Bringer of Prosperity or Bottomless Pit? Top German Economists Debate the Euro
SPIEGEL: Mr. Bofinger and Mr. Starbatty, do you think it was a mistake to introduce the euro?
Peter Bofinger: No, of course not. Today, we live in a currency zone that, despite everything, is significantly more stable than where the dollar or yen are used. The euro has brought growth and prosperity to Europe.
Joachim Starbatty: Actually, the euro was a mistake with particularly serious consequences. A monetary union requires its members to pursue the same policies and be similarly productive. The so-called convergence criteria were meant to ensure that this would happen. But -- as the dramatic developments in Greece are now showing -- they didn't.
SPIEGEL: Do you feel vindicated today?
Starbatty: Unfortunately, our fears have become a reality. The monetary union was launched with real self-deception.
Bofinger: Excuse me?
Starbatty: The euro was sold to us as a modernization program for Europe, and we were also told that it would push the Community toward stability. But, in reality, it has drifted apart and become a truly unstable entity.
Bofinger: Unstable? The inflation rate has been very moderate, hovering at around 2 percent since 1999, and it is significantly lower than it was when Germany used the mark. We have a lower budget deficit than the Americans, the Japanese and the British. Our debt-GDP ratio is also lower than it is in the United States and Japan. There is no reason why the euro should be coming under pressure. The decision to introduce it was smart and far-sighted.
SPIEGEL: Without any drawbacks?
Bofinger: Sure, the euro zone is currently looking a little worse for the wear. But that's to be expected, given the storm the global economy has gone through. Still, thanks to the common currency, it's no longer possible, for example, to wage speculative attacks on individual currencies. This eliminates a key disruptive factor that massively destabilized markets in the past.
Starbatty: But that's exactly the problem! In the past, exchange rates served as a valve. Individual countries could control their economies by allowing their currencies to gain or lose value. Now, this adjustment mechanism no longer works and, as a result, a completely different sort of dangerous imbalance has emerged. Today, there are two blocs within the monetary union: a strong currency bloc in the north and a weak one in the south. The robust north has joined forces with countries that have constantly devalued their currency throughout their histories. Just look at the Italian lira, for example. At the end of the 1950s, I paid 6.70 German marks for 1,000 lire. The final exchange rate was less than one mark for 1,000 lire.
SPIEGEL: What would happen if the old currencies were reintroduced in the euro zone tomorrow?
Bofinger: It would be a catastrophe. The German mark would have to appreciate significantly -- I'd say by 10 percent to 20 percent. Everything that we've worked so hard to attain in terms of competitiveness would vanish overnight. There would be wailing and the gnashing of teeth in Germany. And Europe would be making a serious mistake if it were to revert to regionalism and nationalism during this phase of advancing globalization.
Starbatty: I see things completely differently. The euro was also sold to citizens as an instrument for securing peace. I never understood that because, if that really were the case, you would have to open the monetary union to everyone. Instead, in light of its failure, we are now witnessing just how nationalism arises in the first place. EU flags have already been burned in Greece.
SPIEGEL: Would it have been better if all countries in Europe had kept their own currencies?
Starbatty: Yes. A community can't function when it's made up of unequal partners who are supposed to behave as equals. With the euro, Germany has created an artificial competitive advantage for itself, which has enabled us to conquer markets all over the world. But this has also led to the buildup of massive excess capacity in our export industries and, consequently, the export-oriented companies in the southwestern state of Baden-Württemberg are hurting. The monetary union changed the structure of economies in an unhealthy way.
Bofinger: Oh, come on! You can't blame the euro for these imbalances! The blame primarily lies with economic policies. Since 1995, there have been almost no appreciable wage increases in Germany, partly as a result of pressure brought on from increases in subcontracted labor. Politicians have done everything to relieve employers of the burden of paying social security contributions because we fell into this strange panic, believing we weren't globally competitive. With our economic policies, we placed too much of a lopsided emphasis on exports. The Irish, Greeks and Spaniards, on the other hand, put too much emphasis on domestic demand.
'Putting the Virtuous in the Dock Rather than the Real Offenders'
SPIEGEL: In recent days, French Finance Minister Christine Lagarde has repeatedly criticized Germany's export surpluses for being high compared with those of other EU countries. Is she right to do so?
Starbatty: No. I think it's strange that Madame Lagarde is putting the virtuous, who have always been oriented toward stability, in the dock rather than the real offenders.
Bofinger: But the Germans have sinned just as much as the Spaniards, for example. The Spaniards made their wages too high, while we in Germany practiced the opposite by not increasing the purchasing power of workers for years.
Starbatty: So what? It made us successful. It arose from the concern that jobs would migrate abroad. And Germany's moderate wage policy has made the country attractive to companies again.
Bofinger: You should look at it more holistically. We wouldn't have been able to increase our exports if the other countries had behaved like us and had not increased their demand for an entire decade. In my view, the monetary union is like a relationship: To function properly, its participants must orient their behavior toward the general good. If each participant only contemplates his or her own benefit, it leads to the kind of relationship crisis we are currently experiencing.
SPIEGEL: Such crises occasionally also end in divorce. Would that be an option at some point in the future for Greece, a euro-zone member?
Starbatty: I think that step would make the most sense. The Greeks should voluntarily leave the monetary union and reintroduce the drachma. If they did, they would export more and could replace foreign products with domestic ones. Likewise, tourists would travel to Greece instead of Turkey because it would be the cheaper alternative.
Bofinger: Excluding Greece from the union would be the completely wrong approach. Greece's problem is its inefficiency in terms of public finances. That can be corrected. Compared with other countries, Athens has always collected too few taxes. The government's budget wasn't even balanced in the good years, when there was strong economic growth. That's not the way to manage a country. Greece's government could, for example, raise the top tax rate from 40 percent, where it is today, to something much higher. After Germany's reunification, when Helmut Kohl was chancellor, our top tax rate was 56 percent.
Starbatty: And you seriously believe that would help? Following that approach, the Greeks would save themselves to death, just as the Germans did in the early 1930s under then-Reich Chancellor Heinrich Brüning. What you expect the Greeks to do is Brüning squared. The real problem is that Greece shouldn't have been accepted into the monetary union in the first place. The country submitted doctored numbers, as anyone who read the newspapers knew. And others did the same thing. But officials in Brussels, who were worried that the Greeks would go public with the fraud, said: 'Let's forget it!'
Bofinger: But that's all water under the bridge now! We have to deal with the current situation. In the German Council of Economic Experts, we proposed a consolidation pact, under which each country would be required to specify a fully verifiable path that it will follow as it puts its financial house in order. It wouldn't just be a solution for Greece; it would be for everyone. In return, the Community would be expected to provide guarantees to problem countries that they will be able to raise money in the capital markets at favorable, rather than extremely high, rates. It's unacceptable that governments have spent the last few years spending billions upon billions and incurring debt to save the financial markets, only to see speculators push the countries out of the monetary union.
Starbatty: In my experience, speculators are only successful when political promises diverge from economic reality, as has become clear in Greece. Likewise, when it comes to assistance, I think we have a clear legal framework, according to which neither any member state nor the entire Union can be held liable for the debt of another member state.
SPIEGEL: You are referring, of course, to the famous no-bailout clause.
Starbatty: You, Mr. Bofinger, would eliminate this principle with a stroke of the pen. If we help Greece now, we'll be opening a bottomless pit. If that happens, the euro will be in far more trouble because other countries will expect help. The monetary union will turn into a transfer union. If that happens, my former colleagues and I will take legal action again.
Bofinger: But such a pact would be circumscribed to helping countries help themselves. The idea now is not to buy Greek bonds. Rather, we have to define clear conditions under which Greece and other countries are to receive guarantees. But, there must also be an option to terminate the guarantees if the rules aren't obeyed.
Starbatty: Pacts are written on paper, but what's written isn't always necessarily true. The Stability and Growth Pact for the euro was originally much stricter, but then it was made less so. Nothing much ever comes out of it when sinners discuss sinners.
SPIEGEL: But government debt is still growing considerably. Doesn't this also increase the risk of inflation?
Starbatty: That's what I assume. Inflation would be an elegant means of reducing debt, and many academics are discussing this scenario. But it becomes truly problematic when government bonds eventually lose their status as a safe haven. If China or Japan arrive at this conclusion and sell their bonds, a bubble could burst that is far more dangerous than any other bubble. If that happens, markets will plunge, and interest rates will shoot up.
Bofinger: Oh, Mr. Starbatty, the Chinese have no choice but to buy US Treasury bonds. Otherwise, they would have to allow their currency to appreciate significantly, and they would be more affected by the decline in bond prices than anyone else. For the euro zone, at least, what I see as being more likely is the risk of deflation -- in other words, the risk of price declines on both fronts. If people are now starting to save much more broadly, an enormous downward pressure will inevitably develop as a result.
Starbatty: But people aren't saving. Instead, countries are getting into debt beyond all measure. If Germany's economy remains stagnant and its 1.3 million short-time workers do not find regular employment again, government deficits will rise again, and inflationary expectations will grow.
Bofinger: Government debts don't automatically lead to inflation, as has been shown by developments in Japan over the last two decades. The European Central Bank would never, ever contemplate using inflation to eliminate debt. And even if people did start spending their money out of fear of inflation, at least the factories would finally be operating at full capacity again. In other words, that wouldn't be a tragedy, either.
SPIEGEL: Turbulence in the financial markets has also created a credibility problem for people in your line of work. Hardly any economists predicted the fatal problems.
Starbatty: That's true. Many of us put too much stock in numbers. But mathematical models can't depict complex realities.
Bofinger: On that, I agree with you completely. We have to realize once again that economics is a soft rather than a hard science.
SPIEGEL: Do the two of you actually believe that the euro will still be around in five years?
Bofinger: I'm sure it will be. Every crisis creates an opportunity, and that should also apply to this special relationship crisis. This assumes, however, that officials in Brussels will refrain from pointing fingers at each other and will finally hammer out a joint, coordinated approach.
Starbatty: That's not enough. If we drag the Greeks along now, other member states will also push for financial assistance. And then the monetary union will crumble. The only thing that isn't clear is when this'll happen.
Bofinger: Then you would probably agree with the great British economist John Maynard Keynes, who said: 'In the long run, we are all dead." Then there will be no one left to review things.
Starbatty: I'm afraid it won't take quite that long with the euro.
SPIEGEL: Mr. Bofinger, Mr. Starbatty, we thank you for this interview.