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03/25/2010

SPIEGEL ONLINE: Mr. Mayer, Chancellor Angela Merkel stubbornly argues against EU grants for Greece and calls for help from the International Monetary Fund. Is Merkel a bad European?

Mayer: No, quite the contrary. The monetary union is neither a political nor a fiscal union. The stability pact calls for each country to cope with its own budget problems. Neglecting this principle would be dangerous for the acceptance of the European monetary union, especially in Germany.

SPIEGEL ONLINE: The opposition retains certain doubts. Greece lacks €20 billion to €30 billion ($27 billion to $40 billion) this year to refinance its loans. These costs appear manageable in the context of the financial crisis. The rescue of Hypo Real Estate alone cost about €100 billion.

Mayer: You're right. Let's assume that Germany would have to step in with five billion euros, or slightly more. Compared to the sums required during the financial crisis -- which are still being paid up -- the amount seems small. That's what the Greeks are arguing, along the lines of: "You can pay it out of petty cash." But that is not the point.

SPIEGEL ONLINE: What is the point?

Mayer: This would set a precedent. Governments in other countries would have the impression that they can knock on Berlin's door and get a few billion in case of emergency. The handling of the crisis in Greece is therefore a crucial test: It will determine what will happen with the euro.

SPIEGEL ONLINE: Do you worry about the currency?

Mayer: Of course. We should never steer towards a transfer union, whereby large countries give permanent financial support to less strong countries. The acceptance of the euro would rapidly dwindle among the general population. In the medium term, this could break down the monetary union. The German taxpayer is not prepared to permanently pay out for other countries living beyond their means.

SPIEGEL ONLINE: So it is right to send Greece to the IMF?

Mayer: It is at least the first step. Of the €30 billion euro shortfall expected in Athens this year, the IMF might contribute €10 billion.

SPIEGEL ONLINE: So, in the medium term, EU partners will not be able to avoid paying out?

Mayer: We'll have to wait and see what further assistance might look like. Credit guarantees could also be feasible. But that is not the critical point. The question is: How do we create mechanisms for similar situations in the future? And above all: What if the IMF fails? Suppose it gives Greece money, imposes conditions, and that still doesn't help? This is what is happened in Argentina at the beginning of last decade. Back then, when the IMF people in Buenos Aires packed their suitcases, the country went bankrupt. In the case of Greece, that would be a complete disaster.

SPIEGEL ONLINE: What would happen?

Mayer: A disordered bankruptcy would cause the price of government bonds to immediately nose dive. It could cost the German finance industry up to €40 billion -- that's how high Greece's debts to us are. Insolvency in Athens could also spread to other highly indebted nations like Spain or Portugal. It would be the Financial Crisis II. And it might even be worse than the original. The southern countries that are part of the euro zone have debts of more than €520 billion in Germany alone. We have to take measures against such scenarios. This is where the European Monetary Fund (EMF) could play a role …

SPIEGEL ONLINE: ... The EMF is an idea you proposed together with a fellow economist in February, which German Finance Minister Wolfgang Schäuble would also now like to set up. But what could a European Monetary Fund -- not yet created -- do better than the IMF?

Mayer: It is very simple. If all other measures failed, an EMF could lead an orderly bankruptcy process. It could, for example, temporarily assume debts and work to stop a sell-off in bonds. The IMF has no instruments for that.

SPIEGEL ONLINE: But first an agency has to be established, and expert staff would need to be hired. Couldn't that take years?

Mayer: I believe an EMF could be created within 12 months. It's not as if we have to break ground for a new building in Brussels. A virtual, legal entity would be sufficient. The elements already exist. And Greece is the dry run. Brussels statisticians and fiscal experts are already being sent to Athens to audit the numbers and monitor reforms.

SPIEGEL ONLINE: But the Lisbon Treaty would have to be unpacked before the EU would have the power to create a long-term EMF. It is extremely optimistic to believe that could happen within 12 months.

Mayer: The treaty would have to be altered only to give a country the option of withdrawing from the euro. Anything else is possible through the sort of strong cooperation that is already foreseen in the treaty. It's merely a question of political will.

SPIEGEL ONLINE: Many of your economist colleagues have said that instead of starting something so complex, why not simply improve existing institutions? Wouldn't it be enough to set new, automatic sanctions for infringements against the euro's stability pact?

Mayer: If you follow that logic, then in health care you could also limit things to preventative measures and simply do away with hospitals. What we need in the event of the threat of state bankruptcy is a true cure. If countries continue to fall drastically into debt despite these measures, then we need to have effective instruments available, and we need to deploy them.

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• Part 1: 'Greece Is a Crucial Test' for Euro
• Part 2: 'We Can't Really Apologize for the Ability of Our Industries To Compete Internationally'