Global Crisis Blog

How to Distort History: Pohl Points Europe toward Fracture

 By Shlomo Maital

 A newsletter called CESifo (from IFO, a research institute in Munich, Germany) contains an interview with former Bundesbank head Karl Otto Pohl, at one time the dominant figure in European monetary policy. 

    Pohl blasts the European rescue program paid for in large measure by Germany, that bailed out Greece and Ireland, and perhaps, eventually Portugal and even Spain:  “I put no stock in the rescue programme for the euro area. It gives the countries the wrong incentives and violates the spirit and letter of the monetary union.”  Policy is often the choice of less-bad alternatives. Not bailing out nations in trouble could have led to a euro collapse.  Is this what Pohl thinks is desirable?

     Pohl thinks Greece should have been allowed to sink and leave the euro.    “Greece should never have been accepted into the monetary union. But it was. Now it must be possible to leave the union. Then, a haircut should have been carried out (partial debt forgiveness by the creditors), the Greeks would have devalued in order to improve their competitiveness.”

      America fought a bloody Civil War partly over states’ rights, the right to secede from the Union.  Pohl is unwilling to commit a small fraction of Germany’s resources to save the European Union.

     What would Pohl recommend? For starters, appoint Axel Weber head of the European Central Bank, when the current head Trichet retires.  Weber, of course, is a conservative, and also dislikes the bailout program.   Pohl recommends changing the voting rules,  weighting votes with the country’s size.  “It is not acceptable for the central banks of Malta or Cyprus to have the same voting power in the ECB as the Bundesbank. This waters down the decisions of the European Central Bank. Voting rights in the ECB should be changed and weighted votes should be assigned according to the strength of the countries. This would help the ECB manage future crises more convincingly.”  Such a voting scheme, of course, would also weaken or ruin the European Union, by telling small countries that they had no say in shaping key monetary policies. 

    Pohl was asked about Keynesianism and fiscal policy.  He responded:   “I don’t think that the return to Keynesianism in economic policy will be permanent. At least not to the simple state dirigisme of his time. Just image, in my final examination at the University of Göttingen in 1955 I defended the thesis that the amount of indebtedness is limited by tax revenue.” 

   The only thing holding up America’s economy at the moment is deficit spending – other demand components are very weak.  Many experts believe the U.S. is on a knife edge, growing at 2.5 per cent, just enough to keep unemployment from soaring, not enough to reduce it.  A radical cut in public spending would push the economy over the edge, perhaps toward renewed recession.   

    Pohl’s views are widely held in Europe.  Appointing  Weber as ECB head would push the central bank toward monetary conservatism and seriously weaken the European union.  This cannot be good news for the world.