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An architect of the euro and the
former chief economist of the European Central Bank and the Deutsche Bundesbank,
Otmar Issing, has issued a warning that the “seemingly unstoppable”
movement toward financial transfers from the single currency area's strongest to
its weakest members, is putting the currency at risk.
“The longer this process is characterised by unsound conduct of individual
member countries, the more these tensions will endanger the existence” of
the EMU (European Monetary Union), Dr. Issing warns in an article that was
originally published in the Frankfurter Allgemeine newspaper in Germany in
November and due to be published this week in English in the OMFIF Bulletin of
the Official Monetary and
Financial Institutions Forum, a London-based think tank that is run by
former Financial Times journalist David Marsh and Irishman Michael Lafferty,
whose Lafferty Group is a longtime publisher of financial newsletters.
Issing who will be 75 in March was
from the outset of the euro project sceptical of the EMU sanctions for breaking
the deficit and debt rules and he was appointed to the inaugural governing
council of the ECB in 1998 by German finance minister Theo Waigel, despite the
objections of Chancellor Helmut Kohl. Dr. Issing had opposed Kohl's plan on
reunification to value the East and West German marks at parity -- see
CNBC video clip at bottom of page. The economist retired from the ECB in
2006 and he now heads the
Center for Financial Studies in Frankfurt.
“The crisis brought further
evidence of a basic design flaw of monetary union, namely that we could not rely
for its sound working on member countries to carry out appropriate economic
policies,” Dr. Issing writes and says Germany and
France had in the past weakened the Euro Stability and Growth Pact rules to suit
themselves. “Could we, in truth, really have expected anything else
from a jury in which potential and actual sinners are called upon to pass
judgment on each other?” he writes.
As to the conditions set in EU-IMF rescues, he says: “If such strict
conditionality had not worked in the past, why should we believe that it would
do so in future?”
He warns leaders not to try to create a stronger political union behind the
backs of European citizens.
“A political union worthy of the name cannot be set up by stealth,” he
writes.
If leaders create a de facto political union under which disciplined countries
subsidise the undisciplined, “it will not be long before opposition to
monetary union, and possibly other policies as well, appears on the agenda not
just of extremist groupings but also of established political parties, in
Germany and elsewhere.”
The economist calls for tighter rules on government spending, with automatic
sanctions, and for independent organisations to determine when countries are in
violation.
Bond Markets
On Tuesday, the Greek 10-year bond
yield fell 61 basis points to 11.68%; Ireland’s 10-year bond dipped 36 basis
points to 8.79% and Portugal’s 10-year note yield eased 19 basis points to
7.01%. The Italian 10-year yield slid 5 basis points to 4.80% while Spain’s
10-year bond yield slipped 7 basis points to 5.51%.
The 10-year German bund yield closed
at 2.92%.
Portugal's prime minister, José
Sócrates, said Tuesday the country wouldn't need a bailout and his country is
scheduled to auction up to €1.25bn worth of debt today - - the start of
€20bn worth of fund raising this year.
CNBC's Kate Kelly looks at which hedge funds profited from Eurozone turmoil:
In
a commentary
published on Tuesday, Jacob Funk Kirkegaard, an economist at the Washington DC
think-tank, the Peterson Institute for International Economics, says: "Like
Ireland, Portugal faces a choice - - not whether to accept a bailout but rather
from whom to take the help, along with whatever conditionality the outside
assistance comes. Like Dublin in November 2010, Lisbon today is already on the
'ECB payroll' and protestations of Portuguese politicians that 'we can do
without a bailout' belong in the satirical political theater category."
The Danish national adds: "An expeditious Portuguese
approach to the IMF-EFSF would moreover fit well into the broader Eurozone
agenda. It would roughly coincide with the announced new EU bank stress tests
and - - in combination with substantial new transparency on the financial state
of the Spanish caja sector and pledges of government financial support from
Madrid - - serve to ease contagion risk and broader uncertainty about the fiscal
sustainability of Spain in 2011."
Otmar Issing, former ECB and Bundesbank chief economist recalls how he warned against the creation of a currency union between Eastern and Western Germany at the time of unification. “I must confess that we were totally wrong on the political fundament. We could not imagine early February 1990 that in October, we would have a united country,” he told CNBC in Oct 2010 on the 20th anniversary of reunification:
