Former ECB chief economist Otmar Issing has a piece in today’s FT that is riddled with mistakes and misconceptions. The headline gives you the gist of it: “Get your finances in order and stop blaming Germany: The countries now in trouble have caused their own problems”. Here are a few of the flaws in his argument.
1. “Germany is not only the biggest economy in Europe, it is also the best performing – and it would be in everyone’s interest if the country led by example.”
Yes it is the biggest, but no it isn’t the best performing. It has grown by a mere 2.9% since the first quarter of 2008, Europe’s pre-crisis peak, whereas Norway has grown by more than 4%, Switzerland by more than 6%, Sweden by 7.5% (and Poland by 16.3%). Source: Eurostat
2. “Misguided ideas also dominate discussions about a banking union… But it is hard to justify forcing one country’s taxpayers to pay for the irresponsible practices of another country’s bank’s. [sic]”
Actually, an effective banking union would require bondholder bail-ins, with taxpayer bail-outs only a last resort. This would limit German taxpayers’ liability, both for future bailouts of German banks and indirect ones, such as the EU loan to Spain to bail out its banks, whose creditors were often German banks and investors.
The real reason why Germany has sought to gut the banking union of substance is so as not to cede control over its often distressed banks, which incurred huge losses on bad lending to southern Europe in the pre-crisis years.
3. “The countries now in trouble have caused their own problems through their own policy mistakes.”
In part, yes. But bad lending by German banks also played a huge part, as did the failure of the ECB, where Ossing was chief economist in the pre-crisis years, to curb excessive credit growth – not to mention the role that eurozone policymakers played in sparking panic between 2010-12, exacerbated by self-defeating austerity, a big reason why Italy is in such a deep hole.
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