* Book on euro zone crisis criticises policymaker actions
* Former adviser to Barroso says wrong choices made
* Says long-term future of EU bleak without major changes
By Luke Baker
BRUSSELS, April 17 At the height of the euro
zone debt crisis, with Portugal's economy nearing collapse, the
European Commission told the government in Lisbon that it had to
slash wages if it was ever going to boost competitiveness and
Portuguese shoemakers - one of the economy's main export
sectors - steadfastly ignored the advice and found a way to
bounce back while actually increasing workers' pay.
It is just one of many examples Philippe Legrain, a former
adviser to Commission President Jose Manuel Barroso, cites in a
new book that argues policymakers misdiagnosed the crisis and
ended up prescribing the wrong medicine to resolve it.
He was an adviser from 2011 until resigning in March of this
year, so was involved at some of the most critical moments.
"The Portuguese basically said, 'We're not going to do
that', and they went upmarket instead," said Legrain, the author
of "European Spring: Why our Economies and Politics are in a
Mess", which is published on April 24.
"They are now selling more expensive designer shoes and
their exports are soaring - wages and employment have risen," he
said. "That shows in a nutshell how policy was misguided."
The worst of Europe's debt crisis may have passed after four
years of turmoil. But Legrain's book makes for withering
reading, suggesting that by misunderstanding the problem, EU
leaders and policymakers are responsible for the record-high
unemployment and rock-bottom growth afflicting the union.
Instead of recognising that the crisis was principally the
fault of a banking sector run amok, leaders focused on the
excessive debts of Greece, Ireland and Portugal - effectively
seeing the problem as fiscal rather than financial.
That led policymakers to enforce a strict regimen of budget
cuts, tax increases and lower wages in an effort to improve
competitiveness and make exports comparatively cheaper.
"A crisis that could have been a unifying force - Europe
acting together to tackle overmighty, dysfunctional cross-border
banks - has instead become a divisive one, pitting creditors
against debtors," Legrain writes.
"Across Europe, fifteen million people below the age of
thirty are neither in employment nor education. A lost
Generation is in the making."
OUTLOOK REMAINS DIM
While Legrain acknowledges that Greece, with debts greater
than its GDP and a budget deficit of 6.5 percent of output in
2008, was facing mainly a debt crisis rather than a banking one,
he says the solution chosen by Europe was wrong.
Rather than renegotiating or writing down much of that debt,
the Commission, the International Monetary Fund and the European
Central Bank pushed through two hard-to-swallow bailout
programmes totalling more than 200 billion euros ($277 billion)
that left Greece's economy shattered and just as indebted.
Unemployment now stands at 26 percent and debt is expected
to peak at 170 percent of GDP. Social unrest is bubbling.
"Greece's debts should have been restructured in May 2010,"
said Legrain. "Instead, we have had a lurch towards
self-defeating austerity and now have much more centralised
fiscal controls, which are inflexible and undermine democracy."
EU officials point out that while the rescue programmes
applied to Greece, Portugal, Ireland and Cyprus were strict and
tightly administered, they have succeeded in stabilising the
crisis and all four countries are starting to recover.
Ireland has successfully exited its programme and Portugal
is scheduled to do so in the coming months. Cyprus is on track
with its targets and Greece is running a much healthier than
expected primary budget surplus.
Legrain, who has previously written books about the benefits
of globalisation and the need for more open immigration,
counters that Europe would have bounced back more quickly if the
right diagnosis had been made in the first place.
It would also be further along in resolving deep-seated
problems in its banking sector, while not having tied itself
down with unbending fiscal rules and a single currency many now
perceive as a "sadomasochistic straitjacket".
A pro-European and former chief economist of Britain in
Europe, Legrain is nonetheless downbeat about the prospects for
the EU unless it takes radical steps to raise productivity and
make itself more democratically accountable. He is particularly
concerned about the survival of the single currency.
"The EU will survive, but I think the euro zone might
ultimately break up," he said. "My base line scenario is that
the euro zone is headed for a Japanese-style period of
stagnation and deflation."
($1 = 0.7228 Euros)
(Editing by Michael Roddy and Mark Heinrich)