European Central Bank Chief Economist 'Everyone Is a Sinner at the Moment'

In a SPIEGEL interview, European Central Bank Chief Economist Jürgen Stark discusses the threat of a Greek bankruptcy, disruption in the euro zone and the growing problem of excessive national debts in countries that have adopted Europe's common currency.

SPIEGEL: Mr. Stark, Greece is threatened with a national bankruptcy, other European Union countries are heavily in debt and the common currency has come under great pressure. How safe is the euro these days?

Stark: We have been in a global crisis for more than one-and-a-half years now. We still can't say whether it's over. But you could just as easily apply your question to other regions. No one talks about whether the United States could break apart because of California's ailing finances. So let's not take things too far!


Photo Gallery: Greece 'Must and Will Make It'


SPIEGEL: Washington and the US central bank, the Fed, would certainly intervene before allowing California to go bankrupt.

Stark: To be honest, I don't see that they would do that. There are many examples to the contrary in the history, including American history.

SPIEGEL: But you have to take citizens' worries about the euro seriously. The common currency is currently undergoing massive devaluation, partly because the Greeks can no longer control their finances.

Stark: I do take those concerns seriously. Nevertheless, I want to question your theory of cause and effect. It is often easy to find a dozen reasons for fluctuating exchange rates.

SPIEGEL: We see the current problems as the biggest test the euro has ever faced.

Stark: There were many skeptics at the beginning of the currency union. Since then, the euro has experienced 11 successful years. However, the current crisis has shown that we are all moving in unknown terrain. For instance, the central banks have had to adopt measures that I would have considered to be impossible only two years ago. But all market players and currencies have been put to the same test since the Lehman Brothers bankruptcy. That, by the way, happened on the other side of the Atlantic and led to the tsunami that then hit Europe.

SPIEGEL: The Greeks already pay about four percent more in interest for their treasury bonds than, for example, Germany. Is this just punishment for old lies, accounting tricks and failures?

Stark: As far as the refinancing of countries goes, we are certainly experiencing differences that are unprecedented in the history of the euro.

SPIEGEL: One couldn't put it more politely.

Stark: There are three dimensions to the Greek case. The first consists of poor statistics ...

SPIEGEL: ... which Athens has apparently systematically manipulated for years.

Stark: It was not possible to obtain reliable figures. This also has to do with the internal Greek structures.

SPIEGEL: But that doesn't explain the most recent acute shock in the financial markets.

Stark: Which brings us to problem number two: It became apparent, almost overnight, that the Greeks had a double-digit and not a single-digit budget deficit, which is close to 13 percent of the gross domestic product. That too has to do with the fact that the implementation of the budget was not truly monitored in the past -- neither by Greek nor external institutions.

SPIEGEL: And the third dimension?

Stark: Greece has lost its ability to compete on the basis of price. Its unit labor costs have risen tremendously. The government in Athens has recognized this. That too is something it will have to quickly come to grips with.

SPIEGEL: But all that has been known for years. Was Greece cheating from the start, or was it that the people in Brussels just didn't want to know the details?

Stark: There were corrections after the fact. But you're right: An economy doesn't lose its competitiveness overnight. Greece covered it up for a long time with an extremely generous spending policy. For example, consumer spending was stimulated with pay increases in the government sector. We here at the ECB were vocally critical of this development several years ago.

SPIEGEL: Given so many failures, don't you sometimes wish that your central bank had real options to apply sanctions?

Stark: First of all, I would like to see better supervision. This is where Eurostat (the European Union's statistical office)and the European Commission, in particular, can play a role. We should all learn from the mistakes of the past. Greece was living beyond its means. That has to be corrected now. On the whole, however, stronger automatic mechanisms are needed in the application of the stability pact.

SPIEGEL: In light of the current protests and strikes, one doesn't get the impression that the Greeks are willing to save.

Stark: The new government has assumed political responsibility and unveiled a package of measures. This is the absolute minimum that has to be implemented now, and more will become necessary in light of the significant worsening of the situation. That requires strong leadership.

SPIEGEL: What will the control mechanisms look like?

Stark: Athens will be required to report monthly on the implementation of the measures. We will see what happens after that. The goal is to bring down new borrowing to less than three percent of GDP by 2012, as provided under the stability program. There is a plan in place for this in 2010. All steps taken after that will have to be outlined more specifically.

SPIEGEL: And if Greece simply doesn't make it?

Stark: The country has no other choice. It has to regain the confidence of the markets. Ireland was in a similar situation and has since regained some confidence.

'Responsibility for Setting Its House in Order Clearly Lies with Greek Government'

SPIEGEL: Outgoing EU Economic and Monetary Affairs Commissioner Joaquin Almunia told the European Parliament in Strasbourg that the EU countries will have to help Greece if the government in Athens agrees to a strict policy of savings. How do you feel about that?

SPIEGEL: The responsibility for setting its house in order clearly lies with the Greek government.

SPIEGEL: Bilateral aid is being discussed. Strong countries like Germany could borrow money at favorable terms in the capital markets and then pass on the funds to Greece in return for a surcharge.

SPIEGEL: Many of the ideas that are being thrown around are counterproductive or would be very difficult to reconcile with the fundamentals and principles of the currency union.

SPIEGEL: How do you feel, for example, about the idea of all countries issuing a joint euro bond?

Graphic: Euro-dollar exchange rate

Graphic: Euro-dollar exchange rate


Stark: It was already discussed a while ago. But it would not solve the structural problems of countries like Greece at all. Besides, it would require some euro countries to take responsibility for the debts of others. Interest rates would rise in the euro countries that have managed their economies effectively and would fall in the other countries.

SPIEGEL: In other words, there should not be unlimited solidarity?

Stark: This is in keeping with the treaties and foundations of the currency union. And we cannot have falsely interpreted solidarity. Solidarity is not a one-way street.

SPIEGEL: Aid from the International Monetary Fund (IMF) is another option.

Stark: I don't think it would be appropriate for bringing Greece back to the path of solid budget management. Each country must obey the rules of the common currency.

SPIEGEL: You see the euro as a "community of fate." Shouldn't it be possible to eject a country that absolutely doesn't abide by the rules?

Stark: I don't think that's a realistic option. I draw a different conclusion from the events of recent weeks: When accepting new members into the euro zone, we have to pay closer attention when it comes to the dates and longevity of the convergence.

SPIEGEL: So the euro zone has grown too quickly.

Stark: We began with 11 countries and we have 16 today. The euro zone was never a closed affair. The goal is and must continue to be that all 27 EU countries have the same currency in the end. However, this cannot result in the currency zone drifting apart.

SPIEGEL: Portugal, Spain, Ireland and Italy are also suffering acutely from big deficits. Could such countries really go bankrupt without threatening the very existence of the euro zone?

Stark: That isn't a question we face. But I would like to point to one aspect in this context: Great Britain has a budget deficit of the same magnitude as Greece's. The US budget deficit is also more than 10 percent of GDP. All advanced economies are currently having problems. In fact, it is astonishing to see where most of the criticism of the euro is coming from at the moment.

SPIEGEL: It sounds as if you suspect that the Anglo-American media is behind the attacks.

Stark: At any rate, much of what they are printing reads as if they were trying to deflect attention away from problems in their own backyard.

SPIEGEL: You can also depend on critical media in Europe.

Stark: And that's a good thing. I have no trouble facing criticism, but I don't like exaggerations. They can easily get overheated.

SPIEGEL: As the chief economist of the ECB, however, you have to envision a Greek bankruptcy as a realistic option.

Stark: That isn't a scenario, as far as I'm concerned. But the reforms of the stability pact softened the budget rules in 2005. In the past, there was more talk of the group pressure among the euro countries. Today it is preferable to cite the support offered by the group. It may be more politically correct, but it's also more inefficient when it comes to implementing solid government finances.

SPIEGEL: In September 2008, the public witnessed how the bankruptcy of a relatively small investment bank, Lehman Brothers, could take the entire world to the brink of an abyss. The fear of another national bankruptcy should be understandable.

Stark: I understand this fear, but I don't share it. Since Lehman, governments worldwide have been pressured to incur debts to fight the recession. For many, the amounts could not be big enough. And yet the consequences were clear.

SPIEGEL: Namely?

Stark: That the financial crisis would expand into an economic crisis, which would end up threatening entire countries and their budgets. This is where we are today. And that's why we at the ECB have been warning, since the end of 2008, not to do too much "good." The current debt levels have reached a level almost unmatched in history.

SPIEGEL: In your opinion, governments face a "moral temptation" when they have to estimate such low interest rates for their debts. The German government is also yielding to this temptation by estimating a 5.5-percent budget deficit for 2010.

Stark: The lower the interest rates, the bigger the incentive to borrow. Politicians think in terms of the short term, in terms of legislative periods. But interest rates will rise again in the medium and long term, which politicians should not forget.

Greece 'Must and Will Make It'

SPIEGEL: Is Germany even an effective role model for the rest of the euro zone anymore?

Stark: Definitely. From my perspective, the debt brake (eds. note: the constitutional amendment passed in 2009 that limits deficit spending), which is grounded in Germany's Basic Law, is already an enormous and symbolic step.

SPIEGEL: The central banks aren't innocent either, because they have made enormous sums available to the markets.

Stark: Those were decisions that were urgently needed.

SPIEGEL: At some point, the ECB will also have to abandon its very loose monetary policy.

Stark: And that will happen gradually. The longer our interventions remain in effect, the more dangerous do the side effects become.

SPIEGEL: But the stability pact, which you played a key role in drafting, is dead.

Stark: It is not dead. Without it, we would have much higher deficits. And you also cannot hold it responsible for statistical inaccuracies. After all, it is an important framework for the consolidation measures that now have to be introduced.

SPIEGEL: But now, of all times, it must be very tempting for some countries to massage their own budget figures.

Stark: And that temptation is nothing new. Besides, the phenomenon is not limited to public budgets.

SPIEGEL: Those who wish to lie will lie?

Stark: No, we absolutely cannot make that our basic assumption.

SPIEGEL: Right now, everyone is a sinner.

Stark: Yes, everyone is a sinner at the moment. But we also happen to be dealing with the consequences of the worst recession in 80 years. That's one of the reasons so many governments have yielded to the enormous pressure, in some cases, to take on huge debts. A renaissance of the government's role in the economy was celebrated. The politicians were proud that they could finally rescue something. But who will rescue the state in the end?

SPIEGEL: Do you have an answer?

Stark: Things cannot be allowed to go so far that the state has to be rescued.

SPIEGEL: In the United States, the Fed is doing plenty of rescuing. It simply prints money and buys treasury bonds.

Stark: We cannot take that approach. And I am glad that we are not permitted to do so. Our mission is price stability.

SPIEGEL: You are maneuvering yourself around an answer to the main question: What happens if Greece doesn't make it?

Stark: I do not think that is the most important question, but I will answer it with a clear statement: The country must and will make it.

SPIEGEL: How dangerous can speculators be to the country in the current situation?

Stark: Speculation is a part of the market economy, which I do not want to portray as positive or negative. However, the current situation undoubtedly promotes exaggeration. For this reason, I cannot rule out that speculators are currently amplifying the processes.

SPIEGEL: You have been "only" an economist for your entire life. How exactly do you make sure that you don't fall out of touch with real life?

Stark: My roots are too deep for me to lose my grip on reality. Besides, my family regularly confronts me with real life.

SPIEGEL: Economists seem surprisingly self-certain, even in this crisis. The only problem is that none of them predicted it.

Stark: I understand this criticism. But we at the ECB have long warned of the possible effects of all the new financial instruments, most of which were developed in the United States. Analysis and concern were there, but I also have to say, quite honestly: The Europeans were unable to assert themselves in the debates in the mainstream economy. I hope that we can now demonstrate that the market, and the financial markets in particular, needs basic principles and clear rules.

SPIEGEL: The tenure of ECB President Jean-Claude Trichet ends next year. Bundesbank President Axel Weber is believed to have a good chance of succeeding him. In that case, however, there would hardly be any room for you on the ECB board of directors, because it would be hard to imagine two senior members of the same nationality. Would you replace Weber at the Bundesbank?

SPIEGEL: This personnel debate is far too premature. My contract continues until my 66th birthday.

SPIEGEL: Mr. Stark, we thank you for this interview.

Interview conducted by Christoph Pauly and Thomas Tuma
Die Wiedergabe wurde unterbrochen.