Criticising European politicians

Political leaders in the EU countries draw sharp criticism from Gernot Peter Doppelhofer, Professor of macroeconomics at NHH. He believes weak decision-makers and poor communication are fuelling the crisis in Southern Europe.

02.11.2012 - Text: Hanna Sommerstad Photo: Siv Dolmen

Doppelhofer made this criticism during his talk at NHH's Autumn Conference in Oslo 19 October.

'Europe is in a situation where one crisis follows another. What started as a shock in the American subprime housing market led to a banking crisis, which has now turned into a sovereign debt crisis,' Doppelhofer explained.

Lack of incentives

He believes that ambiguous communication, which leads to people losing confidence in their political leaders, is one of the key explanations for the crisis we are seeing in Europe today.

'Necessary economic and fiscal policy decisions are getting harder and harder to make because politicians don't want to become unpopular with their electorate. Instead, they choose to cloak the message and fail to tell the people how dismal the country's economy actually is,' says Doppelhofer.

He also pointed out that the eurozone collaboration has led to the worst affected countries being left with no incentives to remedy the situation.

'Countries like Greece, for example, have seen that the other European countries come to their rescue with financial bailout packages. Many sectors in Greece are still protected from competition with Europe, and a common market has yet to be implemented. Instead of opening its markets, Greece sees it can keep doing what it has always done because help is always at hand no matter what,' explained the professor at the NHH conference.

Have to reach agreement

The solution, according to Doppelhofer, is clearer communication and more action on the part of the politicians. This is necessary if they are to win back voters and thereby put an end to self-defeating expectations that the countries can't deal with their problems themselves.

'The way things are now, the different players in the EU countries are all talking at cross purposes. There is no clear idea about what direction to take. The politicians have to dare to tell people the truth about the severity of the crisis. Then, the involved parties have to agree on what is to be done, and act quickly,' says the professor of macroeconomics.

According to NHH professor Gernot P Doppelhofer, weak decision-makers and poor communication are fuelling the crisis in Southern Europe.

Look to Sweden and Ireland

He used Sweden as an example, and explained that the Swedish Minister for Finance has dared to take the necessary action to stop the poor economic trend. Combined with a credible framework for fiscal policy, that gave Sweden more flexibility when the crisis broke, Doppelhofer believes.

'Sweden was able to quickly sort out the problems in its banking sector, which in turn led to greater confidence in their financial markets. Sweden's Riksbank established its credibility at an early stage, and the country can now pursue an aggressive monetary policy that helps to stabilise the economy. In addition, Sweden gains from having a flexible exchange rate in relation to its trading partners, including countries in the eurozone,' explained Doppelhofer.

He also pointed out that Ireland was extremely hard hit by the financial crisis, but that it has also managed to turn the situation around.

'The whole Irish banking sector was in crisis. But Ireland made some difficult decisions to tackle the crisis early on. This is now starting to pay off, and the prospects for Ireland look better than, for example, Greece or Spain,' said Doppelhofer.

Wants to see a banking union

Doppelhofer also pointed out that even closer collaboration within the eurozone may also be an important part of the solution if the members want to continue to have a common currency. He believes that the introduction of a common deposit protection system indicates that the EU is moving towards a fiscal policy union, but this is controversial in many EU countries.

'As the situation is now, several member states are sceptical about closer collaboration because they want to be able to have full control of their own banks. That is not a good solution if they want to put an end to the crisis, however. If a banking union is established, for example, there will be a common body to supervise the banking sector, and it will also be possible to restructure the banks, if necessary,' Doppelhofer concluded.