Waigel: ‘EU should have questioned Greece’s budget figures much sooner’


Theo Waigel, Germany’s former finance minister and one of the architects of the euro in the 1990s, says the Greek sovereign debt crisis has exposed the failure of the institutions underpinning the common currency, in particular the European Commission. He spoke to euractiv.de in an exclusive interview.

Theo Waigel was Germany's Minister of Finance from 1989 to 1998. He was considered the father of the Stability and Growth Pact, which ensures fiscal monitoring of countries in the eurozone by the Commission and the Council of ministers.

He was speaking to Alexander Wragge of EURACTIV Germany

You are one of the founding fathers of the Stability and Growth Pact. What is your view of the dramatic rescue that was undertaken in the course of the euro crisis? Were the right measures taken?

Altogether, it was right and necessary to intervene. Whether or not a smaller rescue fund would have sufficed or if the measures should have been taken earlier, I cannot say, as I do not have the facts. Essentially, what we had was not a euro crisis but a stability crisis in certain countries whose budgetary policy had lost its credibility.

The EU and the euro zone responded correctly to this: as you can see, the subject of the euro crisis has disappeared from the first, second, third and fourth pages of the newspapers.

The Stability and Growth Pact was supposed to prevent such crises. Is it flawed?

This is not a crisis of the Stability Pact, but first and foremost a crisis of the institutions that were supposed to safeguard its functioning. Greece fiddled with the numbers, which is quite a nasty trick. However, the [European] Commission and the other institutions should have questioned Greece’s budget figures much sooner. The country should not have joined the euro zone under such circumstances.

Additionally, the virtually unpardonable mistake was committed of watering down the Pact. In particular Germany, the creator of the Stability Pact, did not play by the rules under the previous governing coalition.

Some experts consider the Greek bail-out and the rescue mechanism for the euro as a breach of EU law, especially of the ‘no bail-out’ clause. The German constitutional court in Karlsruhe received several lawsuits.

These are the same people that have been saying the same thing for 15 years, who have not learnt anything and never will. Their opposition is of no consequence. I am certain that the Federal Constitutional Court will not heed the arguments of a euro critic like Wilhelm Hankel.

In the EU treaties it says that one member state must not guarantee another’s obligations.

That is not what we are doing. Neither the EU is guaranteeing such obligations, nor a single member state. However, when a single member state or the EU decides that it is important to help someone to help themselves, to assist a country in getting out of a situation that they may or may not have caused themselves: for them to be able to pay their obligations back at a later date – there is no law against this.

It is like a family: I am not responsible for the debt that my brother, my sister or my children have amassed. But if I want to help them, there is certainly no-one who could deny me this right. I have to make my help conditional, though, define it clearly and present it as helping them to help themselves. Where such a plan is limited in time, conditional and linked to stringent measures for budget consolidation in a state, this resists every ruling of a constitutional court.

Is it really possible for 16 states with divergent economic politics, diverse wage levels and diverse export levels to manage to get along with a single currency?

It has worked brilliantly for many years. On the tenth anniversary of the euro, everyone was full of praise and the model is now working again. The federal states of the USA have highly divergent economic models and yet share a common currency.

Of course, it is necessary for the members of the euro zone to stick to the criteria and for them to be monitored more effectively. We need a better early warning system and better sanction procedures.

When I was entrusted with the project, this was unfortunately impossible to implement. I would have loved to introduce automatic sanctions instead of a decision in the European Council.

We have to look at countries in great depth before we let them into the euro zone. I blame the governments at the time and the Commission for not being stringent enough. I hope the lesson will be learned.

Germanyis pressing for the tightening of the Stability Pact. Yet many measures to punish those in breach of deficit limits would require treaty change. What are the chances, do you think, of achieving a significant tightening?

Treaty change will not be easy. That is a goal for the medium to long term. At first, one should only do what is immediately necessary, that is, enforcing better monitoring of the statistics and providing more immediate recommendations for the countries in question.

If a state falls foul of the criteria it should be threatened with cuts to its EU funds. This sanction would also be possible without treaty change. Cutting funds is the quickest and most efficient method available. As soon as EU financing for large structural projects – such as the extension of motorways – is discontinued, the pressure on the government to respect the criteria will grow.

You have seen for yourself that tough sanction mechanisms are difficult to implement. Why are you hopeful this time around?

Everyone has seen how Greece, a country that contributes a fraction of the European gross domestic product, managed to cause such a stir. In the end everyone else had to throw their weight in to turn the ship around. The volatility and sensitivity of financial markets has shown to all of us that it is crucial to respond before it is too late.

You argue that it is enough for everyone to stick to the criteria. But do we not also need an adjustment of economic policy in the euro zone? Germany’s EU neighbourskeep asking it to strengthen internal demand and raise its pay levels.

French Finance Minister Christine Lagarde has made such remarks. Even though I have high personal esteem for Ms. Lagarde, I find such demands inappropriate. It has never been sensible to abolish competition and to replace it with prescribed mediocrity. All of us must try to build on our strengths.

Regarding the Maastricht criteria, we also referred to the top three rather than the average. Within the EU, and within the euro zone, there must be competition. What is certain is that we need greater coordination of our budgetary policy.

I do not mind at all if budget plans are submitted to the Commission before being accepted and if the Commission then issues an opinion. On the contrary, I think the ‘European Semester’ can help a country to achieve budgetary discipline at home.

How far can common economic governance go?

It is sensible and right if budgetary and economic policy remains in the hands of the nation state. Let’s look at the example of Greece, Ireland or Spain. No-one believes that a commissioner or a ‘European’ finance minister can introduce measures more quickly or more effectively than a national politician.

Nationally-elected politicians may not cede all competences to Brussels – they have to be responsible to their populations at home. If they make mistakes, they have to correct them. Budget discipline is at the heart of the national interest. If Greece introduces austerity measures, it does not do so for the euro’s sake, or for Germany’s, but for its own. The same is true for Spain, Portugal and every other country.

There are still doubts as to whether Greece can escape national bankruptcy.

First of all, one should look at what the Greeks have done to consolidate their finances. According to my information, they have done a lot to date. The IMF and the EU estimate that they are on schedule and have significantly reduced their deficit. I find it important to acknowledge these steps and stand by the Greek government. At the same time, European pressure is helpful for them.

Can EU rules help the domestic political debate?

What is certain is that we need greater coordination of our budgetary policy.

I do not mind at all if budget plans are submitted to the Commission before being accepted and if the Commission then issues an opinion. On the contrary, I think the ‘European Semester’ can help a country to achieve budgetary discipline at home.

Recently Eastern European states demanded a change in the way the deficit is calculated. The cost of the pension reforms should not be included. Do you fear a watering-down of the Pact?

No, on the contrary. The Pact will certainly be tightened. This little game, where one person wants to exclude spending on defence, another wants to cut social affairs spending and another wants to exempt transport, will not be possible. Too many exceptions are dangerous.

Let’s return to Greece. Creditors, including many German banks, receive very high interest rates and are not even taking any risks, as the euro zone is prepared to intervene in case of an emergency and cover the debt. Do we not need insolvency regulations for a member of the euro zone that allow for a waiver of receivables on the side of the creditors?

I would not be opposed to establishing an orderly procedure for such a case, which would allow for restructuring. This time around we did not have this, and we had no other choice but to act as we did.  However, it would be important to be able to claim risks from investors in the future.

Let’s talk about regulation of EU financial markets. The EU is planning a whole series of measures. A new financial supervisory authority was launched recently. You have also demanded common EU supervision. Why could this not be done sooner?

I do not understand this. Sensible financial supervision, especially at European level, has always been popular. It is really absolutely necessary. In Germany we have to simplify our structures and merge the double structure of the Bundesbank and the BaFin [German Federal Financial Supervisory Authority] into one integrated general supervisory authority.

What matters most are uniform European rules that are put into practice on a national level. The same is true for the rating agencies. These are two points where Europe can really make great progress. Here the EU can say: ‘This is our European model, we do not want to depend on Wall Street anymore.’

The financial crisis showed that German regional banks can lose money on Irish special-purpose companies. US insurance giant AIG was brought to the brink of ruin by the deals done in its London branch. Were you surprised to find out what kind of irresponsible deals were possible in Europe?

Yes, that was very upsetting. I had assumed that on every board of executives of a bank, there was a person who was familiar with all the investments and knows their worth. Apparently that was not the case in many companies.

Unfortunately, there were also failings in the public sector. Everyone must draw conclusions from this crisis: that is true for banks and for supervisory authorities.

Germany, France and the UK disagree often when it comes to regulation of financial markets. Is there a trend towards a European solution to these questions?

I believe the crisis has increased the pressure for common solutions. As a matter of fact everyone knows that national regulation of financial markets is pointless. Another thing the crisis has taught us is that without the euro, Europe would have turned into a disaster zone in the past two years.

Not one country would have been able to effectively respond to the crisis. In this sense the single currency was a blessing for the members of the euro zone.

Germanyin particular is benefiting…

In such a situation the D-Mark would have gone up against the other currencies, it would have needed to be revalued and we would have been in a fatal situation. That would have cost us economic growth and jobs. We would not be experiencing a recovery but a downturn.

Greece, on the other hand, has to live with the fact that it cannot devalue its own currency to improve competitiveness…

The Greeks have to try hard to improve their financial indicators, and then they have a chance. They have a fantastic country and can make even better use of tourism.

Can you tell us something about the future: how much longer will the euro exist?

Longer than you or me will live to see.

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