Shared debt is ′a step in the wrong direction′ | Business| Economy and finance news from a German perspective | DW | 27.06.2012
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Shared debt is 'a step in the wrong direction'

The upcoming EU summit is supposed to succeed in curbing the current debt crisis - something that politicians have been unable so far to achieve. A former government official says a U-turn is needed.

Professor Johann Eekhoff was a senior civil servant in the German Economics Ministry between 1991 and 1994. He currently heads the Institute for Economic Policy at Cologne University.

DW: As of Thursday, the heads of EU states and governments are meeting once again to find a way out of the current debt crisis. Various rescue schemes have already been adopted, but the lifetime of those measures is getting shorter and shorter. How much time will policy makers still be able to win themselves?

Johann Eekhoff: That's difficult to say. The process can only be held back by the resistance of the people, who are growing increasingly aware of the costs involved. Each additional rescue measure will cost extra money. Each and every delay will cost extra money.

The current policies started in May 2010 when the first rescue package was bundled for Greece. Should one have acted differently already back then?

From the start, our institute endorsed a policy that would not break existing laws and would allow the Greeks to get rid of their debt by dealing with their creditors.

Last year, you were still endorsing a Greek insolvency. But what followed instead was a second rescue package, and now a third one is likely. Is this just a policy of putting off bankruptcy?

Once politicians have embarked on a wrong course, it's hard for them to return. That's why they've been trying, come what may, to resolve the crisis without Greece having to declare bankruptcy. I believe that's the wrong path.

Financial markets don't have much trust left in the euro. The breaking apart of the eurozone is considered as being a likely scenario. Is that realistic?

Prof. Johann Eekhoff

Eekhoff says countries should be liable for their own debt

It's a question of just how it would break apart. The obvious thing would be for Greece to exit the euro or introduce a parallel currency. The other option would be for the northern member countries to leave the eurozone - in other words, those nations which are keeping the whole thing together and footing the bill for the rescue operation. The big question would be whether France would belong to that group. In an extreme case, Germany could opt out on its own; that would make it very apparent that the whole rescue construction is currently relying on the German taxpayers.

Which solution do you prefer then?

I'd prefer it if Italy and Spain would say we don't need any money from you, we can cope on our own. Both nations have economies which are solid enough to deal with the debt load. Or you could do it the other way round, meaning that the other countries say we won't grant any more financial assistance. And finally, a way must be found to resolve the Greek issue.

Given that all previous rescue attempts have failed and that the Permanent European Stability Mechanism (ESM) has been stopped for the time being by the Germany's Supreme Court, should the government in Berlin now stop the ratification of the ESM treaty?

I think that's possible, in order to signal that we cannot allow a permanent rescue mechanism, because that would mean sharing the debt of other nations. That's the wrong signal for capital markets. For them it must be clear again that those who pile up debt will be the first to be held liable for it. After them come the creditors. Interest rates would rise if the situation got tough. Governments ought not to complain about rising interest rates: it's their own fault.

German Finance Minister Wolfgang Schäuble wants a referendum to achieve a political union. The government thinks it's a mistake that the euro was introduced without such a political union. But you are of a different opinion, aren't you?

Yes, because what's commonly understood by political union is unrealistic. Essentially, we already have such a union, because we coordinate our moves in many fields. And I think we should progress on this path in small steps. Real political union involves transferring many budgetary, fiscal and parliamentary powers to Brussels, and it's not yet clear to whom exactly they would be transferred. Take the social union for instance - in other words, something that is not yet a full-fledged political union. It would be impossible to arrive at a social union in a couple of years because our social systems differ so much. On the one hand, Germany for instance has a system based on regular premiums paid into statutory social insurance systems. Others a have purely tax-dependent systems. Others again have a mixture of both. Claims stemming from those systems can span 30 to 40 years. We simply can't throw everything in one basket. It just wouldn't work.

There are other ideas being floated to save the euro - a banking union or fiscal union as a medium or long-term objective, or euro-bills and sinking funds as short-term remedies. What do you make of such instruments?

All those proposals aim to put in place a system of shared debt. But that's the wrong step, because it signals that, if the going gets tough, those who haven't caused the debt will be liable. Once you do that, capital markets will lose faith in you.

What will the eurozone be like in a year from now? Will we have a smaller single currency union, perhaps without Greece? Or will we have a northern European euro alongside a weaker southern European euro? Or will we have an irrevocable transfer union? Or will the euro be just a thing of the past by then?

I guess everything will probably survive somehow over the next 12 months. Greece will be given more time to restructure. Let's face it, the Greeks are only prepared to negotiate about schemes to win them more time and get even more bailout funds from others. That's the only government policy objective in Athens, and that's not going to get us anywhere. They're not talking about the labor market reforms they need. Perhaps everything will go on as usual for a year or eighteen months, but eventually member countries' willingness to foot the bill will be gone.

Is peace at stake on the continent, if the euro fails?

It's the other way round. Peace is most at stake right now. When we see what the Greeks are saying about the Germans, the Germans about the Greeks, the Spaniards about the Germans and so on, it's clear that the big European idea of unity is already gravely damaged. Europe used to be a symbol of joint interests and growing together, of mutually advantageous activities. But that's all being damaged by policy makers hell-bent on keeping Greece in the euro area. People who debate the concept of political union today don't actually know what they're talking about. The population is no longer behind it. Three years ago, we were so much closer to cooperation and coordination in selected policy areas. But the willingness to continue on this path is no longer there. Europe is increasingly being seen as a threat rather than an opportunity.

Interview: Zhang Danhong / hg
Editor: Michael Lawton

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