SPIEGEL Interview with Ex-ECB Chief Economist Issing: 'The Euro Will Exist for a Long Time to Come'
The European Union is hoping to agree on a lasting solution to the euro crisis this week. SPIEGEL spoke with former European Central Bank chief economist Otmar Issing about what to do about heavily indebted countries like Ireland and Greece and whether leaving the euro zone makes sense for Germany.
The European Union has taken steps toward saving the common currency. But will they be enough?
SPIEGEL: Mr. Issing, at the most recent summit, European Union member states agreed on a package to rescue the euro that includes, among other things, augmenting the crisis fund. Will this safeguard the common currency?
Issing: The euro is now on stronger footing. In that sense, things could have been worse. But the resolutions are still a far cry from what the monetary union needs. The fundamental problem hasn't been solved.
SPIEGEL: What's the obstacle?
Issing: Before the euro was introduced, former Chancellor Helmut Kohl said: The monetary union will not function without a political union. But a political union of Europe doesn't exist, and it won't happen in the foreseeable future. That's why we need mechanisms that force the member states to pursue solid financial policies. These mechanisms are missing, and even the most recent decisions reached in Brussels can do little to change this.
SPIEGEL: The EU heads of state want to significantly tighten the Stability Pact so that debt crises can be prevented before they begin. Why isn't this enough?
Issing: My confidence in the sustainability of such resolutions has always been limited. But it was completely shaken when Germany and France mutually killed the pact in 2003. At the time, several European finance ministers said to me: How are we to convince our citizens to support a stability pact if not even Germany wants to abide by it?
SPIEGEL: But now the European Commission in Brussels is receiving additional tools to monitor national budget policy. Isn't that a big improvement?
Issing: Ultimately, the European Commission cannot impose any effective sanctions, because the national governments make all key decisions, so we have potential violators passing judgment on current violators. The jury is biased. In addition to political control, another, incorruptible authority is needed.
SPIEGEL: And who exactly should that be?
Issing: The market. The decisions of investors in the financial markets constitute an additional control mechanism. A country that behaves correctly pays low interest rates, while one that lives beyond its means pays higher interest.
SPIEGEL: With all due respect to your confidence in the markets, isn't it rather naïve, given the fact that investors have also lent money to ailing governments in the past without hesitation?
Issing: I have never been one of those people who trusted the market completely. The most important thing is how the government sets the underlying conditions. And this is where the euro has its greatest shortcomings. Under the Maastricht Treaty, EU members agreed that they would not be liable for each other's sovereign debt. But the markets never trusted this pledge and, as it turned out, they were right. This is the key starting point for a reform. It has to be clear to investors that they are partly liable when a country can no longer service its debt.
SPIEGEL: But this is precisely what is happening at the moment. The German government has made sure that private creditors will be involved on a case-by-case basis when a country can no longer service its debt. That's progress, isn't it?
Issing: Case-by-case means that the issue is ultimately resolved politically. However, I doubt that politicians will administer such bitter medicine when push comes to shove. That's why the involvement of private creditors must occur automatically and in accordance with set rules. This is what I envision: As soon as public money is spent, private investors must also be involved and relinquish portions of their claims or agree to extending maturity dates. It is part of the market economy that those who buy securities and collect higher interest rates for doing so should carry part of the risk when something goes wrong. Taxpayers shouldn't always be footing the bill.
SPIEGEL: The question is whether this is even feasible. When the German government was thinking about the involvement of private creditors several months ago, investors, fearing losses, sold off their Greek and Portuguese bonds en masse. It's like trying to extinguish a fire by pouring on more fuel. Can that be a permanent solution?
Issing: At the time, the German government didn't make it sufficiently clear that the involvement of private creditors was only intended for the future. The investors feared losses on their existing investments and were anxious as a result. But this doesn't have to happen if the government makes its plans sufficiently transparent.
SPIEGEL: EU leaders want to augment the bailout fund so that it can mobilize 440 billion ($620 billion). The eventual permanent bailout fund is to have more than 500 billion at its disposal. Are these dimensions necessary?
Issing: In my view, the dimensions are not the key issue. More important are the conditions under which the fund distributes its money. It would be fatal, however, if the shear size of the bailout fund tempted those in charge of it to dole out the money, thinking: Now we have so much money available, so we should use it. The fund has to be big enough to impress the markets, but it should also be used sparingly.
SPIEGEL: Responding to a German initiative, the euro countries want to make a pact to improve their competitiveness. Do you think this is a good idea?
Issing: The pact stems from the realization that the success of a monetary union depends on each individual member. Not all euro countries have to march in step, but at least they should be moving in the same direction. But it would be problematic to demand, in the name of such a pact, that the Irish increase their corporate taxes, for example.
SPIEGEL: But that's a legitimate concern. The EU gives the Irish money, and they use it to fund low corporate tax rates. Is that a good model for a future-oriented European fiscal policy?
Issing: The Irish will point out, with some justification, that the EU forcing them to raise tax rates undermines their prospects for growth. This cannot be in the interest of the other countries.
SPIEGEL: Do you expect that Portugal and Spain will have to resort to the bailout fund?
- Part 1: 'The Euro Will Exist for a Long Time to Come'
- Part 2: 'I Am One of Those Idiots'
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