Germany would be “ill-advised” to allow the euro zone to break up, Adam Posen, a member of the Monetary Policy Committee at the Bank of England said in an interview with the BBC.
It is in Germany’s commercial and economic interest to restructure the debt of euro-zone countries in trouble, Posen said, according to the transcript of an interview released by the broadcaster yesterday. The debt crisis is the result of decisions by the Germans who acted similarly to sub-prime lenders in the US, he added in the interview.
“It was German government decisions and German banks who lent the money to all these countries so they could buy German exports,” said Posen. Germany has “been running a scheme and so just as everywhere around the world you want to restructure the debt, you can’t make it all on the borrower.” Lenders have to “take a hit” as well, he said.
Germany’s Chancellor Angela Merkel, the leader of Europe’s largest economy and the biggest single contributor to euro-region bailouts, is facing calls from Italy and Spain to pool debt to bring down bond yields, from Greece to back an easing of its austerity timetable and from the European Central Bank for politicians to take the lead in fighting the crisis. She also faces domestic pressure from her coalition partners to refuse any more aid for Greece.
In break-up scenario, Germany’s currency would “shoot through the roof,” the country’s trade relations would be disrupted and its banks have to be bailed out, Posen said. It would also “overwhelm” the U.K. economy, leaving it with no ways to counteract the development, the central banker said.
While a debt restructuring would cause German banks some losses, trade and exports would go on, as markets around it would grow and “there would be political stability” and “banks would actually be disciplined and would function better,” he said.
The ECB also should intervene to help cut interest rates on Italian and Spanish government bonds, the BBC cited Posen as saying.
Interest rates in Spain and Italy on government bonds, and shutdowns in those bond markets are “completely unjustified by the economics and are undermining the euro zone as well as the world economy,” Posen told the BBC.