German Banking Expert on Euro Crisis
'Punishing Italy Is a Rational Thing to Do'
SPIEGEL ONLINE: The markets are yet again in turmoil, the euro on Monday fell considerably and the risk premiums on Italian state bonds have climbed to a record level. How dangerous has the situation become for the country?
Burghof: What Italy is experiencing at the moment is a massive shot across the bow. But it was also overdue. The country is not innocent when it comes to its decline. In particular, it was Prime Minister Silvio Berlusconi's reckless chatter that led to this market reaction.
SPIEGEL ONLINE: In what way?
Burghof: Berlusconi publicly questioned the austerity drive of his finance minister, Giulio Tremonti, the very man who stands most credibly for a solid Italian finance policy.
SPIEGEL ONLINE: So do you think that this warning shot will now result in Italy taking action?
Burghof: It doesn't necessarily mean that. You read little about the crisis in the Italian media. That is alarming to me because it shows that the country would prefer to detach itself from reality. One can do that for a while, but now the capital markets are obviously saying: Those days are over. Either you face up to reality or you will be punished.
SPIEGEL ONLINE: And do you think this punishment in the form of higher borrowing costs for Italy could become the biggest problem yet for the entire euro zone?
Burghof: Correct. But there is one advantage for Italy. It has to be clear to everyone that we cannot save this country. The principle that was applied to Greece -- the idea that we just need to throw enough money at the problem and everything will be OK -- won't work. Everyone knows that Italy has to solve its problems on its own.
SPIEGEL ONLINE: What must Italy do in concrete terms?
Burghof: To begin with, Italy first needs to implement credible savings measures. The Berlusconi government already has considerable problems in that respect. The country also needs a strict revenue policy -- tax evasion needs to be fought more effectively. And some things have also gone wrong with Italy's industrial policy.
SPIEGEL ONLINE: At the moment, the government isn't making a very confident impression. Finance Minister Tremonti has linked his fate with that of the country and the currency: If he falls, he said, then the euro will follow.
Burghof: That is a definitely a little melodramatic. On the other hand, one has to say that Tremonti is convincing when it comes to reforms and credible when it comes to savings. It doesn't make Italy any more credible when Berlusconi cracks jokes about him.
SPIEGEL ONLINE: What can other euro-zone countries do in order to prevent the spread of the debt crisis?
Burghof: We need to stick to our principles. Right now, we are paying the price for breaching those principles. That means that as long as we do not have a central economic government (for the euro zone) that can discipline violators of the deficit rules, then it is the markets that will do so -- and every country in the euro zone will be held liable for the sins of other EU member states by the markets. We cannot allow this kind of reflex action.
SPIEGEL ONLINE: German Finance Minister Wolfgang Schäuble says the situation in Italy isn't even that bad and that the speculation against the country will stop again. But this all sounds suspiciously familiar. Do you believe this strategy of quieting down the markets can work?
Burghof: The fundamental problem is that politicians believe that markets react in panic, in other words, irrationally. But that's not true. The capital markets aren't children who can simply be quieted down. Investors look at the figures and can see that Italy is highly indebted.
SPIEGEL ONLINE: So you're saying that the markets are more rational than politicians?
Burghof: Yes, because punishing Italy is a rational thing to do. There are people who have invested their money there and have now determined that the investment is no longer secure, so they are pulling out. In addition, there are players who have taken notice that the yields are rising and they are betting on that. That's the snowball effect which we are now seeing. It is not based on panic, but rather on totally rational appraisals.
SPIEGEL ONLINE: You think it is rational that people are speculating against the country, and that they are betting on Italy's continuing decline with short-selling and credit default swaps?
Burghof: Yes, of course. That is how investors can share their opinion on the market. It is just like in a democracy: Of course, some people get irritated when another person expresses an opinion they don't like. But you still have to accept it.
SPIEGEL ONLINE: We've been dealing with the euro crisis for almost a year and a half now. Is there really a chance that the worst problems will soon be solved?
Burghof: We will be dealing with the crisis for some time to come. There won't be a single, full-blown plan. Each country in the crisis has different problems.
SPIEGEL ONLINE: What needs to happen in the case of Greece?
Burghof: Providing the country with extended maturities and lower interest rates is in no way a true solution. Greece finally needs its debt to be restructured in order to have a little breathing room.
SPIEGEL ONLINE: Does that also apply to other countries?
Burghof: Italy's budget deficit isn't even that massive, but the country's national debt, at 120 percent of gross domestic product, is far too high. If the government doesn't signal that it wants to reduce these debts, then the markets will not be calmed. The country needs to pass a credible austerity package as fast as possible.
SPIEGEL ONLINE: But the risk of contagion remains.
Burghof: I don't believe in this idea of a domino effect. Investors are already making an effort to evaluate the euro-zone countries independently of one another. American investors, as well, are able to differentiate between Spain and Italy. If they couldn't, then they would be handling their money in a way that was criminally negligent. In the euro crisis, each country must be considered separately.
Interview conducted by Christian Teevs