Monday, October 14, 2013

Helper In The Introduction Of The Euro Now Member Of Euro Sceptic Party

The Spiegel (German) has an interesting article on Wolfgang Glomb, who for years headed the department "European Monetary Union" in the German Finance Ministry. Today, he is a member of the euro sceptic AfD.

His positions are very clear:

  • He made no mistake.
  • The system was ironclad.
  • Former finance minister Hans Eichel is at fault because he let Greece join the euro.
  • If only Germany had not ignored the Maastricht criteria, which make a deficit of more than 3 percent and a debt to GDP ratio of more than 60 percent "illegal", then everything would be fine and dandy.
Of course, most of these points are completely bogus. Yes, Greece's debt to GDP ratio was well above the 60 percent when they joined (I agree that they should not have joined but Greece is not at fault for what happened in the other countries), but Spain and Ireland not only had debt to GDP ratios below that magic mark, their debt was actually falling in 2000-2007.

The myth that all the program countries were living beyond their means is very strong in Germany. Of course, smarter people like Hans-Werner Sinn blame private debt in Spain and Ireland, and they do not argue that the system was ironclad.

The fairy tale that somehow the German Schröder (1998-2005) government is to blame for a "weakening" of the Maastricht criteria is also a story which is often being told in Germany. But it is fact that these criteria are completely nonsensical. The last five years clearly show that even if one is able to reduce the debt during good times that does not prevent the debt to GDP ratio from deteriorating during a local crisis. Yes, it is better to start of with lower debt, but it is definitely no guarantee, that one can avoid crises, which due to the nature of the euro zone aren't cushioned through federal programs(unemployment and healthcare insurance) and therefore affect the local balance sheet much more than say in a US state.  

Mr. Glomb is not alone with his believes. These stories can be heard whenever one sees a news piece on the euro zone. In Germany we are living in a very simplistic universe where "saving" is good; and a worsening of the debt to GDP ratio means that the country isn't trying hard enough. 

Austerity actually making the debt situation even worse is something that isn't even mentioned. We have made up a new Grimm's fairy tale which has a very simple moral: debt is bad. Our solution is therefore punishing the debtors. But we forgot that breaking the bones of the debtors will make it less likely that they will pay in the end. 

Mr. Glomb is an example of a smart man who has been fooled twice. First he believed the euro was a good idea and now he believes in this simplistic tale. No, the euro was not a good idea without first having a state with automatic stabilizers like a euro area wide banking union and a "federal" unemployment insurance. No, breaking up the euro now is also not a good idea.

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