ECB-director Jörg Asmussen is pro a Greece in the Euro-zone and defends the buy of debt by the ECB against critique from Bundesbank CEO Weidmann. Athens leaving the currency union would be manageable; but expensive.
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The fear of a Euro breakup grows. This week chancellor Merkel, the French president and the Greek head of government discussed the consequences. ECB-direktor Asmussen warns against underestimating the cost of forcing Greece out.
Q: Herr Asmussen, the Finnish Foreign Secretary has said it clearly: The Euro falls apart. Is he right?
A: He has obviously revised his statements in the mean time. If he had said so, the he would not be right. The Euro will remain a stable currency.
Q: But the danger that Greece leaves is rising?
1) My preference is clear. Greece should remain in the Monetary Union.
2) To ensure that is up to Greece.
3) Greece leaving would be controllable. But:
4) Leaving would not be as orderly as some imagine. It would be connected with growth cuts and higher unemployment and be very expensive – in Greece, in the whole of Europe and in Germany too.
Q: German policians demand that there will be made an example of Greece. The South European should not be allowed to let the others pay. How helpful are such expressions?
A: I’m always surprised with the flippancy some speculate in a departure and the outspoken contempt of other Europeans. The bandying national stereotypes around by all sides: In Germany about Greeks and vice versa that is not appropriate in the complex situation.
Q: If a Greek departure is controllable, does that mean that Spain and Italy are protected from infection?
A: The danger of contagion is still there even though we are better armed today with the EFSF and hopefully soon with the ESM. In spite of that one shouldn’t pretend to know with certainty what would happen with a departure of a country: Is it the first domino or jettisoned ballast?
Q: The Constitutional Court rule September 12th on the German laws on the ESM. What would a No from Karlsruhe mean for the Euro?
A: Then the ESM cannot get in force in the planned form.
Q: The German Government has warned of a great setback for the Euro Rescue.
It would indeed be good, if the ESM could start working as soon as possible. The ESM is a better crisis management instrument than the EFSF.
Q: Could You explain why German citizens should be liable for deficit countries?
A: Up to now the credits and guarantees have not cost the German taxpayer one single Euro; but there are of course risks. Germany is the greatest profiteer of this currency union and the common domestic market. There are millions of jobs in the export to Europe. When our neighbours are in a bad way it does hurt Germany long term.
Q: Why is the currency union so unstable?
A: The EMU has a design flaw that will have to be corrected now. When the Euro was introduced it was said: Now we have new notes and coins. The banknotes were a bit more colourful, but other than that not much had changed.
One should have explained at the time, that the beginning of the currency union would be a de facto membership of a political union. We will have to make up for that now and complete the monetary union. The four missing elements are: Union of financial markets, fiscal union, real economic union and a legitimate democratic political Union.
Q: That would ultimately mean common liability for the debt?
A: The four elements depend on each other. A fiscal union without democratic control is unthinkable, control and liability belong together. That is why Eurobonds are logical only in a complete fiscal union; they are not a crisis management tool. Nobody gives a stranger a credit card in the hand without being able to control the expenditure.
Q: The markets have gained confidence since ECB-CEO Mario Draghi inflammatory speech. How can the ECB keep their promise to do everything so the Euro survives?
A: The President has said that the ECB will do everything within it’s mandate to guard the continued existence of the Euro.
Q: What did he mean by that?
A: The financial markets still imposes high risk premiums on sovereign bonds on certain countries. These risk premiums to some extend reflect reservations as to the reversibility of the Euro, i.e. an exchange risk that theoretically shouldn’t exist in a monetary union. This leads to our monetary policy only extends incompletely in many Euro economies. Our actions try to repair this flaw in in the “Transmission Mechanism”, as it is called in CB-German.
Careless talk about Europe
Q: When the markets assume a breakup they are wrong again?
A: Every broker in New York, Singapore or Hong Kong read every day on his computer how carelessly the Euro is spoken of in Europe. Then one should not wonder there are concerns about a break up. Precisely this doubt about the continued existence is the one we want to take away from the market players.
Q: That is why there should be more debt buy outs. Why do You think that the new program will be more successful than the first two programs that only led to a short term lowering of the interest rate?
A: Because it is a better concept than the old SMP buyout program.
Q: You’ll have to elaborate on that.
A: The ECB does only works in conjunction with the EFSF or later the ESM. A state must apply for assistance and fulfil extensive economic and political conditions. In my personal opinion it would be beneficial to demand that the application for an initial market intervention would pass through the EFSF/ESM before the ECB take action. Such an application is just a necessary condition for ECB intervention. The ECB-Council can then in complete independence decide if, when and how debt is to be purchased on the secondary market.
Q: Why should this connection be more successful?
A: It is not goal oriented if the ECB tries to counteract market disturbances and the country in question not simultaneously tries its best to deal with the roots to its economic problems. The Italian mistake last summer cannot be allowed to be repeated: The ECB bought Italian sovereign bonds and the time wasn’t used to implement the necessary adjustments.
„We are working on a new program“
Q: That is a political argument. But why should that concern the market?
A: There is a further reason that the ECB CEO has already pointed to: In the new buyout program we want to address the problem that private investors think the ECB has a senior creditor status. That makes the road back to the market more difficult for the country in question, because private investors fell their status uncertain and will shy away from that country. Furthermore we will only buy bonds of short maturity because that is the timeframe for our monetary policy.
Q: The old program was always of limited scope in as well as extend. Mario Draghi has not said these words. Could the new program be successful because it is unlimited?
A: You have heard correctly. But wait and see. We are working on the wider implications of the new program and will deal with this question at our next meeting.
Q: Bundesbank CEO Jens Weidmann has as the only in ECB-Council voted against the new program. What sees Jörg Asmussen differently from Jens Weidmann?
A: I was on vacation and did not participate in the last meeting.
Q: Do You share Bundesbank-CEO Weidman’s concerns?
A: Jens Weidmann and I discuss; but not each other. The cooperation is close and confident; but also confidential as in the good old days of the Great Coalition.
Only a continued currency can be stable.
Q: The Bundesbank is worried that the mandate of the ECB is overstepped. With any reason?
A: We act within our mandate that has medium term price stability in the whole Euro-zone as priority. Only a currency that indubitably continues to exist can be stable. That is our mission in the ECB.
Q: Is the Bundesbank isolated in Europe?
A: No, and nobody should try to give the impression that the Bundesbank nor her CEO are isolated.
Q: The Germans are worried about the stability of the Euro. Can the ECB also fight inflation effectively?
A : The facts speak for themselves: In the 13 years since the introduction of the Euro the inflation has always been around our target of a shade under two percent. The credit and money growth in the Euro-zone is moderate; the expected inflation in the whole Euro-zone is anchored to our target. We do observe the price development very closely and have the necessary instruments to fight inflationary dangers effectively and appropriately.