One of Germany's foremost economists and the designer of the framework for Economic and Monetary Union (EMU), Otmar Issing, has dismissed claims the country gave up the Deutschmark to secure long-term competitive advantage in the euro area.
"The story that this was an intelligent and insidious idea by the Germans to get a competitive advantage in the EMU is one of the strangest ideas I have ever heard," Issing tells Central Banking Journal editor Christopher Jeffery in an in-depth interview published today (October 13). "It is ridiculous because what really happened is that Germany entered the euro with an overvalued currency, and it took six or seven difficult years featuring high unemployment in Germany for the country to regain its competitiveness."
Issing who was in contact with many of Germany's top politicians and economists at the time, finds it ironic that other countries that "failed to grasp that opportunity" of price stability now try to "make Germany a scapegoat for their own failures".
"Take Italy, for one. It was the candidate that stood to benefit most from joining the euro," says Issing. "By joining the euro, Italians enjoyed the lowest real interest rate they had seen for a very long time. They missed a tremendous opportunity and emerged as the worst performer in growth terms in the euro area."
Politicians 'made the story up'
Issing attributes the claims of a plot by Germany to secure internal competitive advantage to "irresponsible politicians" that "have made up this story" to deflect blame for their own failings. "Let me be blunt: we wouldn't even have had the economic intelligence to design such a plan," says Issing, who was a founding member of the executive board of the European Central Bank with responsibility for the directorates of general economics and research from 1998 to 2006.
The former Bundesbank director (1990 to 1998) added that Germans were deeply concerned at the time that they would suffer from the monetary union and the loss of the Deutschmark. "It was others that hoped to gain stability from a new currency; it was their dream," Issing declared, adding the early success of the euro, which involved unifying the monetary policy of 11 heterogeneous countries, was by no means a given.
Issing, who was appointed by German chancellor Angela Merkel to head her Advisory Group on the New Financial Order between 2008 and 2012, also says he does not believe Germany "gave up the Deutschmark in return for reunification" – although he said this hypothesis is "not out of the realms of possibility".
In his meetings with then chancellor Helmut Kohl (in power from 1982 to 1998), Issing says Kohl pushed on with monetary union absent of political and fiscal union as "he did not trust the future behaviour of Germans".
Issing says Kohl was "strongly influenced by his experiences of World War II and the death of his brother" and was convinced that "the final step to integrate Germany into Europe was a single currency".
"The move was deeply unpopular in Germany. But Kohl took this risk – and I had some discussions with him on this – that Germany needed to be irrevocably bound to Europe," says Issing. "The plans for monetary union existed before the collapse of the Berlin Wall."
While Issing says the fall of the wall "was a coincidence", German unification "certainly fostered the willingness of Germans to go in this direction".
A more trusting time?
Issing also says Karl Otto Pöhl, the president of the Bundesbank (1980–91), was initially sceptical of a 'one person, one vote' system for the supervisory board of the ECB. Pöhl found it "bizarre" that the German central bank with its far larger liabilities should have the same voting rights as the central banks of countries such as Luxembourg. However, "increasingly, he warmed to the idea that the governors of national central banks sitting on the governing council should be there as individuals making European decisions", says Issing.
Pöhl's endorsement was important. For instance, Issing says UK prime minister from 1979–90 Margaret Thatcher attributed Bank of England governor Robin Leigh-Pemberton's (1983–93) support for the Maastricht Treaty as being due to Pohl's subscribing to it. "[Pöhl] was seen as the final arbiter," says Issing.
It was one of Pöhl's successors as Bundesbank president, Hans Tietmeyer (1993–99), who "protested" that national central bank governors were sat behind plaques with representations of their nations at the first council meeting of the ECB in 1998. "We are not representatives of our countries," Issing says Tietmeyer declared. From then on, council members have always had plaques bearing only their surnames.
But the tradition of not acting as representatives of nations has become more difficult, if not impossible, the more the council votes on measures that have immediate implications for individual countries and the closer the policies are to fiscal policy. "It is not so much a problem with the voting, it is more to do with where the ECB policy has strayed," Issing says.
The German economist points to the ECB's commitment to purchase the bonds of troubled eurozone nations and its acceptance of a role as Europe's apex banking supervision as two aspects where the central bank has significantly exceeded its original mandate.
As a result deep fissures have emerged in the governing council between some fiscally prudent northern European nations and some of their southern counterparts, with the Deutsche Bundesbank, the largest ECB shareholder, often outvoted.
"But even in the current situation, weighted votes would not have helped, as those with an interest in more lax policies can always arrange for a majority," Issing says. "All it would do is instil a national element in the governing council that would creep into all decisions."