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‘Sexy’ Europe Growth Compact Inevitable; Greece to Stay: Pro

A growth compact to sit alongside the existing fiscal treaty is a certainty for the euro zone as it battles the flames of discontent fanned by the harsh austerity measures implemented in struggling economies, one expert told CNBC Thursday.

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“It seems inevitable that we’ll get some sort of growth compact, the question is what that will entail but everybody means different things by it. It’s hugely important to be promoting investment and very important to crack down on tax avoidance and tax evasion collectively,” Sony Kapoor, managing director at international think tank Re-Define told CNBC’s "Squawk Box Europe."

"Slowly it has become sexy to talk about a growth compact and now it seems inevitable we are going to get some sort of a growth compact," he added.

Greece has long been criticized for being its own worst enemy in terms of endorsing a culture of relatively early retirement, a bloated public sector and, crucially, a more relaxed approach to tax collection.

Kappor told CNBC this was a pivotal issue the periphery needed to address.

“Anybody that you talk to will tell you that in Greece and Italy some of the biggest problems are the massive amounts of tax avoidance and evasion,” he added.

Encouraging growth versus austerity has taken center stage in European politics in recent weeks. It was the key pledge which saw Francois Hollande take France’s presidency earlier this month and what has led to the political impasse now playing out in Greece.

Kapoor warned that the dichotomy which now existed between what individuals would be looking to do and what the "greater good" might be was exacerbating the situation.

“The right thing to do individually is to hold close to [your] cash, to sit on it and not invest and not spend; individually that’s right, but collectively disastrous as we are seeing,” Kapoor added.

The European Central Bank (ECB) halted liquidity operations with four Greek banks Wednesday with some Greek banks now receiving emergency liquidity from the central bank of Greece.

Kapoor said it was a “technical decision with unfortunate timing”.

The question of a "Grexit" is now being considered seriously as a likely scenario if the Greek election to be held on June 17th does not have a clear pro-bailout party as the winner. The leftist parties have vociferously denounced the international bailout and the conditions attached to the agreement.

Size Matters

Kapoor was pessimistic about the future of the euro zone peripheral countries currently undergoing structural reform amid austerity measures.

“Latvia is used as an example of an economy that made it through but that was different, it was a tiny economy and the social fabric did not break down.

But once macro economically significant economies such as Spain or Italy – these economies are big - start to go downhill we cannot pull ourselves out by our bootstraps, that’s the problem,” Kapoor said.

He said the high stakes game of chicken now being played by European politicians and Greece needed careful political statements by both sides and the only body equipped to deal with the crisis now was the International Monetary Fund (IMF).

“I don’t think there is any ECB policymaker who is prepared for a Greek exit or actively wants Greece to exit. The rhetoric has been targeted at the Greek public and politicians," Kapoor said.

"This idea that there is a contingency plan and people being prepared for a Greek exit is disingenuous. You cannot be prepared for something of this magnitude, the contagion impact is massive and the political consequences are huge.”

He added the social, economic and contagion costs were “incalculable.”

However, some now view the dire political situation in Europe as the worst it has ever been.

"The political situation is out of control it cannot get any worse. We’re now two thirds through this crisis but the third part is for more volatility and distress in order to move towards a mandate for change,” Steen Jakobsen, chief economist at Saxobank told CNBC.

Kapoor said fatigue and a lack of political wherewithal to deal with the debt crisis among European politicians meant the IMF was the most likely candidate to deal with the crisis.

“Maybe it’s time for the IMF, a neutral arbiter who is going to tell us what needs to be done and it can also tell us how to have more balanced adjustment. It could mean that the ECB is at the receiving end of conditionality and get the Europeans to get their act together and have a pan-European funding guarantee scheme for banks,” he said.

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