:00:00. > :00:12.Now on BBC News, it's time for HARDtalk.
:00:13. > :00:20.Welcome to HARDtalk. I am Stephen Sackur. The European economy just
:00:21. > :00:25.about survived the post crash era of recession, debt crisis and emergency
:00:26. > :00:31.bailout. But its resilience is about to be tested again. Global growth is
:00:32. > :00:36.sluggish, Europe's ranks of look fragile and the EU is full of
:00:37. > :00:43.political uncertainty. Germany has long been Europe's rock of stability
:00:44. > :00:46.but for how much longer? Well, my guest is Otmar Issing, influential
:00:47. > :00:50.German economist and former board member of the European Central Bank.
:00:51. > :01:17.Should Europe brace itself for new economic storms?
:01:18. > :01:29.Otmar Issing, in Germany, welcome to HARDtalk. Good afternoon. Let's
:01:30. > :01:33.start with an overview of the world economy. Markets across the world
:01:34. > :01:37.are deeply nervous. We've seen them in turmoil in recent weeks. We also
:01:38. > :01:44.see global commodity prices are crashing. And dynamic growth is very
:01:45. > :01:49.hard to find. How nervous are you at about the state of the world
:01:50. > :01:56.economy? Think you have identified already an number of risks for the
:01:57. > :02:00.world economy. In the first place I would point to geopolitical risks,
:02:01. > :02:05.war in some parts of the world, terrorism is a threat. And in
:02:06. > :02:10.economic terms it is a combination of uncertainty about what is going
:02:11. > :02:17.on in China, what will happen in the future with the oil markets, the
:02:18. > :02:26.banking system is stable enough to overcome eight new crisis, all this
:02:27. > :02:32.creates a commendation of risks which are reflected in extreme
:02:33. > :02:36.uncertainty and accordingly we see high volatility in markets -- a new
:02:37. > :02:39.crisis. There is nothing Europe can do about a slowdown in China but it
:02:40. > :02:44.will affect Europe. To what extent do you worry that the one thing that
:02:45. > :02:48.the world economy had going for it in the last financial meltdown was
:02:49. > :02:54.the fact that the emerging markets, China in particular, retained their
:02:55. > :03:01.capacity to offer growth. This time around that isn't the case. This is
:03:02. > :03:07.true. We don't identify for the moment any sort of countervailing
:03:08. > :03:13.developments in the world. It is going more all less all in the same
:03:14. > :03:17.direction. And of course the biggest uncertainty is about China, it is
:03:18. > :03:21.now an important player for years in the past -- more or less. China has
:03:22. > :03:28.delivered more than half of growth for the world economy. And this has
:03:29. > :03:34.more less stopped for Europe and Germany. This will have an impact on
:03:35. > :03:40.exports. By itself, if it were only China, I don't think we would be too
:03:41. > :03:45.concerned, but it is just one element in this sea of uncertainty.
:03:46. > :03:50.Let's get to Europe now, and two matters much closer to your heart,
:03:51. > :03:53.as one of the sort of elite central bankers in Europe over the last
:03:54. > :03:56.generation -- to matters. Do you share the view of, well, it was
:03:57. > :04:02.expressed in the Financial Times just the other day, that Europe, for
:04:03. > :04:07.all of its talk of sorting itself out after 2008, in particular
:04:08. > :04:10.sorting out its banks and financial systems to make a more resilient,
:04:11. > :04:13.what we seek to day with the new round of nervousness across the
:04:14. > :04:22.world economy is that Europe's banking system remains desperately
:04:23. > :04:29.fragile. I would not say desperately fragile. Fragile is enough. LAUGHS.
:04:30. > :04:32.Fragile is still an indictment, Mr Issing of everything that has been
:04:33. > :04:38.done in the last seven years. Yeah, but I think, all in all, this
:04:39. > :04:43.banking system is in better shape than before the last financial
:04:44. > :04:50.crisis in 2008. Banks are better capitalised, they are better
:04:51. > :04:56.provided with liquidity, the ECB has provided assistance for the banking
:04:57. > :05:01.system, so, all in all, I think fragile is OK, desperately fragile
:05:02. > :05:05.is absolutely exaggerated. Well, let's not get stuck on semantics.
:05:06. > :05:09.The bottom line is if one looks at public confidence in the banks, and
:05:10. > :05:14.let's talk about a sort of totemic bank in your country, Germany,
:05:15. > :05:18.Deutsche bank. Shares plummeting about up to 40% at one point as the
:05:19. > :05:26.public, and indeed the financial markets, lose confidence in these
:05:27. > :05:33.important banks' ability to withstand future shocks. I think
:05:34. > :05:39.that the Deutsche Bank case is a special case. Its position is such
:05:40. > :05:44.that it is quite gloomy but it is more due to past failures, part
:05:45. > :05:50.storm is to criminal acts in which the bank had to spend a lot of money
:05:51. > :05:56.and it new capital was raised over the last few years. It was wasted by
:05:57. > :06:03.paying fines. This adds to a double-digit billion fine. So, I
:06:04. > :06:06.think this is something different from the general fragility of the
:06:07. > :06:14.banking system. I think nobody would doubt that the Deutsche Bank can and
:06:15. > :06:18.will survive and go on in future again. So, I refer more to banks
:06:19. > :06:24.which are sitting on a lot of non-performing loans. This is
:06:25. > :06:28.especially true with the periphery. For me this is the bigger risk than
:06:29. > :06:35.just what is going on in Deutsche Bank. Lets make it much more
:06:36. > :06:38.broadband Deutsche Bank. In the words of the Financial Times there
:06:39. > :06:44.are still zombie lenders in parts of Europe, you know, with debts that
:06:45. > :06:49.will never be paid on their books. And, you know, one wonders, for all
:06:50. > :06:53.this talk of banking union in Europe to make the banking sector so much
:06:54. > :06:59.stronger, what that really means, 'cause in the end there are no
:07:00. > :07:05.guarantees of bailouts, there is no sort of guaranteed Euro wide deposit
:07:06. > :07:11.insurance. What exactly is the banking union? Well, the banking
:07:12. > :07:15.union is still an unfinished house. We have established a single
:07:16. > :07:22.supervisory mechanism at the European Central Bank, and I must
:07:23. > :07:27.say I would not have expected that the ECB would, after one year, be in
:07:28. > :07:33.such a strong position. You see, they had to hire more than 1000
:07:34. > :07:39.staff and at the same time starting supervising the most relevant 129
:07:40. > :07:45.banks in Europe, in the euro area to be more precise. I think this has
:07:46. > :07:52.worked so far quite well on deposit insurance and resolution mechanism
:07:53. > :07:59.work still to go on. My personal opinion is that common deposit
:08:00. > :08:04.insurance should not be introduced before the situation of bank
:08:05. > :08:11.balances is clarified, all the loans are digestive... You mean that the
:08:12. > :08:15.zombie banks go bust before the eurowide commitment to bailing out
:08:16. > :08:21.banks and insuring depositors' money is delivered, is that what you mean?
:08:22. > :08:27.You are again going very far, to go bust. I think you referred a moment
:08:28. > :08:35.ago to zombie lenders. I think this is a problem which we have seen
:08:36. > :08:46.contributing to long-standing growth in Japan, zombie banks lending to
:08:47. > :08:54.zombie companies. I think this is an important burden for the recovery,
:08:55. > :08:58.and I think the banking system has to be clarified. This is what the
:08:59. > :09:05.Americans have done very quickly after the crisis. It has been missed
:09:06. > :09:09.in Europe. Quite. Europe has been much slower. And actually, now that
:09:10. > :09:13.you make the comparison with Japan, I am going to extend it a little
:09:14. > :09:17.bit. You know, there is a parallel, is there not, between what we see in
:09:18. > :09:21.Europe today and what we see, what we have seen, for the last
:09:22. > :09:24.generation in Japan, that is long-term economic stagnation. And
:09:25. > :09:30.one symbol of it in Japan, which is now coming to Europe, is negative
:09:31. > :09:38.interest rates. I mean we now see in Sweden and interbank lending rate of
:09:39. > :09:42.-0.5%, that suggests a long-term lack of confidence in growth, a
:09:43. > :09:51.long-term sickness, does it not, in the perception of the European
:09:52. > :09:54.economy? I think growth has stopped to fall, it is now in positive
:09:55. > :10:00.territory. It looks still quite stable, it is moderate but 1.5%, I
:10:01. > :10:06.think this is not stagnation. You egg and exaggerate. I am not
:10:07. > :10:10.exaggerating about this trend towards negative interest rates in
:10:11. > :10:17.Europe, that is a reality -- you again. I think this trend might
:10:18. > :10:26.continue as long as structural reforms are not really... Don't
:10:27. > :10:32.really materialise. I think low investment, low growth, is not any
:10:33. > :10:39.more due to too high interest rates but these low interest rates can
:10:40. > :10:45.have a positive, substantial impact on especially the economies of the
:10:46. > :10:52.periphery only if they meet markets which are not burdened by too much
:10:53. > :10:56.regulation especially the labour market. That is interesting. You are
:10:57. > :11:02.saying that has to be an onus now on the politicians to do deliver
:11:03. > :11:05.structural reforms, you cannot just rely on bankers to deliver monetary
:11:06. > :11:10.policy. It seems to me you could argue that the ECB, where you were a
:11:11. > :11:13.board member, has run out of ammunition, or at least appears to
:11:14. > :11:17.have run out of weaponry to stimulate the European economy. They
:11:18. > :11:22.have used a form of quantitative easing to pour what, 1 trillion
:11:23. > :11:26.euros, into the European economy in recent times, and you say it is
:11:27. > :11:32.growth, but it is paltry growth, but there are not many monetary weapons
:11:33. > :11:39.left to use, are there? I would not say it is running out of ammunition.
:11:40. > :11:48.You can increase quantitative easing endlessly. That's not the German
:11:49. > :11:51.way, Mr Issing, is it? I am talking about hypothetical situation...
:11:52. > :11:55.LAUGHS. ISAF very hypothetical. You know as
:11:56. > :12:00.well as I do that the Germans don't want to see endless resort to
:12:01. > :12:03.quantitative easing -- I say. It comes back to the Japan model.
:12:04. > :12:08.Europe is stark. Even with the lowest interest rates in history,
:12:09. > :12:11.even with pouring money in the form of quantitative easing, nothing is
:12:12. > :12:19.really getting Europe going -- stuck. I am always really angry when
:12:20. > :12:27.I see that the Japanese situation is presented as a kind of permanent
:12:28. > :12:33.nightmare. But you know, like me, that over the last ten years growth
:12:34. > :12:39.per capita in Japan was higher than in the US. So, as economists I
:12:40. > :12:45.think, the welfare, perhaps, the welfare of people is key and in this
:12:46. > :12:49.respect Japan hasn't done so bad as it is presented by the BBC or the
:12:50. > :12:54.Financial Times. On these eurozone issue, you have been on the record
:12:55. > :12:57.in recent times as saying that you think in many respects the third
:12:58. > :13:01.bailout of Greece was a mistake, that Greece probably would have been
:13:02. > :13:05.better off, the eurozone would have been better off, if Greece had at
:13:06. > :13:10.least for a time being exiled out of the eurozone. But it seems to me
:13:11. > :13:16.that the institutions in Europe don't recognise the reality that you
:13:17. > :13:21.see. I mean, they are still, frankly, talking about new forms of
:13:22. > :13:26.fiscal union, they're talking about a finance ministry for Europe, a
:13:27. > :13:29.budget for the eurozone, a degree of fiscal union that doesn't seem to
:13:30. > :13:36.recognise the reality of the last seven years.
:13:37. > :13:44.Let me make two remarks under question. The first is, I think I am
:13:45. > :13:51.convinced it could have been better for Greece to leave for a while and
:13:52. > :13:59.to be supported by the others but direct it towards improving the
:14:00. > :14:02.situation of the people's institutions in Greece. Nobody knows
:14:03. > :14:08.what would have happened if Greece would have left, whether this would
:14:09. > :14:15.have had contagion effect on the others. It is difficult to judge. On
:14:16. > :14:20.the proposal in the euro area presented by the five presidents
:14:21. > :14:29.recently in their report, they are suggesting Europe Monetary Union
:14:30. > :14:33.should move in the direction of political union, especially in the
:14:34. > :14:38.context of creating a fiscal union. For me, the key point is the
:14:39. > :14:47.following. The fiscal union, however you define it in the end, it is a
:14:48. > :14:53.question of European public spending, at least for a substantial
:14:54. > :15:05.part of it. I think this can and only should happen in the context of
:15:06. > :15:13.Democratic legitimacy. It is a fantasy. It is essentially creating
:15:14. > :15:17.one of the pillars of an integrated United States of Europe but without
:15:18. > :15:24.actually delivering the political reality of it. It is just fantasy
:15:25. > :15:30.politics. I agree. It is fantasy or a vision for the distant future.
:15:31. > :15:34.Whatever you might call it. But I see the risk that this demand for
:15:35. > :15:45.creating a fiscal union will end in a transfer union without legitimacy
:15:46. > :15:51.by the people. And I think, in your country when the democracy started
:15:52. > :15:56.and public spending was taken over from the king and given to
:15:57. > :16:02.Parliament, this is key. So, I see these developments as very
:16:03. > :16:07.dangerous. I think in the end, people will not accept that.
:16:08. > :16:11.Interesting that you call it very dangerous. I suspect many people in
:16:12. > :16:15.the United Kingdom, of course where there is a great degree of this
:16:16. > :16:20.isn't about the European Union, even amongst those who want to stay in it
:16:21. > :16:25.echo your feeling. Let me talk to you about the so-called Brexit
:16:26. > :16:29.possibility. As you know the referenda may happen as early as
:16:30. > :16:33.this summer for the British people, in or out on the European Union.
:16:34. > :16:38.Let's look at it from both points of view. From point a view of Britain
:16:39. > :16:40.and Europe, speaking as a German, would it fundamentally change the
:16:41. > :16:46.European Union if Britain were to leave? I think it would be a very
:16:47. > :16:54.bad development for Europe. Germany would lose a partner in the fight
:16:55. > :17:04.against your third bureaucracy and centralisation -- further, it would
:17:05. > :17:06.be badly missed, especially in Germany but probably much less in
:17:07. > :17:14.France come this British pragmatism. After the UK had left --
:17:15. > :17:20.has left, the European Union will be a different element. But this has
:17:21. > :17:24.consequences for the UK, because I see many British thinking that left,
:17:25. > :17:30.their position will not be much different from being a half member,
:17:31. > :17:34.so to say, of the European Union, taking the best of both worlds. I
:17:35. > :17:41.think Britain in the future would have to deal with different European
:17:42. > :17:47.Union issues in which protectionist attitudes would dominate much more
:17:48. > :17:51.than with the presence of the UK in the European Union. This is very
:17:52. > :17:56.important because the advocates of an exit here in the UK say, look, we
:17:57. > :18:00.will have an awful lot of leverage with the EU to negotiate a
:18:01. > :18:05.favourable trade deal from the British point of view if we leave
:18:06. > :18:08.because Britain is such a powerful economic player in Europe. The
:18:09. > :18:12.European Union needs us just as much as we need them, so therefore let's
:18:13. > :18:16.not make it parallel with Norway which is a very small country which
:18:17. > :18:20.has to sign onto all of the European Union rules and regulations as part
:18:21. > :18:27.of the European economic area. We in Britain wouldn't have to sign onto
:18:28. > :18:31.everything because we are more powerful and Europeans will want to
:18:32. > :18:36.trade with them. Are they correct in that? I've talked to many friends in
:18:37. > :18:43.Britain on this issue and they think that the EU is not changed after
:18:44. > :18:51.Britain has left. I think it would be a dramatic change and of
:18:52. > :18:56.course,... Are you telling me that if Britain leaves and EU changes,
:18:57. > :18:59.the EU mindset will be much more protectionist and much less inclined
:19:00. > :19:08.to give Britain a favourable trading relationship with the EU? Exactly. I
:19:09. > :19:15.think in economic terms, it is clear, the EU would hurt itself. But
:19:16. > :19:21.in such an environment, extreme parties on the continent will get
:19:22. > :19:25.more power and for the trouble in France, this argument that you heard
:19:26. > :19:33.yourself, if you protect the market against Britain, this market will
:19:34. > :19:39.not really prevailed over political interests. I am afraid. I hope I am
:19:40. > :19:43.wrong. One other specific point, David Cameron right now is in the
:19:44. > :19:47.midst of negotiations trying to persuade fellow British European
:19:48. > :19:51.leaders to let him have concessions, particularly on cutting benefits and
:19:52. > :19:57.welfare payments to EU migrants who are living and working in the United
:19:58. > :20:00.Kingdom. He wants to have at least four years of limitations on benefit
:20:01. > :20:06.payments and he wants them scaled to the local economy in a country like
:20:07. > :20:12.Poland rather than based on the cost of living in the UK. These are quite
:20:13. > :20:15.important changes. If he wins concessions, if he wins those
:20:16. > :20:23.changes, what a government like Germany demand the same changes also
:20:24. > :20:31.inside Germany? You asked exactly what I wanted to say. My hope is
:20:32. > :20:39.that in these negotiations of Cameron with his EU partners, we
:20:40. > :20:43.will find a solution to prevent welfare migration. Because this
:20:44. > :20:47.cannot work. No country can digest welfare migration and Germany, with
:20:48. > :20:55.the highest social benefits in Europe, would gain a lot if it could
:20:56. > :21:05.establish a system in the context of the negotiations which could be at
:21:06. > :21:11.least setting some limitations to the welfare migration. Again, to put
:21:12. > :21:15.it crudely, would Germany want to copycat and? Because the Eastern
:21:16. > :21:17.Europeans would not want that and they're trying to bring this into
:21:18. > :21:20.say whatever concessions are given to Britain are absolutely not going
:21:21. > :21:26.to be accepted for any other country like Germany -- Cameron? For the
:21:27. > :21:34.moment I think Germany would not go this way but in the context of the
:21:35. > :21:38.refugee crisis, the fiscal burden, Germany will grow when a diamond
:21:39. > :21:45.should in which this issue will have to be seen from a different
:21:46. > :21:51.perspective. Let's talk about a future of one or two years, this
:21:52. > :21:56.situation will change almost everything in Germany and the nice
:21:57. > :22:00.fiscal position, the budget surplus will be totally changed and there
:22:01. > :22:09.will be limits to the welfare system and so on. In this context it might
:22:10. > :22:13.happen. If I may say so, you have led to my last question. I began by
:22:14. > :22:18.talking about uncertainties facing Europe, one of them is the shadow of
:22:19. > :22:22.a possible Brexit from the European Union but another is the migration
:22:23. > :22:25.challenge, most of all in Germany where you have a million migrants
:22:26. > :22:30.who came in last year and you may well get similar numbers this coming
:22:31. > :22:33.year. To what extent is this going to challenge our perception of
:22:34. > :22:39.Germany as the rock of stability at the heart of Europe? I think this
:22:40. > :22:47.rock of stability is in great danger. I think Germany has two ways
:22:48. > :22:55.to react to the refugee problem. One is by pathological learning, seeing
:22:56. > :23:01.unemployment rising, social unrest increasing, and then hopefully
:23:02. > :23:06.reacting to that, or in treating this challenge by making the economy
:23:07. > :23:10.much more flexible because integration, quick integration in
:23:11. > :23:17.the labour market, is key. If this cannot be achieved, I think not much
:23:18. > :23:27.from the rock of stability will be left. Really? You fear for this rock
:23:28. > :23:31.of stability, do you? Yes. I feel it has to be deserved and Germany has
:23:32. > :23:39.enjoyed a kind of Goldilocks situation four years. Full
:23:40. > :23:41.employment, budget surplus, low inflation, our consumption has
:23:42. > :23:48.picked up and stabilise the economy. Everything looked perfect.
:23:49. > :23:53.This is a dangerous situation creating complacency and this
:23:54. > :23:57.complacency is now absolutely forbidden in the context of this
:23:58. > :24:01.challenge of the refugees. Well, we have to end back there but Otmar
:24:02. > :24:28.Issing, I thank you very much for being on HARDtalk. My pleasure.
:24:29. > :24:30.Nowhere near as cold as it was this time
:24:31. > :24:35.yesterday, but still a chilly start to the day with frost across parts
:24:36. > :24:38.Generally more cloud around which is producing rain.