4 September 2012
An interview with Dominique Berns which appeared today in the economy pages of the daily newspaper, LE SOIR.
“To save the Euro, we must mutually pool the debts”
Q : The president of the ECB, Mario Draghi, has pledged to do “everything within his power to save the Euro”. Numerous observers expect the ECB to start buying up sovereign securities once again, only this time in a far more pro-active manner, in order to reduce the interest rates for the countries in difficulty, in particular for Spain and Italy. And this is in spite of opposition from the Bundesbank, the German Central Bank. Do you also think that Draghi is the only person now who can save the Euro?
A : Perhaps a little paradoxically, I feel very close to Jens Weidmann, the President of the Bundesbank on this point. There aren’t many things one can be certain about in Economics, but the principles underlying the monetary system are fortunately one of the things we do know. A monetary mass needs to be managed prudently as one would manage a household’s finances. It has to reflect the economic situation of the monetary zone where it is being put into circulation. One can – and one has to – create additional money when more wealth has been created, but one cannot simply create money because there isn’t enough of it. That is a recipe for disaster! Apparently this is not something which is well understood. Jens Weidmann understands it, as did his predecessor Axel Weber and the former Chief Economist of the ECB, Jürgen Stark, both of whom resigned last year because they disagreed with the European institution’s sovereign debt repurchase programme.
Q: But all the same, wouldn’t you say that the interest rates asked by the markets for Spain and Italy are excessive – and, above all, unsustainable if they stay at current levels?
A : Indeed. But we are trying to lower the level of Spanish and Italian interest rates by buying their debt, as if the problem was an issue of supply and demand! Their rates are elevated to these levels because they include a double risk premium: one premium to cover the risk of non-repayment, but also a conversion premium since there exists a real risk of a Eurozone collapse and a return to national currencies. It is these risk premiums that need to be reduced, by implementing a real solidarity with these countries, and guaranteeing that they will not be abandoned. If this was done the risk would be reduced and as a result the rates would automatically fall.
Q : But isn’t that just it, isn’t the real problem that absence of any real solidarity between the various Eurozone members ?
A : To pool the debt or not to pool the debt? That is the question! However, for the moment, in words everyone swears it is a ‘yes’, but the facts only seem to indicate a ‘perhaps’. Jens Weidmann declared, quite correctly, that the ECB cannot implement a policy of integration which the political leaders do not have the courage to carry out. The politicians content themselves with saying to the ECB, “get printing then!” (money, that is). Yes, it is true to say that the Federal Reserve, the American central bank, has not held back. But it can, because it still benefits from the fact that the Dollar is the reserve currency. The Eurozone cannot allow itself to do the same. So, there remain two choices: either one puts an end to the Euro, acknowledging that one hadn’t understood that a monetary zone could not function without fiscal unification; or on the other hand, one creates a federation.
Q : But who wants European federalism today ?
R : But that is really the only solution – mutually pooling the public debts of all 17 members of the monetary union. One Sunday evening, before the financial markets open in Asia, the decision needs to be taken that there will no longer be any national sovereign debts, only Eurozone debts, a Eurodebt. As a consequence it will be restructured in accordance with the cash that remains in the Eurozone as a whole. The next day, the market will decide what the Euro is worth in relation to the other currencies. This is the only solution if one wants to avoid a gradual break-up of the Eurozone, which will see countries jumping overboard one by one. First Greece, then Portugal, then Spain…..and still without resolving any of the problems of those still on deck!