Otmar Issing on ECB Policies and the Eurozone

An Interview with the Former Chief Economist of the European Central Bank


As one of the original architects of the euro, Professor Otmar Issing was on the frontlines as the Eurozone adopted a single currency. Today, Europe is at a crossroads, with Greece struggling financially and Britain threatening to exit the union. At the same time, many are debating the monetary policies of the European Central Bank (ECB) and the effects of low inflation and low interest rates on the economy as the region slowly recovers from the financial crisis of 2008.

Professor Issing recently sat down with Jens Kengelbach, a BCG partner in the Munich office of The Boston Consulting Group. Edited excerpts from that conversation follow.

Welcome and thank you for joining us. As a former chief economist of the European Central Bank, why do you think the ECB is currently not achieving its 2% inflation target?

My first point is that I would not be concerned. The inflation rate is so low in the euro area mainly due to very low oil prices. All euro area members are importing countries. It’s a big gift to those economies, for households; the terms of trade are very positive for the Eurozone. Second, I don’t see this leading to a deflationary spiral. The ECB could be much more relaxed. Inflation will come back one day, not too far in the future.

Given today’s high debt levels, many people are arguing that we need higher levels of inflation to reach a healthier level of indebtedness.

I don’t see inflation as the right, the appropriate, tool to solve the debt problem. By the way, governments profit from very low interest rates, which are related to low inflation. For example, Germany—and Italy even more so—save billions every year because of very low interest rate payments. This is not the problem.

On the other hand, entire industries, like banking and insurance, are suffering from low interest rates. Is that the solution—to keep rates so low and drive entire industries out of business?

No. These extremely low interest rates—which we’ve had for quite a few years—create big problems. This is true for the banking industry and especially for insurance companies. If this goes on for too long, the very existence of these companies would be at stake, so it should change. I think we’re coming to a time of more normal multipolicy measures.

Some are saying that the current policies of the ECB—the extreme measures and quantitative easing—are not the right way to go forward. What is your view?

I would separate the policy of the ECB into two periods. After the financial crisis in 2008, it was appropriate to act decisively with very low interest rates, with quantitative easing—or, you could say, conditionally open market measures. In the past two or three years, the additional positive effects of increased quantitative easing are getting lower and lower, and the negative side effects are increasing. The time has come to apply more normal multipolicy measures rather than extend this period of even negative interest rates into the future.

With the euro and the Eurozone, some countries can no longer balance their trade deficits or labor costs. On the other hand, Angela Merkel has said that if the euro fails, the Eurozone might fail. What’s your view on how to strike a balance between devaluing currencies and keeping the Eurozone together?

A multiunion with a single currency means that one size of multipolicy has to fit all. The ECB cannot do anything about this divergence in countries. The average situation is the basis for the policy measures of the ECB. Countries must prepare themselves, must do their homework, to live with this regime of a singular multipolicy. Regarding the Chancellor’s remark, I don’t agree. I think the collapse of the euro, which I don’t foresee, would have a traumatic impact economically and politically on the Eurozone and on Europe as a whole. But in the end, Europe is more than just the euro.

If you look at Europe as a whole, there are different types of unification—fiscal, monetary, and political—but we really only have one of the three. What is your view on next steps? Should we go forward into integration or take a step back?

Europe is indeed at a crossroads between going forward or back. But I would not call it going backwards. Rather, I would call it going back to the rules that were agreed upon when the Maastricht treaty was signed. The idea of political union in Europe is farther away than at any time since the end of the Second World War. We would not find support from the people. If any politician or government dared to have a referendum on creating a political union, the answer to that would be very clear. So this vision is for the more distant future at best.

But if it is not realistic for the time being, for the near future, then any idea of moving toward a fiscal union loses its anchor. For that you need democratic legitimization, which in the end can be supported only by the people, by the voters. Fiscal union without political union would be a very dangerous way to go.

When you took office at the ECB, you called the euro an experiment that we could try. Now, a number of years later, what is your view? Has the experiment failed, or do we need to pause?

I wouldn’t say it failed, but it may have fallen short of expectations. Many mistakes have been made. Given what we know today, I wonder if anybody would suggest creating a single currency with so many heterogeneous nations. But the euro is a fact, so we have to live with that and adapt to a situation of sovereign countries that share a common currency and a single European Central Bank.

About Otmar Issing