Otmar Issing: EU will only live up to expectations when tendency toward centralisation and bureaucratisation resisted

This post is part of a series of interviews carried out by our sister organization, Open Europe Berlin. To read the original interview between Otmar Issing, the former Chief Economist of the European Central Bank, and Open Europe Berlin in German click here.

Otmar Issing addresses the audience at the Open Europe Berlin launch, Oct.2012

OEB: What does Europe mean to you?

Issing: Following the terrible wars and dictatorships of the past, for me, Europe means a continent of peace and freedom.  The freedom to travel, and particularly for young people -- to learn, study, and to make friends beyond national borders. The single market, a barrier-free market serving over 500 million people, is the economic dimension, and the prerequisite for prosperity and employment in Europe. 

OEB: What does the European Union mean to you?

Issing: The European Union embodies the institutional structures, which preserve the aforementioned achievements.  The European Union will live up to expectations only when the tendency towards centralisation and bureaucratisation are resisted. 

What does the euro, the shared currency, mean to you?

Issing:The euro represents a promise of a stable currency to the citizens of the euro area.  During the first 14 years of the euro, the central bank fulfilled this promise by way of its obligatory price stability policy.  However, the existing economic policies of many countries continue to be contradictory to [the ECB's] policy, which is absolutely necessary to the guarantee of long-term stability for the euro and the eurozone. 

"If the euro fails, then Europe fails!" To what extent do you agree or disagree with this statement?  

Issing: Europe is far more than the euro. It is more than currency and economy. But a collapse of the euro, which I consider rather unlikely, would indeed cause considerable economic and political turbulence and it would set European integration back. 

'More Europe' in which form of the EU? In which policy areas should the European Union (a) do more; (b) change its practice; or (c) do less? 

Issing: ‘More Europe’ is a mantra, which in my opinion, lacks concrete content and easily leads to the misguided adoption of ever further centralization.  Should the EU wish to realize its aspiration of becoming the leading voice for Europe on the global stage then it must:

• Create the preconditions for growth and employment;
• Encourage the individual member states to take responsibility for the implementation of necessary reforms;
• Accommodate the principle of subsidiarity, rather than continuing to shift competencies to the European level. 

Open Europe Berlin: one to watch!

This is exciting stuff. As we've argued repeatedly, the future of Europe will largely be decided in Germany, as that country goes through a very dynamic, internal debate.

Which is why Wednesday's  launch of Open Europe Berlin gGmbH, Open Europe’s new independent partner organisation, was so incredibly timely. 220+ journalists, policy-makers, business leaders, academics, diplomats and others crowded at a packed Hotel de Rome in Berlin, to listen to OEB Director Prof. Dr. Michael Wohlgemuth and the keynote speaker Otmar Issing, former chief economist at the ECB.

The message from the podium no doubt struck a chord: the future of Europe isn't alternativlos – without alternatives to ever more centralisation. In his welcome address, OE Berlin Director, Prof. Dr. Michael Wohlgemuth argued that:

“We stand for a Europe governed by the rule of law and a Europe of citizens, not of bureaucrats… We are Europe-friendly but we place emphasis on measures that made Europe free & prosperous, not central planning… the current crisis measures will lead to institutional sclerosis & harmonised lack of responsibility, a clear case of ‘moral hazard’… Instead we stand for a liberal & competitive Europe; a democratically controllable decentralised arrangement within a clear rules based system.” 

OE Berlin Director Prof. Dr. Wohlgemuth delivering his opening remarks

In a keynote address entitled “More Europe – what kind of Europe?”, the former ECB Chief Economist Otmar Issing noted that “A think tank contributing fresh thinking on Europe is sorely needed and deserves support.”

Otmar Issing and event moderator Karen Horn

In his speech, Issing argued that:

“Placing too much value on a currency, whether it is the D-Mark or the Euro is not a good idea. It cannot be maintained at any cost...I welcome solidarity when it is about helping the weak get back on their feet. However, the fiscal union is a false interpretation of solidarity…The fiscal union is a clear case of wrong incentives. I do not believe that ‘more Europe’, a political union, is an alternative to the present state of affairs.” 

Instead, he said that failures within the euro were structural and were not caused by ‘financial speculation’, and that member states had to deal with their own problems rather than trying to move them to the European level. Issing also criticised the EU Commission’s “deeply absurd” rush towards establishing a banking union. He added that the proposed ‘Chinese wall’ between supervision and monetary policy at the ECB was “illusionary”.

The full video of the launch event is available here (auf Deutsch).

The crowd mingles at the Hotel de Rome

For German media coverage of the launch, see here.

Open Europe London Director Mats Persson outside OE Berlin office on Oranienburger Strasse in Berlin's Mitte district

Germans vs Inflation: the battle continues

In our daily review of UK and continental press, we spotted an interesting consumer analysis survey referenced on the front page of Bild yesterday. The survey - conducted by Axel Springer AG and the Bauer Media Group - found that Germans were conservative and prudent in terms of their finances with 67.9% of respondents possessing a savings book, 57.2% setting aside a specific sum every month, with only 33.8% having a credit card.

In contrast, in 2010, 64% of the UK’s adult population had a credit card – almost double that of Germany’s. This could possibly help to explain how the German and UK debates on the eurozone pass each other by so often, especially when it comes to the role of the ECB. The view from Berlin is that the ECB ought to remain as the guardian of price stability and not engage in activist monetary policies such as bond-buying, while the view from London, Washington and indeed other European capitals is that Draghi’s recent actions mark a decisive turning point in the crisis, and that it is good that he has been able to overcome German resistance – as argued by David Laws at an Open Europe fringe event at the Lib Dem conference.

Incidentally, former ECB chief economist Otmar Issing has an interview in yesterday’s Die Welt in which he warns against the social and economic damage of unchecked inflation:

“Many people come up to me on the street. Savers are deeply insecure and they have every reason to be. [The ECB’s] monetary policy has reached its limits [it] risks losing its credibility.” 

"There is no immediate risk of inflation. However I have my doubts that the ECB will stop its immense liquidity at the correct time. If this fails, prices will rise. I do not anticipate hyperinflation. However, even an inflation rate of 4 to 5% disposes savers and creates social problems… The social partnership between employers and unions, everything depends on a reliable monetary policy. Inflation is the most anti-social policy.” 

“[Pumping more liquidity into the system] is a dangerous argument. In putting out a fire, it is also the case that more water is not always better per se. Ultimately it could turn out that the damage caused by the water exceeds the actual fire damage.” 

Speaking to the German Industry Federation (BDI) yesterday, ECB President Mario Draghi defended the ECB’s new bond-buying programme, and in an apparent swipe at German fears of inflation, that in times of crisis “we cannot always look to the past for answers”. While Bundesbank chief Jens Weidmann may have been isolated in voting against the OMT programme, he retains the backing of a huge swathe of German public opinion which is deeply rooted in the country’s culture of savings and financial prudence.

This battle is not over by any stretch of the imagination.

Who can live life in the euro to Issing (Germany)'s rules

Otmar Issing's article in the FT this morning makes for very interesting reading. His former role on the ECB's executive board and therefore as an architect of the Single Currency makes his analysis of the current problems all the more important. But it also raises big questions.

He writes:

"The crisis of European economic and monetary union seems to confirm a long-standing belief that monetary union cannot survive without political union...

...Connecting the initial idea of a political union with developments currently under way is both logically flawed and politically dangerous. In short: a consistent concept of a political union should be based on a constitution, and imply a European government controlled by a European Parliament, elected according to democratic principles.

What we see happening now is something quite different. More and more national taxpayers’ money is now at risk to “save” the euro. Yet the conclusion that this process is leading in the direction of political union is derived from the strict conditions imposed upon member states that broke the rules, in exchange for help – conditions which imply a kind of European control over elements of member state governments."

He goes on to warn that:

"Any attempt to 'save' monetary union via agreements which transfer sovereignty to a European level, where violations of fundamental treaties have become a regular event, lacks any logic. In the end it will only further alienate the people from Europe itself.

...This type of political union would not survive. Its collapse would be brought by resistance from the people. In the past cries of 'no taxation without representation' have brought war. This time the consequence would be to threaten the collapse of the most successful project of economic integration in the history of mankind."

Issing's analysis is extremely powerful and one that we would largely agree with - and it's also an indication of the frustration in Germany over the direction in which the Single Currency is moving, not least with the ECB's decision to start splashing around in the Spanish and Italian bond markets. But Issing's article begs the question, what is the alternative solution to the political union that he describes? After all, Issing is not arguing for the euro to be abolished. In fact in his last sentence, he describes it as "the most successful project of economic integration in the history of mankind."

Issing describes the euro as a "depoliticised currency" based on "rules enshrined in international treaties" and "entrusted to an independent central bank with a clear mandate to maintain price stability." This could very easily be characterised as the wider German rule-based view of how the euro (and many other things in life) should work.

But what about the countries who haven't been able to survive within the rules? Alright Greece broke them from the start but the likes of Spain and Italy are clearly struggling to cope within the euro's one-size-fits-all straitjacket and played by the rules in good times.

Issing doesn't offer an opinion on how this should be addressed but surely the logic of maintaining this rules-based view is that those that can't stick to them will have to leave.

Of course, Issing is far too diplomatic to even hint at this possibility but once you acknowledge that going down the current path of collectivising debt in the eurozone, and saving the fiscally irresponsible, will cause the euro to "collapse" and "further alienate people" what other alternative is there to showing the rule-breakers the exit door?