Interview with architect of the eurozone Otmar Issing.
The euro is already more than 20 years old. You were one of its creators. How to judge, whether the euro is a success story or a not so successful one?
First, the euro is an unquestionable success story. It is a stable currency; average inflation is 1.7 percent per year. The inflation of the German mark during its 50-year existence was 2.8 percent. The euro is the second most important currency in the world, although still far from the dollar.
But when we speak about the eurozone the success is unfortunately limited and the cause is not the euro but the failure of the national governments to perform their duties. Wage rise is faster than productivity growth in a number of countries, youth unemployment is unbearably high but that has nothing to do with the euro, it is caused by the states’ policy.
For example, youth unemployment in Spain was over 30 percent for most of the time even before the euro was introduced. This means that the cause is inefficiency of the education system. It is simply confusing and incorrect to cite the euro as its cause.
In my opinion the governments have simply failed to do their job. Of course there are exceptions and Estonia is a shining example how the eurozone could work. Your public sector debt is still extremely low, you managed the crisis amazingly well. If all countries had behaved the same way, we could speak of a huge success of the eurozone.
Do you have any objections to the European Central Bank’s monetary policy or are only the governments deserving of criticism?
With hindsight, the ECB was very late handling the deep depression, which led to the costly monetary policy, which is presently even more costly. We could discuss whether the eurozone needs monetary policy support roughly ten years after recovery from the crisis. In this extent certainly not.
This means that when looking towards future crises the ECB should have stopped QE (quantitative easing) much faster and raise the basic interest rate. The ECB seems to live still in the crisis situation.
Mario Draghi’s mandate as the ECB President is coming to an end. What do you think about how he ran the ECB during these eight years? These must have been the most dramatic years of the euro.
On the one hand Draghi is seen as the savior of the eurozone; not the euro, but the members of the eurozone. But on the other hand, by announcing “whatever it takes” (Draghi’s famous phrase at the 2012 London economic conference “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro“, after which the interest rates in Italy and other countries began to drop – Ed.) he accepted, in my opinion, the ECB’s responsibility for matters which the national governments should have handled.
It is feared that due to the very low interest rates and massive QE policy there may be no measures available to overcome the next crisis.
I would say that QE and the offering of liquidity to the banking sector by the central banks will remain available in the future as well, but the ECB will naturally restrict the use of this instrument by continuing the zero interest environment. The negative interest rate environment has significant side effects in the financial sector: pension funds, banks, insurance firms and the young generation, since increasing income after working age will become significantly more difficult. This is a negative side effect.
The ECB mandate is very limited and several individuals, including ECB presidential candidate Olli Rehn, have voiced opinion that it should be changed. The current situation is, after all, quite different from that 20 years ago. Inflation risk is presently downward rather than upward.
We should not forget that the ECB mandate is maintaining price stability, This is the mandate, not two-percent inflation.
But this is the goal?
Before we began, I proposed that the ECB must explain our idea of how to realize the price stability mandate. This was keeping the average annual inflation level below two percent.
I do not understand why people fear the one-percent base inflation. What is the problem? Price stability is important and I see no inflation risk. Why should the central bank do everything it can to move inflation towards two percent?
Why did you propose two percent back then rather than 1.5 or 2.5 percent?
The alternative could have been 1.5 percent, even zero inflation could have been an alternative. There were several arguments in the beginning, One was that there should be some distance from inflation risk, the other was the situation in different areas of the eurozone where inflation was somewhat peculiar.
These were the main reasons why I recommended interpreting the inflation goal as two percent. By the way, it became a global interpretation.
Is the European debt crisis over?
Does Estonia have a debt crisis?
No, I meant Europe.
(Laughs). This was my answer. There is no debt crisis in Estonia, there is no debt crisis in Germany. Germany has reduced the debt level from more than 90 percent of GDP to 60 percent. This is also a sign that a large budget deficit is not a condition of rapid growth.
There are no countries with high budget deficit and rapid economic growth. The idea that countries with very low debt level like Estonia or countries with declining debt burden like Germany, which have budget surplus, should realize costly policies. I can see no arguments in favor of it.
I would like to argue with the IMF representatives, since I have seen no macroeconomy textbooks recommending countries like Estonia with rapid economic growth use costly budget policy under stimulating monetary policy. (The IMF has repeatedly recommended Estonia to make loan – Ed.).
What do you think of Germany’s economy? Some think that the shine of Germany’s economy is waning. We know that the automobile industry and the banking sector are not doing that well.
We should not forget that Germany’s economy has been growing for ten years. This is a very long time for positive developments. Experience shows that it must end one day. There are risks like a trade war, which would change the economic environment and that is a major challenge for Germany’s economy.
Germany’s population is shrinking and aging. I am very critical about what is being done regarding pensions and what is the opposite to what should have been done. The present and the former coalition were spending, but even more dangerous is that they gave hope for the future and left undone the reforms planned by Schröder (the chancellor in 1998-2005, thanks to his reforms Germany’s economy began to grow again – Ed.).
When economic growth is slowing down and especially when it is declining, Germany will find itself in a very complicated situation.
What should we think about the situation in Italy? Italy’s current government is talking about discarding the budget rules. What could it lead to?
Italy is a real problem state. It is large and I think that their current government is moving in the wrong direction. They should employ fiscal methods to boost economic growth but they are doing the exact opposite.
Giving up the pension system, which was a great achievement of the previous, Mario Monti’s government, which was urgently needed, since Italy’s population is shrinking even faster than in Germany, means fiscal suicide.
What can the EU do to prevent the disaster?
In my opinion the initial idea was to establish general control over the member countries’ budget policy. This would not mean specific entries but the budget policy. When they asked President Juncker two years ago why the Commission is so favorable towards France’s budget developments, he answered: “Because it is France”.
This is precisely what must be avoided. The Stability and Growth Pact must be based on ruled. If we make exceptions to the large, it undermines the cohesion of the eurozone. The idea that the small must obey the rules while the large can me allowed exceptions is totally against the essence of the eurozone,
Will the situation in Italy clear?
In my opinion the sole factor which can exert pressure on the Italian politicians is the rise of long-term interest rates to a level they cannot afford. If a country with debt burden of 130 percent of GDP does everything to spend more on consumption and calls this growth a fiscal stimulus, it is irresponsible. Italy has decided to move in that direction.
I believe that Italy is facing hard times. And to ask then for solidarity would be very strange, You cannot ask for solidarity if you have ignored the rules.