Sep.
11
2013

No need not to worry

Actions taken for saving the Eurozone are surrounded by severe legal uncertainties, which can lead to a new crisis anytime. Otmar Issing, the former Chief Economist and member of the Executive Board of the European Central Bank, the President of the Center for Financial Studies, and the winner of the most prestigious academic prizes of Germany and France, indicates in the interview that even in his homeland, Germany, many latent issues are neglected in the federal election, which can cause big troubles further on.

Issing is explaining the problems of the Southern European countries by harmful cultural traditions, most importantly, the patron-client relationship of the main political and economic players.
The interviewee explains that the euro as currency is not the least bit in danger. However, the European Central Bank had to go too far with intervention lately – due to political pressure as well. According to Issing, there is a good change that Hungary will follow Slovakia and the Baltic countries to join the euro.

Markets seem to have stopped worrying about the future of the Eurozone. Is this problem really solved?

The current crisis is in the middle of a development. Although a lot of work has been done in countries like Greece, Spain, and Portugal, the fundamental problems of the European Union have not been fully solved yet. There is still a conflict between the underlying principles of the monetary union and the crisis management. We would like to return to the roots of the Maastricht treaty: sovereign countries should be responsible for their own economic policies, advantages, and mistakes and return to the no bailout clause. However, the current crisis management has violated this. There are a number of countries which wish financial support and want to take steps towards a fiscal union, which – in my interpretation – can only be achieved in the context of a fully-fledged political union.

Do you think that such a political union would be the goal?

My assessment– which is more or less a common opinion – is that the member states are not ready to give up their sovereignty and do not intend to go into a political union. It is unimaginable for the present that France, for example, would agree to that its foreign and fiscal policies are directed by Brussels from now on. So I think this is just an illusion or a vision for the future. However, I see a bigger risk in the development of the monetary union. If some elements of a fiscal union were introduced without forming a fully fledged political union with full democratic legislation, the principles of democracy would be violated.

That is one reason why nationalist tendencies have intensified. Great Britain is getting fed up with that and is considering quitting the EU. It is unclear whether any of the East-Central European countries will take actions that contribute to the dissolution of the EU.

I see this danger, too. The UK is a special problem, so let’s concentrate on the 17 or – from next year on – 18 members of European Monetary Union. Here, we can clearly see that the people are certainly not in favor of transferring the competence on taxes and the public spending to Brussels. The more this is planned, the more it triggers nationalist sentiments. However, most of the people are not radicals or nationalists but they also do not support giving up the sovereignty of their country.

You know well the German political elite. Do you think that coming elections will spur the solving of the big European conflicts?

The most powerful parties have been supporting the intensification of European integration for years but now, they have realized that their electors are not behind them anymore. So the problems of the Eurozone are hushed up in the election campaign. There are huge internal conflicts of interest between the big companies, which are in favor of going into a transfer union as a fixed exchange rate would foster exports, and the middle-sized companies, which are strongly against it.

The mood of the markets does not reflect the dramatic conflicts around the Eurozone you mentioned. The optimism of companies and the macroeconomic data suggest that the crisis has come to an end. The dominating market players apparently think that Germany and Brussels would not turn their back on any of the member states, if they got into trouble.

Although the risk that the euro might collapse has more or less disappeared, the danger might come back at anytime with a sudden event in Greece or any other problematic country. For me, the euro as a currency has never really been at a risk; I have had no doubt that the euro would survive. Since it was introduced in 1999, the euro has been a stable and strong currency, its exchange rate has appreciated against the dollar and the inflation is modest. It is still the second most important currency in the world. Moreover, the “mother” of the euro, the European Central Bank is one of the most respected institutions in Europe. The only question is how many countries will be members of the monetary union in the future. I am convinced that after the crisis, Hungary, Poland, and the Czech Republic will consider joining because they learnt that countries within the Eurozone are able to develop quicker and safer than the ones outside of it. In times of crisis, it is different, of course.

But the most problematic countries like Greece, Spain, and Portugal, are members of the Eurozone…

That’s right. These countries did not keep themselves to the rules. We should go back a rule-based system where countries observe the rules and take responsibility for their own mistakes. Especially, in Greece, fundamental reforms are needed. The later these reforms are implemented, the bigger the chance is that a new crisis will erupt. Whatever market players predict, Germany would certainly not be able to extend itself to save a bigger country like France or Italy. It simply does not have enough resources. It is also important to note that those countries struggle the most, in which interconnected small groups, “clienteles” wield big influence in decision making. These cultural traditions go back to centuries. But can the common currency trigger a process that slowly changes the culture to an extent that is needed to participate in a monetary union? At the same time, we must not completely adjust our cultures. Cultural diversity is the strength of Europe, not a weakness.

You have just appreciated the role of the European Central Bank. Hasn’t the ECB violated the underlying principles of the monetary union by buying bonds and strongly intervening in the markets?

The primary function of the ECB is to maintain price stability and to guarantee the stability of the euro within the Eurozone. However, during the crisis, the ECB had to broaden the scope of its activities. It has been more and more seen as the only institution which can work and has the “big bazooka”, meaning it can intervene in markets with almost an unlimited amount of money. The ECB has gotten into a political game, which can be dangerous for the institution over time.

When people speak about the political pressure on the ECB, they imply that it is dominated by the Germans…

This is nonsense. In the history of the ECB, there has never been a German president: the first president was Dutch, the second one was French, and now it is Italian. The ECB has a mandate which was verified by all member countries, by all parliaments. Of course, its structure was based on the one of the Bundesbank but just because it had a successful and well-functioning system and could be held up as a model. The ECB has a goal that all member countries wish to achieve, not only Germany, namely, having a stable currency. Furthermore, it is very transparent; the president immediately reports the outcome of the decisions made to the public.

How long will the almost zero interest rate policy last?

As long as the economic situation is weak, low interest rates set by central banks are essential. However, we know from the case of Japan that a very long period of very low interest rates is creating distortions. If rescuing banks are not solvent, a zombie economy might be created, which involving higher risks. Thus, I think that central banks should consider getting out of this zero-level interest rate policy rather sooner than later.