Council on Foreign Relations compares Germany’s hardline stance with US policy towards Britain at the end of the Second World War
The eurozone debt crisis is deepening and threatens to re-erupt on a larger scale when the liquidity cycle turns, a leading panel of economists warned in a clash of views with German officials in Berlin.
“Debts above 130pc of GDP for Italy and 170pc for Greece are a recipe for disaster once we go into the next downturn,” said Professor Charles Wyplosz, from Geneva University.
“Today’s politicians believe the crisis is over and don’t want to hear any more about it, but they have not tackled the core issues of fiscal union and public debt,” he said, speaking at Euromoney’s annual Germany conference.
Ludger Schuknecht, director-general of the German finance ministry, insisted that the debt-stricken states of the eurozone are well on the way to recovery, ending their EU-IMF rescue programmes successfully one by one. There is no need for any major shift in policy. “The strategy has been right. We need to bring down debt and this is now consensus,” he said.
This optimism is sharply at odds with the view of almost every foreign-based economist attending the event. Charles Dallara, former head of the International Instititute for Finance and chief negotiator for global banks in Greece’s debt-restructuring, said little has be done to put the eurozone on a viable footing, even if sovereign bond yields in southern Europe have fallen to record lows.
Benn Steil, from the Council on Foreign Relations, said Germany’s refusal to allow the eurozone rescue fund (ESM) to recapitalise banks directly means there will be no back-stop in place to prevent problems spinning out of control if European banks fail stress tests later this year, as expected.
This ignores the key lesson of the US stress tests, where government capital lay in reserve to ensure the stability of the system. “There is the potential for a fresh crisis if they announce the stress tests without the ESM being able to recapitalise banks,” he said.
Mr Steil compared Germany’s hardline stance with US policy towards Britain at the end of the Second World War, when a prostrate UK emerged with the world’s biggest debts – though US policy later changed. “We are hearing the same language as in the 1940s. The crisis was all the fault of lax policies in the debtor countries. It was precisely the way the US spoke when it was a creditor,” he said.
Full article: Top economists warn Germany that EMU crisis as dangerous as ever (The Telegraph)