The former ECB chief economist said he was relying on rigorous bank stress tests, and hoped that the OMT bond purchases would never become a reality. In his opinion, the ECB should not have been entrusted with banking supervision.
Mainly translated from the German
The European Central Bank (ECB) is going through perhaps its most challenging peroid of its existance yet. As one of the founding fathers of the ECB, German Economist Ottmar Issing gave an interview to the Swiss newspaper Finanz und Wirtschaft, as the central bank prepares to take on the role of bank supervisor for the biggest eurozone banks.
Mr Issing, the economic situation in the peripheral countries of the eurozone is improving but the credit channel remains blocked. The ECB's interest rate signals are not getting through. What can the ECB do?
I'm not sure if the credit channel really is blocked. The fact alone that few loans are being awarded in the peripheral countries is no proof of this. Rather, the demand for credit is weak. There are also certain restrictions on the supply side, but those are limited. The main reason is the weakness of the economy.
To be transparent and effective, central banks now publish their future monetary policy decisions, so-called forward guidance. Is this the right way?
The way in which it is practised at the moment I think is a mistake. It creates the impression that the central bank is giving a promise for a long time, which obviously cannot be true: New shocks might happen where the dimensions are impossible to estimate, or the central bank might change key personnel.
Are the promised direct bond purchases - Outright Monetary Transactions (OMT) - fit for purpose?
The OMTs are a promise that in an emergency and under certain conditions, the ECB will buy government bonds to an unlimited extent. If one makes such a promise, it must be unlimited - it would not make sense to set a maximum amount. The promise has worked well and the markets have calmed down. But I hope it remains a promise and never has to be used.
Because the ECB would then be both hold hostage by politics, as politics define the conditions, as well as by the markets, because an exit would be virtually impossible. Imagine: The ECB buys government bonds from a country which has signed certain economic conditions. These conditions are not met, not least because the interest rates are not increased and the incentive for the policy to enforce reforms has slowed. The ECB draws the consequences and announces its exit. Just the idea that the ECB could get out of the programme under such circumstances would cause chaos on the markets which we can de facto not afford.
The euro rescue programmes will start to run out this or next year and need to be replaced to some extent. Have they been as useful as intended?
The mix of aid and conditions has resulted in certain promising changes in countries such as Portugal, which has kept strictly to all requirements and is on the right track. This also applies to Spain. Things are looking up. Whether this is happening fast enough and how long the population will continue to support these measures depends largely on whether we can build onto the initial success. But I think we can be cautiously optimistic.
Which role do the emergency loans from the national central banks, the so-called ELAs, play in the EMU? Are they a cause for concern?
That is a problematic issue. Their dimension and their durability suggest that here the prohibition of monetary financing of governments is undermined. In Ireland, this is quite obvious as the national debt was basically dumped onto the central bank. At least the ECB has made it clear that they want to make the conditions for the use of ELAs more transparent.
In his inaugural speech at the occasion of the launch of OpenEurope's sister organisation OpenEurope Berlin, Ottmar Issing warned that the ECB was not the appropriate institution to be entrusted with the role of bank supervisor and that a Banking Union of 17 in an EU of 28 would drive a further wedge between the two blocks.
"Everywhere I hear "we need more Europe" to give Europe a greater role in the world. But how would "more Europe" achieve this? From my observations it has become clear that European integration is based on economic success. Without growth, without high levels of employment, without a stable currency, Europe will not improve its standing in the world and cannot even maintain its current one. And if one centralised and harmonised fiscal and other policues in the European Union, the effect would be quite the opposite."
In an OpenEurope Berlin interview, he said:
What does the European Union mean to you?
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?
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.
'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?
"More Europe" is a mantra, which in my opinion lacks concrete content and easily leads to the misguided adoption of ever further centralisation. Should the EU wish to realise 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.
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