Otmar Issing - European Central Bank Board, 1998 - 2006 HARDtalk

called upon Hugo Chavez to remedy a long list of broken promises.

Now it is time for HARDtalk. European leaders fear they could

damage the currency, and Europe itself. My guest helped bring the

euro to life. Back then, Otmar Issing believed political union was

essential. Now he fears that greater centralisation of powers in

Brussels will cause a public backlash that will wreck not just

the currency, but the continent as well.

Otmar Issing, welcome to HARDtalk. When you were first nominated for a

position on the board of the newly- created European Central Thank you

appeared before the European Parliament and at the time you said

"I don't think I'm under any illusion as to how difficult this

job will be". What made it so? There is an anecdote which is true.

A former president of the Bundesbank once came to the office.

I was a member of the Board of the Bundesbank. He suggested that I

should be the German candidate for the first executive board of the

ECB. He tried to convince the Chancellor. One day he came back to

me and he said that the idea had been rejected. He was asked if I

ever said anything friendly about the euro. I asked him - what did

you say? He said "probably not". I was not sceptical, but I was aware

of all the problems. Problems which stem from the fact that the 11

countries which would form the first group of the Union were

anything but a homogenous group. Economic theorists have developed

the idea of an optimal currency and that countries have to fulfil

certain criteria or - that they are fit for the union. This certainly

did not apply for these 11 countries. On top of that, from the

beginning, or even before there was a weak spot which was fiscal policy.

The Germans had insisted on introducing the stability and

growth bank to have a European control on public finance in

national sovereign states. But in a publication from the Institute of

economic Affairs, I said that was putting the cart before the horse.

Having this stability and Growth Pact implies that you have a jury

consisting of politicians, finance ministers - a jury consisting of

potential sinners judging actual sinners. Can this work? And the

question was answered very early on, because it was in fact Germany and

France that breached the growth and stability pact themselves. Let me

put something to you that Henning Christiansen, one of the European

Commissioners, said to me. He said it was the then prime ministers of

Germany and France who took the decision to suspend the stability

pact. He said that that was, in his view, a major disaster. Was that

where it started to go wrong? started going wrong before and in

different fields. Also in fiscal policies, because monitoring,

surveillance by the commission, it was too lax. What is mostly

forgotten is that the main message of the stability and Growth Pact

was not that the country should not exceed the 3% deficit limit, the

main message was that a country, in normal times, economic normal times,

should have a balanced budget. If it has high debt, it should have a

surplus. That is so that in times of economic weakness we had a long

way to go from 0 deficit all the way to 3%. This main message was

never dominating the discussion. The discussion was all about

dominating the -- not violating the 3%. When France and Germany do that

in 2003, that was the fatal blow to this idea of European control of

fiscal policies of sovereign states. I was an economic and financial

committee representative on the European Central Bank - this is the

committee which prepared for the finance ministers. It was the

deputy finance ministers Commission in the European Central Bank. As a

German, I was not the German representative of the ECB, but in

this moment, I felt, as a German, this was humiliating. Germany, the

country which had insisted on having such a pact, it violated it.

They organise their political majority against the application of

the rules and sanctions. This was also a bad signal and it gave the

impression that rules are for the small countries, the small members

of this club. The big guns to what they want to do. How did the

smaller members react when they saw the big guys effectively tearing up

the rule book? This was another disappointment. It was another

disappointment because I waited for the moment in which the rules would

not only be applied to the small ones, for example, we applied the

rules to Ireland because Ireland had a surplus which was behind to

their promise. I argued in favour of the rules, because we have to

demonstrate that the rules have to be strictly observed. I expected an

outcry by the small members. But this was very muted. The

explanation was that there was political pressure behind the

scenes, promises, all of that. this what was worrying you in the

early days when the preparations were being made for the euro? You

were only in place six months before the euro was launched.

Admittedly, the notes and coins didn't arrive until the beginning

of 2002, but even so, you were a new institution tried to draw up

new rules for something that had never existed before. In doing so,

it was based on information you receive from other countries. I

wonder what the quality of that information was? It was lousy. In

one word. This is not blaming anybody, because it was only three

weeks before we started with the executive board of the European

Central Bank in June 1998. It was then that this union was created.

So, statistics were not prepared for ten years or so. Just take one

example, when I received a number on, let's say cars sold in the last

quarter, say, 5 million - this number doesn't tell you anything.

You must know what it should be normally. He need the comparison

with past data, etc. All this didn't exist. Data, for example, on

unemployment from Italy had a time lag of nine months. Others had six

months, three months. They were then aggregated to one figure. We

were really sailing through uncharted waters. This was a big

problem. In retrospect, the introduction of the euro in 1999

went without any turmoil in the markets. If you would come from

Mars and look at monetary statistics from December 1998

through to January 1999, you wouldn't see any impact. This is

incredible. I was aware of the challenge because people were very

suspicious about losing the Deutschmark and having a new

currency. Having an experienced more board in front for it in

exchange for a well-respected Deutsche a Bundesbank. I was well

aware of all that. I was working on confidence and credibility. It was

a major challenge and this task was much better solved than anybody

could have expected. But Salford, for what you are saying, on the

basis of inadequate and incomplete data -- solved. Maybe even

falsified data? You're probably referring to Greece. Greece came to

matter years later. But talking about them - we had to take the

data which came from them. Of course, the data for Greece on

public deficit and the deficit in the public expenditure, the decline

came surprisingly fast. This raises some suspicion. If you had that

suspicion, would you under the obligation to challenge it? -- were

you not. If we asked, and they would have said "that is not your

responsibility". You could have played euros that, couldn't you?

You could have told them to interrogate Greece. They were

asking you to make some very important decisions on the basis of

data, that you were very unhappy and uncertain about, even if you

couldn't pin down what was actually wrong with it. But this is from

hindsight. From hindsight. Nobody at the ECB was asking these

questions? They were looking at the data and saying "hopefully this is

true". Building a new currency on "hopefully"? The other currency was

already established. There was some creative accounting in almost all

countries. Well, let's move on to what's happening now. I suppose the

most pressing question right now is whether to grant Greece more time

to meet the terms of the bailout. What is your view? My view very

early was that one should make a clear case - if the country doesn't

deliver on commitments, one should not continue to give financial aid.

The argument against that was always contagion. If Greece would

leave, speculators would then attacked other countries - we will

not mention names. This is a relevant risk, but there is another

kind of contagion, which is the following - if a country gets one

rebate after another on commitments, then the pressure for other

countries to comply with commitments is declining. I think

we have seen that makes difficulties for governments like

in Portugal, making difficulties for them to stick to commitment and

reforms in the way that when he did over the past decades. The crisis

has brought it to the limelight all the deficiencies and structural

problems in different countries. But at the same time, the crisis

has also worked as a catalyst. is the point of making Greece leave

the eurozone, in effect, when the rules have already been broken?

It's already been bailed out twice. Isn't it better, in Germany's

interest as well, that Greece remains. It's an export market,

it's part of the dream of Europe, the European ideal. This is

certainly relevant and it is an economic argument. And, as the

identity of what is called Europe. This is an aspect that has to be

reflected. At the same time, the question is - what kind of union

should survive? I once said that this is a kind of club. If you are

a club of non-smokers and a member of the club continues to smoke or

starts smoking after entry, what do you do? You have two alternatives.

Either you change the rules and the club becomes a club of free will

for everybody, or those who want to The Greeks will say that Germany

has an historical field of Haifa inflation back from the 1920s. --

hyper inflation. The damage it did to Germany. But there is another

lesson that Germany are not learning and that is what happened

after the First World War. Germany paid reparations. Even when its

economy could not face it because France said it must be punished and

it has to learn the lesson. That is the lesson they via the Greeks are

being getting. This comparison is a very bad sign. The idea was that

Europe would bring us closer to political union but increased

identification of people with Europe. I always thought the Soviet

to be wrong. Something OP has said he is happening. We had the

illusion, and the hope that memories of the past of the Nazi

regime, after more than 50 years since the end of the Second World

War are something for the history books. This is coming up again and

these bad feelings,... This is a sign for me that with the

introduction of the euro, a single currency for all members, we have

come very far to what is accepted by the people and for me, this is

an indication that we need for more Europe, that very cry, is a

conclusion which we have gone too far. You have mentioned that Angela

Merkel told about the need for a better Europe. We have had some

solutions proposed. The European Central Bank is providing the

mechanisms that will allow it to buy bonds. Mario Draghi, the

President of the central bank, saying this is the way the markets

can be reassured that countries will be given breathing space to

make the reforms necessary to make the euro were it. The German

president in August described the actions as legally questionable. Do

you think it is acting beyond its powers? If it is illegal or not

will be decided by the European Court of Justice. Leave that aside.

For me, these expanse the mandate of the ECB be on what it should do.

The ECB you said well start to buy bonds - they are ready 200 billion

in its balance and 60 million off covered bombs. So this is something

which has already happened. Now it is potentially unlimited. -- thongs.

I understand why the notion is there is no limit because otherwise

it would be testing the market. Signalling it needed a limited -- a

limited that mack of this is something very dangerous. The ECB

is doing the business which is not done by governments. The treaty on

which the multi- union his face is a simple principle - this is a

union of sovereign states and sovereign states in the end are

responsible for their policies, good and bad. Financial aid is

given, or solidarity is shown in case of for example an earthquake,

but these are not problems which are due to shocks, they are due to

mistakes of governments in the past. So it governments, European

governments together, they decide on a no bailout, then it is their

business and not the central bank. It those countries like Italy or

Spain or Greece were to leave the eurozone, would Germany suffer more

than it would gain. It may not see the transfer of resources to prop

them up but it may lose export markets? Unit to distinguish

between the short-term and the medium to long-term. I'm not

arguing that Germany should reintroduce a national currency.

This would be a foolish idea. Very dangerous and absorb. Germany

should not leave the eurozone? absolutely sure Germany will never

leave the eurozone for political and economic reasons. You said, I

belong to a group that argues Europe should been preceded by

political union. Are they coming to terms with the need for that. There

is now much talk for a move towards what they describe his genuine

political and monetary union? are talking about two different

animals. The political reunion I referred to, which was by the way

mention by the Chancellor in 1991 when he presented to the treaty to

the back, he said it would be a sort to have a political malty

Union without political union. This idea was based arm for a common

government and parliament. What the top is now, it is on correcting

problems by going in to the direction of a political union. The

political union is so far away from being an mechanism for repairing

programmes -- problems that I do not see any a readiness in

countries to treat you changed to take a risk of referendum etc. I do

not see the people are yearning for political union. What is discussed

now is for me a kind of fancy idea. It is the kind of idea, to bring it

to the point, we promise to go in the direction of malty Union in

exchange for that, we neutralise that. Money now and the promise of

political union later. This is a dangerous idea. I think it is even

fatal for identification of the people of Europe and nations within

the euro. Not just for the single company but fatal for the European

Union? Take the example of if I were to introduce euro ones which

is a popular idea with politicians at the Commission and academics.

The consequence would be to have interest rates rise in Germany

because Germany would have to shoulder guarantees for much more

debt, market would punish that, rates would rise in Germany. This

would imply... And in other countries it would decline soaked

it require a transfer of money from Germany to other countries without

any democratic litigation. This is a violation of the principle of no

taxation without representation. You wish you had challenged the

politicians more forcefully when the euro was being created? Years.

I think I realised very early that these Monetary prices did not

really work. One of the aspects... Mario Monti in a conference in

Brussels before he became Prime Minister said... He was polite and

said, we were too polite to each other. He did not suggest we should

shout at one another but, you see, if you're in negotiations and the

new government is elected, they come with promises and ideas and

then you give them money etc. To make things better. Then you see