Johan Van Overtveldt–The Problem with Papademos

Throughout November, Johan Van Overtveldt, author of The End of the Euro, is blogging here twice weekly about the Eurozone crisis:

Technocrat and economist Lucas Papademos is Greece’s new prime minister. He will lead the national government until the elections of February 2012. The Papademos government is supposed to push through the tough austerity program imposed as part of the latest European rescue deal for Greece.  Papademos enjoys an impeccable reputation that, upon closer inspection, looks overblown.

Papademos eaned a PhD in economics  from MIT in 1978, joined the Bank of Greece in 1985, and became the bank’s governor in 1994. Greece did not belong to the group of countries that first formed the European monetary union in 1999; Papademos was the key figure in Greece’s eventual approval for entry to the Eurozone in 2001. In recent months, Greek and European officials have confirmed that Greece’s admission to the Eurozone was approved on the basis of deliberately falsified data, especially with respect to the magnitude of Greece’s budget deficits. In 2002, Papademos left the Bank of Greece and joined the executive committee of the European Central Bank (ECB) as its vice president. He left this position in May of last year.

Given Papademos’s close and daily involvement in Greece’s EMU approval process, one of two things must be true. Either he didn’t know about the forged data–which implies problems with oversight of the entry effort– or he knew about and still approved the data–which implies problems with his “impeccable” credentials. I believe it unlikely that Papademos did not know about the forged data.

Considering this aspect of Papademos’s career leads one to consider Mario Draghi, the man who recently succeeded Jean-Claude Trichet as president of the ECB. Papademos and Draghi have known each other for a long time–Draghi too earned his PhD in economics at MIT, two years earlier than Papademos. Draghi was also vice chairman and managing director of Goldman Sachs International during the period 2002-2005. Goldman Sachs engineered the highly sophisticated financial strategies that many believe allowed Greece to obscure its falsified data for many years.

Draghi has always claimed that these strategies were set up and executed before his time at Goldman Sachs. I am not sure these claims are convincing. However, even if Draghi’s claim are true, then Goldman Sachs’s contribution to the Greek charade dates from before 2002–which means it occurred on Papademos’s watch as governor of the Bank of Greece.

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