Greece was only able to join the euro through deception and the currency bloc’s leaders have been “too polite” ever since to deploy adequate sanctions that could have averted the region’s debt crisis, former European Central Bank Chief Economist Otmar Issing said.
“When I worked for the ECB, I suffered every time countries didn’t meet the criteria,” Issing, 75, said in an interview in Copenhagen yesterday. “Greece cheated to get in, and it’s difficult to know how we should deal with cheaters.”
Issing, who joined the ECB a year before the euro’s inception in 1999 and stayed there until 2006, warned yesterday that Greece will probably be unable to honor its debts as it grapples with insolvency. The country’s repayment ability remains questionable even after the government endorsed an accelerated asset-sale plan and a package of budget cuts necessary to draw a fifth tranche of its bailout, he said.
Issing said he blames an absence of adequate sanctions for the currency bloc’s current condition, which he called “critical” at an event yesterday hosted by Nykredit A/S.
“There should have been better monitoring, better scrutiny and more sanctioning,” he said in the interview. “This crisis wasn’t unavoidable.”
The cost to insure Greek debt against default rose to a record this week and the yield on the nation’s 2-year and 10-year bonds increased the most since the euro was introduced in 1999. Yields on Greek 10-year bonds have more than doubled since the country obtained a 110 billion-euro ($156 billion) bailout from the European Union, the International Monetary Fund and the ECB just over a year ago.
The country may not be able to draw on a fifth tranche of the IMF portion of its loan, according to Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers.
“There are specific IMF rules and one of those rules says that IMF can only take action when the refinancing guarantee is given over 12 months,” Juncker said yesterday at a conference in Luxembourg. “I don’t think that the troika will come to the conclusion that this is given.”
According to Nobel prize-winning economist Paul Krugman, there’s a 50 percent chance Greece will need to exit the euro, as its debt burden becomes unsustainable. The country’s bondholders risk “significant” losses, he said at the same press conference yesterday.
Greece has no plans to leave the euro, George Petalotis, a spokesman for the Greek government, said at a May 25 press conference. Juncker said yesterday that so-called “reprofiling” of Greece’s debt would be a “last step of a whole set of measures Greece will have to take.”
Doubts about Greece’s fiscal responsibility gained ground after the government of Costas Karamanlis in 2004 disclosed that its socialist predecessor had cheated on its euro-entry exam in 2000. The country was able to enter the currency bloc after claiming its deficit was less than 1 percent of gross domestic product, well within the bloc’s 3 percent threshold.
European Commission reports have since revealed Greece’s budget hasn’t been within the 3 percent limit a single year since its accession.
Greece went unpunished except for being told by the EU to tighten up its bookkeeping. At the same time, proposals to strengthen Eurostat, the bloc’s statistics watchdog, foundered on national opposition.
Germany and France helped ease the rules when they forced through the relaxation of the anti-debt “stability pact” in 2005 after three years of deficits above the threshold.
“I was never euro-phoric,” Issing said at yesterday’s press conference. “I was among many economists in Germany warning against premature entry into the monetary union and against too many countries.”
The commission this month estimated Greece’s 2011 budget shortfall will be 9.5 percent on debt of 158 percent of gross domestic product, more than twice the EU’s limit of 60 percent. Its debt burden will continue to swell to 166 percent in 2012 without policy changes, according to the commission.
The currency blocs “rules were not observed,” Issing said at a speech yesterday. “There are flaws in the design.” The euro will survive, “but I would not bet on all 17 countries,” he said.