia, are more closely connected to Germany than the southern economies are - Spain, Portugal, even Italy and Greece. There are two different types of economies and they will have benefited if they had their own currency. So, if it could be worked out in practice, what would make sense, as an economic solution would be to split the Euro into two, have two types of Euro: Euro-South, Euro-North because of where we are and let them fluctuate between them. I think everyone would be better off from such situation. But, given that we have one currency, it's not easy to split countries, and there's the big elephant in the room - it's France. Where does France go?

SS: South or North?

CP: Just a part of not knowing where France goes is enough not to make it practical to split the Eurozone into two.

SS: Professor Pissarides, thank you very much for this wonderful interview.