Former Central Bank Head Karl Otto Pöhl says bailout plan is all about ‘rescuing banks and rich Greeks’

From “Bailout Plan Is All About ‘Rescuing Banks and Rich Greeks’“, Der Spiegel, 18 May 2010 — Red emphasis added.

SPIEGEL: What do you think will happen?

Pöhl: The euro has already sunk in value against a whole list of other currencies. This trend could continue, because what we have basically done is guarantee a long line of weaker currencies that never should have been allowed to become part of the euro.

SPIEGEL: The German government has said that there was no alternative to the rescue package for Greece, nor to that for other debt-laden countries.

Pöhl: I don’t believe that. Of course there were alternatives. For instance, never having allowed Greece to become part of the euro zone in the first place.

SPIEGEL: That may be true. But that was a mistake made years ago.

Pöhl: All the same, it was a mistake. That much is completely clear. I would also have expected the (European) Commission and the ECB to intervene far earlier. They must have realized that a small, indeed a tiny, country like Greece, one with no industrial base, would never be in a position to pay back €300 billion worth of debt. …

SPIEGEL: But according to Chancellor Angela Merkel, that would have led to a domino effect, with repercussions for other European states facing debt crises of their own.

Pöhl: I do not believe that. I think it was about something altogether different. It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about — namely, rescuing the banks and the rich Greeks.

SPIEGEL: In the current crisis situation, and with all the turbulence in the markets, has there really been any opportunity to share the costs of the rescue plan with creditors?

Pöhl: I believe so. They could have slashed the debts by one-third. The banks would then have had to write off a third of their securities.

SPIEGEL: There was fear that investors would not have touched Greek government bonds for years, nor would they have touched the bonds of any other southern European countries.

Pöhl: I believe the opposite would have happened. Investors would quickly have seen that Greece could get a handle on its debt problems. And for that reason, trust would quickly have been restored. But that moment has passed. Now we have this mess.

SPIEGEL: How is it possible that the foundation of the euro was abandoned, essentially overnight?

Pöhl: It did indeed happen with the stroke of a pen — in the German parliament as well. Everyone was busy complaining about speculators and all of a sudden, anything seems possible. …

SPIEGEL: What will be the political consequences of this crisis?

Pöhl: The whole mechanism of the European community will change. The EU is a federation of nations, not a federal republic. But now the European Commission will have a lot more power and more authority as well as the potential to interfere in national budget law. That, however, is constitutionally problematic in Germany.

SPIEGEL: But this could also be construed as a positive development. For a long time, critics have been saying that before we can have a genuine currency union we need common fiscal and economic policy. Surely this crisis has brought the EU closer to that goal.

Pöhl: Yes, that is the logical next step of our union, but we must bear the burden. You only have to look at what it is going to cost us Germans. I would have preferred that things hadn’t gone quite this far.

SPIEGEL: In the past, the bankers at the Bundesbank, Germany’s central bank, were vehemently opposed to any political interference — for example, when the government wanted to take control of gold stocks. At the moment even larger taboos are being broken — yet there has been little outcry. Why is that?

Pöhl: The president of the Bundesbank, Axel Weber, is in a bind. He has been issuing warnings about these kinds of developments for some time and he continues to do so. But of course it is difficult to keep this up in the face of a political majority.

SPIEGEL: Especially when he aspires to the presidency of the ECB and is therefore dependent on political goodwill.

Pöhl: That may also play a role.

Posts about Europe on the FM website

  1. Can the European Monetary Union survive the next recession?, 11 July 2008
  2. The periphery of Europe – a flashpoint to the global economy, 8 February 2010
  3. Would a default by the US government help America?, 21 February 2010
  4. We might default on our governments’ debt in the future. Do you know how often we’ve done so in the past?, 5 March 2010
  5. Our government’s finances are broken. How do we compare with our peers?, 8 April 2010
  6. Governments cannot go bankrupt, 2 April 2010
  7. The EU does Kabuki for Greece. Is it the next domino to fall?, 14 April 2010

Afterword

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