Leading German economists Peter Bofinger and Stefan Homburg are split over the euro’s chances of survival. In a discussion moderated by SPIEGEL, they talked about the wisdom of introducing a euro bond and what would happen if Germany left the common currency.
SPIEGEL: Mr. Bofinger, Mr. Homburg, can the euro be saved?
Stefan Homburg: In 1995, the great thinker and European policy expert Ralf Dahrendorf predicted that the euro would divide rather than unite the continent. At the moment, we are experiencing the beginning of this process. Political tensions are growing in Europe, and the Germans are being viewed as taskmasters. For these reasons, it would be better to bring down the curtain on the euro and return to the deutsche mark.
Peter Bofinger: That would be irresponsible. The euro has been a model of success. It is essential that we preserve it. The only problem is that the steps taken so far haven’t sufficed. What we need now is a bold step toward more economic integration.
SPIEGEL: What do you have in mind?
Bofinger: We should seize upon the proposal of Luxembourg Prime Minister Jean-Claude Juncker and introduce common bonds for the euro zone. Such euro bonds would significantly reduce the interest costs for problem countries, such as Greece, Ireland and Portugal. These countries would then have an easier time putting their government finances in order with austerity measures.
Homburg: I doubt that. Euro bonds violate the Maastricht Treaty, which stipulates that no country can be held liable for another country in the euro zone. The euro bonds would even elevate liability to the level of a principle and force Germany to vouch for the debts of other countries whose fiscal behavior we cannot control. Our population would not tolerate the tax increases and reductions in transfer payments that this would necessitate.
Bofinger: Yes, they would. We would just have to explain to them that this is the only way to preserve the euro. This will not succeed with the current bailout funds. They are not sufficient for anything more than Greece, Ireland and Portugal, and possibly Spain. But they would not be enough if a country like Italy joined the fold.
Homburg: Are you seriously suggesting that Germany should leap in to help if Italy stops servicing its debts?
Bofinger: Absolutely. If Italy falls, so do billions upon billions that German banks and insurance companies hold in the form of Italian bonds. The consequence would be a massive financial crash – a risk that no government can take. That’s why we have no choice; we have to stabilize the system.
Homburg: Pardon me, but that’s nothing but scaremongering. Throughout history, there have been hundreds of government bankruptcies. Look at Argentina and Russia, for example. But in none of these cases did the entire financial system collapse. Of course, the financial industry likes being able to collect hefty risk premiums without risk. But, it can’t be right for Germany’s taxpayers to prop up the banking sector under the guise of saving countries or the euro…