Serpent's Egg

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Eurozone ‘destruction’ necessary if countries are to thrive again, warns former ECB hawk

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Mr Stark called for “less centralisation” of policies as he said the eurozone was unsustainable in its current form CREDIT: AFP

The eurozone must break up if its members are to thrive again, according to a former European Central Bank official.

Jürgen Stark, who served on the ECB’s executive board during the financial crisis, said it was time to “think the unthinkable” and work towards a “reset” of Europe that pulled power away from Brussels.

The former vice-president of Germany’s Bundesbank said the creation of a two-speed eurozone, with France and Germany at its core, would help to ensure the smaller bloc’s survival.

We have had divergence rather than convergence in the eurozone from the very beginningJürgen Stark

“We have to think the unthinkable. And it is already unthinkable to think about the restart of Europe, which means we have to be creative.

But in order to be creative, you have to destruct [sic] something.”

Mr Stark said countries such as Italy, which has seen its economy stagnate since the crisis, would be better off outside the single currency area.

“Italy was accustomed to this ongoing devaluation of the lira from the mid-Seventies until the late Nineties. Maybe they need devaluation and their own currency in order to become more competitive again,” he said.

Speaking at an event organised by ETF Securities, Mr Stark said current accommodative ECB policy meant countries were likely to “muddle through” in the coming years and move closer “by coincidence”.

However, he told the Telegraph that the eurozone’s problems would resurface, regardless of the political landscape.

“In the long run, in the context of a European reset, one has to discuss the issue of whether it is still appropriate to keep these countries with different economic structures and different economic performances together. There is no convergence anymore.

“We have had divergence rather than convergence… from the very beginning.”

Mr Stark said Belgium, France, Luxembourg, the Netherlands and Germany “plus Austria and Finland” could form the core of a system with “staggered integration” for other countries such as Italy and Greece.

Marine le pen
Marine Le Pen is leader of the Front National (FN) in France.

While he described Marine Le Pen’s victory in French elections this year as “unlikely” due to the country’s voting system, Mr Stark said the Front National leader’s victory would also be the catalyst of a eurozone split.

Mr Stark, who resigned from the ECB in 2011, said he “blamed” the central bank for allowing countries to drag their heels on reforms.

We have to think the unthinkable. And it is already unthinkable to think about the restart of EuropeJürgen Stark

“As long as the ECB gives a signal in its operations to governments that ‘we are the backstop’ and ‘we will prevent country ‘a’ or country ‘b’ from becoming insolvent’ – there will be no structural reforms,” he said.

“The politicians don’t feel the heat.” Mr Stark said he disagreed with the ECB’s bond buying programme and negative interest rate policy, which he described as “damaging”.

“Reforming economies is painful and costly, but it’s even more costly and in the long term more painful to follow a no reform policy.”

Jens Weidmann, the current Bundesbank president, launched a fresh attack on the ECB’s quantitative easing programme last week as he warned that government bond purchases risked turning central banks into “prisoners of markets or fiscal policy”.

Mr Stark also dismissed the idea that Berlin would be the first to leave the bloc.

“The euro will not fail because of Germany,” he said.

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This entry was posted on January 29, 2017 by and tagged , , .

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