Interview with Hayo about financial crisis of Eurozone

Bernd Hayo is a german Professor of Macroeconomics at Marburg Center for Institutional Economics.; he wrote several papers about ECB and Eurozone.

I asked him a short interview about the ongoing financial crisis of Eurozone.

1) According to you, after the greek situation and the irish situation, what went wrong in the European Union?

I think that it was wrong to give up the 'no bailout'-clause based on the reason that it is necessary for the survival of the euro area. From my perspective, there exists no necessary linkage between the sovereign debt crisis and the survival of the euro. Look at the situation in the US: California is bankrupt but nobody thinks that it should leave the US dollar currency union. If the EU had let Greece become bankrupt, creditors would have lost money. Nothing wrong with that. Costs of increasing Greek government debt would have risen-again nothing wrong with that. It would have made it clear to Greece that it ought to address its problem of tax evasion and corruption-this is a good thing. Now it is the EU which is seemingly responsible for the hardship awaiting Greek citizens in the future. In my view, there is one argument that would help explain why the EU was so keen on saving Greece: the continuing instability of the European banking system. But then Germany and the other relatively more solvent governments should have intervened directly in the financial markets again, as now we face two situations of moral hazard: private banks know that they will be bailed out and governments know that they will be bailed out too. This does not bode too well for the future.

2) What do you think about the decision of 3rd may 2010 when ECB decided to suspend its minimum threshold for Greek debt "until further notice"? Don't you think it's a big change in monetary policy and independence of ECB?

In practice, it is not such a big thing as Greece is small and the ECB sterilised the intervention (i.e. kept the monetary base constant). It is a violation of fundamental principles, though, and one can only wonder what is going to happen if more countries start encountering similar sovereign debt problems than Greece. If the ECB started buying government bonds from lots of countries than its mandate of keeping price stability could be in peril. This could really endanger the integrity of the European currency union.

3) What do you think about the hypothesis of expulsion or withdrawal of acountry from EMU? Do you think it could be possible, as extrema ratio, to save EMU?

First, I do not think that European monetary union is endangered by one country's sovereign debt problem in the same way as California's bankruptcy does not endanger the US dollar area. Second, there is no legal basis for a country's expulsion from EMU. A country could consider moving out on its own accord (of course, other EMU members could in principle exert strong political pressure), as I would find it unlikely that the political will of a free country would be disregarded by the other EMU members. However, the costs would be high indeed: loss of credibility, loss of deep capital markets, loss of trade, loss of ECB as lender of last resort, etc.