Top Economists Debate the Crisis
'Clinging to the Euro Will Only Prolong the Agony'
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.
Bofinger: I completely agree with you. If it were somehow possible to isolate the effects of a bank's failure, it would be better for us to simply allow all the banks that speculated recklessly to go under. The only problem is that, unfortunately, we can't isolate the effects. Today's banks are too big and too interconnected for that. Besides, they have no equity reserves for government bonds. The financial crisis has taught us that the markets have a tendency toward uncontrollable chain reactions.
SPIEGEL: Are you saying that the euro crisis could develop into a new Lehman case?
Bofinger: The Lehman bankruptcy would look like a drop in the ocean compared to what we would see if a country in the euro zone were to go bankrupt.
Homburg: I see things completely differently. The cause of the euro crisis is not to be found in the irrationality of the financial markets. Rather, it lies in the fact that certain countries lived beyond their means. A Greek train driver earns a monthly net salary of €5,000 ($6,600), and Spanish air traffic controllers make up to €300,000 a year. Do you really want to ask German workers, who haven't seen wage increases in a long time, to pay for incomes like that with even higher taxes?
Bofinger: Now, hold on a minute. In Spain and Ireland, it was the private sector, not the government, that lived beyond its means. In 2007, the Irish government had a balanced budget, and the Spanish government even had a surplus. The financial sector, on the other hand, issued loans that made no sense at all for years. The damage is considerable, but it could be contained if Europe would introduce euro bonds. After all, a euro bond is not a transfer union.
Homburg: What else could it be? Economists have made reliable calculations showing that the interest rate on a euro bond would be about a percentage point higher than the rate on a German government bond. Each year, this would cost the (German) government about €20 billion more, which would be the equivalent of a 2 percent hike in the value-added tax.
Bofinger: I would contest the assertion that the interest rate on a euro bond would be higher than that on a German government bond. Indeed, the current problem is precisely that risks associated with the euro countries are evaluated separately. If, on the other hand, they had a united presence on the financial market, the risk of a bankruptcy would be low, and the risk premiums would disappear. US Treasury bonds would be the most important competitors. Since total new borrowing for the euro zone is substantially lower than that of the United States, the euro bond would be an attractive instrument at the international level. And that's particularly the case since the market for euro bonds would be much bigger than the market for German government bonds.
Homburg: Euro bonds would not be as safe as German government bonds. And since they would stimulate even heavier borrowing, they would have to yield higher rates. In the wake of the current bailout measures, the German government has already burdened taxpayers with risks worth €200 billion. Likewise, over the last year, risk premiums for German government bonds have doubled. There simply isn't any more room for maneuver.
Bofinger: If you stir together eggs, water and flour, you don't get 50 percent flour, 25 percent water and 25 percent eggs. Rather, you get dough for egg noodles. You create something new -- and the same would apply to the euro bond.
Homburg: You're living in a dream world. Euro bonds create a system in which countries assume joint liability -- and at Germany's expense. The European Central Bank (ECB) has already asked (euro-zone) member states for a capital infusion because, since the crisis began, it has bought up close to €75 billion in troubled government bonds. And who is paying the lion's share? Germany. For the time being, the shell game being played by politicians and the ECB is still working. But things will get worse when Greece and others can no longer service their debts. Then we'll have to guarantee amounts that no one could even imagine today. And, in Germany, it would necessitate massive cuts.
Bofinger: Things won't reach that point if the proposal is correctly implemented. After all, it doesn't just call for new bonds; it also calls for more power for the European Commission in Brussels. Under the proposal, in the future, it would be up to the European Commission to ensure that all member states are pursuing sound fiscal policies. It's very simple: Whoever violates the criteria of the Stability Pact will not be allowed to issue any more euro bonds.
SPIEGEL: Let's assume that the system is introduced in the form that Mr. Bofinger suggests. Would that be the solution, Mr. Homburg?
Homburg: No. The Stability Pact hasn't worked, and it never will. The German government has massively failed in all its efforts to bolster the Stability Pact.
Bofinger: It's a question of negotiating skill. I'm convinced that, if the German government were willing to allow the introduction of euro bonds, it could impose conditions on the other countries. In effect, it would be saying: "We'll give the euro another chance, but only if our partners commit themselves to stricter fiscal discipline."
Homburg: Clinging to the euro will only draw out the agony. I argue in favor of making a painful break -- that is, putting an end to this monetary experiment. It would calm thing down in Europe and, on balance, the continent would be better off.