Otmar Issing On Germany And The Euro Zone

A Word to the Wise

Readers may remember former BuBa board member and ECB chief economist Otmar Issing, who probably like few others personified the image of the stern, conservative German central banker (Jürgen Stark and Axel Weber were also people in this mold). Issing now and then still offers his opinion to those interested, most recently in an editorial in the FT, entitled “Get your finances in order and stop blaming Germany”.

As one might expect, Issing is no fan of ‘euro-zone bonds’ and similar ideas attempting to create shared responsibility for the debts of independent sovereign countries running their own fiscal policy. Several of his points are worth commenting on.

Germany Shoots Own Goal

Issing starts out by noting that Germany should best lead by example – and not by throwing money at the euro area’s problems. He also reminds us that Germany’s economic success is not irrevocable, and that there is a threat it won’t be preserved:

“Germany is not only the biggest economy in Europe, it is also the best performing – and it would be in everyone’s interest if the country led by example. Unfortunately, it may be undermining its economic dominance by undoing past reforms and reinforcing labour market regulations. It is perhaps not too pessimistic to argue that the time will come when Germany’s economy is no longer the subject of envy.”

Ain’t that the truth. The current German ‘grand coalition’ government has inter alia ‘compromised’ on the labor reform question by means of back-pedaling on the reforms which former chancellor Schröder instituted against much opposition (even in his own party) and amid popular upheaval. Schröder in the end even sacrificed his political career over these reforms. You could say they were hard-won indeed. Others reaped the gains: a few years later, Germany was no longer the ‘sick man of Europe’, but its ‘economic locomotive’. One wonders what malady has infested the heads of today’s German politicians that they believe they can once again afford to ignore the laws of economics and give away such a great economic advantage in a paroxysm of populism. Germany has fared very well by eschewing the economic nonsense of a ‘minimum wage’. No longer.

Sovereign Irresponsibility and Political Union

Next, Issing tackles the question of responsibility and solidarity, and makes the point that helping others to abandon the former does not constitute the latter:

“At present, the argument for German leadership boils down to a plea that it should put more and more money on the European table. Yet the principle that there should be no bailouts is fundamental in a union of countries that share a currency but remain sovereign when it comes to public finances. A democratic European monetary union could not have been built without respecting this principle. It will be a long time before a fully fledged political union is established. Fiscal transfers will remain a matter for national parliaments.

Jointly issued eurozone bonds would violate this principle and undermine democracy. They would send a message to highly indebted countries that they can enjoy modest borrowing costs without making efforts to bring public finances under control. This would reward bad policies and punish sound economic management. Who could call this an act of solidarity?”