Saturday , June 10 2023

"The threats of the eurozone and the EU are very real."


German government parties mainly care for themselves – it's shaken at the door: Italy wants to increase its debt massively. A big threat to Germany and the euro area, economist Clemens Fuest warns in an interview with t

German government CDUs, CSUs and VPDs are currently dominated by personal and party-based debates. As a result, the controversial issue has disappeared in the background: the Italian government wants to significantly increase its public debt and insists on its position vis-à-vis the European Union. Capital markets are nervous. The risk of panic in the capital market, which can turn into a bankruptcy of the state, is more important than ever before.

Clemens Fuest: If there is a financial crisis in Italy, creditors have a problem. The problem that will lead to Germany will warn the head of the Ifo Institute. (Source: Ifo Institute, Munich)Clemens Fuest: If there is a financial crisis in Italy, creditors have a problem. The problem that will lead to Germany will warn the head of the Ifo Institute. (Source: Ifo Institute, Munich)

What will be the consequences and what is in Brussels, for which Germany is opposed? And: Do the taxpayer have to abandon? The questions answered by Clemens Fuest, head of the Ifo Institute in Munich, in an interview with t

Mr Fuest, the ruling parties are currently working intensively on staffing issues. Another issue is the back side, with enormous consequences in Germany: the economic crisis in Italy. The new government in Rome wants to continue to increase debt. The EU Commission has rejected this budget. What now

Clemens Fuest: More than 130 percent of public debt can not afford a permanent country without its own currency. The real problem in Italy is not excessive indebtedness, but economic stagnation. Italy has not risen since 1990, productivity has stabilized. Globalization has hit the Italian economy hard and is not well adapted. The reasons are poorly functioning education system, less efficient judiciary and poor labor market rules.

Is Italy also in need of the Hartz reform in the German model?

You must be careful with the message: do it like a Germans! Italy is a country with different circumstances. In the labor market, unlike Germany before the Hartz reforms, the problem is not that the benefits to the unemployed are too broad. This is more than ensuring that workers are strictly protected and that young people have a poor opportunity to integrate into the labor market.

This is also reflected in the capital markets where nervousness is spreading and the yield on Italian government bonds is becoming more and more expensive. The problem for the EU financial market?

The rising profitability shows that the financial market is operating and endangering the risks. As regards the financial crisis in Italy, creditors have a problem. The Italian state and banks are largely indebted to their citizens. As far as foreign countries are concerned, the German banks in Italy are less involved than, for example, French. With € 300 billion, one third of the so-called foreign exhibitions in Italy are located in France. But it really helps us if Germany lends less to Italy but is more involved in France. The problem will take us all.

Clemens Fuest (left) and his speaker in a conversation with editors Sabrina Manthey and Florian Harms (Source: Fuest (left) and his speaker in a conversation with editors Sabrina Manthey and Florian Harms (Source:

What is the risk of state bankruptcy in Italy?

In the short term, the biggest risk is the capital market panic. which can quickly lead to state bankruptcy. It would be a situation where investors questioned Italy's ability to refinance their debts. Then, after the end of the government bonds will not be re-bought, and the state will become insolvent. In the long run, the debt ratio needs to decline, otherwise, in the next economic downturn, Italy will have to face difficulties.

When is the dynamics going, do you expect the EU to save and save Italy billions?

Italy is ten times larger than Greece. That is why we are talking about a lot, a lot of money. But I do not think that the rescue measures are too small, as is often claimed. If Italy had submitted an application for a support program under the European Stability Mechanism (ESM), the ECB could buy Italian government bonds and maintain Italian liquidity. The real question is whether there can still be ESM programs?

Do you think about the issue of national competence?

Yes. It is questionable whether the Bundestag can still accept ESM programs. According to the judgment of the Federal Constitutional Court, OMT program (Unrestricted purchase of government bonds by the European Central Bank, editorial note) exceeds the competence of the ECB. The Court of Justice of the European Communities states the opposite. This raises the question of what the Bundestag will follow. More importantly, there is a government in Italy that does not want to comply with EU rules. In this situation, European rescue services are not available. It contains funds for restructuring purposes only.

How influential does the EU Commission deal with the Italian government during the war of politics?

The climate change between the war between Brussels and Rome is too high. The Italian Government has decided on the budget for which it was elected. The EU can not prevent it. European rules help governments that want to comply with their resist resistance in their country. The idea that Brussels can do this against the will of the national government is an illusion. It does not work. We can not rely on it in the euro area.

But how then?

The key is market discipline. On the one hand, it is right to say that the Italian voters have democratically decided to engage in bigger debts. But this also means that they can not transfer costs to taxpayers from other euro-countries.

Sounds reasonable, but also somewhat cheap. Again concrete: what kind of freedom in the EU is to prevent the Italian crisis from infecting the rest of Europe?

In essence, the European Union needs to do two things: firstly, for the dialogue to be verified. We have a strong interest in the lack of bankruptcy in Italy. Secondly, the EU must now prepare for the crisis. This means that they should reduce the risk positions and thus be less shaggy.

So withdraw money from Italy, which is really urgent for it.

The task of the other euro area countries is not to keep Italy's national liquid by refusing to agree on a commonly agreed rules of the game. The problem is that you can be as a creditor in a template way. Other euro area banks should reduce their financial requirements to the Italian state and its banks or better with equity. Otherwise, in the event of a crisis, we will again have to guarantee our banks with taxpayers' money.

Let's look at the future: what will happen if the Italian government does not resist, but will continue to borrow to expand the welfare state?

The most likely scenario is that, in the next economic downturn, the state will move into a financing crisis: a state-run bankruptcy in Italy will trigger a financial market crisis that can only be speculated. If the Italian banking system collapsed, Italy could voluntarily introduce a new currency. There is also a parallel currency option – the so-called mini bots. All this will lead to the most serious clashes in the euro area.

So the European Deposit Guarantee Fund would be a solution, as is now required by some companies?

In the current situation, this would be a serious mistake. After that, Italy could sell more government bonds to their banks. Failure to do so will bring losses to the euro area public. The pressure on the financial markets on Italy would be reduced by remuneration for exceeding the commonly agreed debt limits. If the euro area is to operate in the long term, we need a joint deposit insurance. However, a prerequisite for this is that banks should wholly or at least rely heavily on their respective home state funding. Otherwise, it is better to leave your fingers.

Simplified questions: For years, Italy has escaped from an unstable political and economic situation to the next. Is the state even reformable?

I think so. You can also look at the situation in Italy differently. Imagine that Germany has experienced a 20-year stagnation. How would our country be political? This Italian society is still strong in this country, so it deserves respect. What is lacking are certain reforms; Maybe they will come when it becomes clear that the current policy only worsens the problems.

Economist Fuest (average): Economist Fuest (center): "I do not speak in Paradise when Angela Merkel leaves." (Source:

Let's look at Germany. How does the Italian crisis affect us?

Germany is urgently interested in the economic recovery of Italy. The federal government should turn to the government in Rome and try to win it in order to launch a European policy that will financially free all participating countries. Instead of Berlin there is a thriving silence.

What could be Germany and Italy together to stabilize the situation?

Germany and Italy could develop European foreign and security policy and cooperate more closely in development aid and migration policy. Joint military procurement, the unification of embassies and consulates, and not national and fragmented development aid in Europe, all this would ease the national budget. There is the impression that Germany is too busy with itself and too little with Europe.

Why is this?

In the big coalition, you look at each other. At the same time, government and opposition are operating.

Is the federal government not effective enough?

You must be careful with such judgments. But the power struggle in Berlin really is a reality. European themes get bogged down. They are at least as important as housing or migration. The threats to the eurozone and the EU are very realistic.

What will they explain to citizens?

If Angela Merkel wants to stay with the Chancellor until the end of the legislature, she needs a rationale, a political project. This project could include a determined fight against EU and euro area reforms and ensure that the EU is increasingly involved in policies where European action brings real added value. I have called for policy areas.

Do you feel that Merkel is still a leader?

Their decision to get rid of the CDU chairman deserves respect. But now the question arises whether she wants to change the chancellor's status. European politics would be an area in which the big coalition could come together again to change the situation.

As for Germany: the country is economically better than it has been for decades. At the same time, new social divides arise between East and West, the elderly and young people, the rich and the poor, on the left and on the right. Or do you see the economic reasons for it?

In Germany, political polarization is less pronounced than in other countries, but it does exist. Many believe that migration is the driving force behind this development. In my opinion, this is rather a perception of migration: many people are developing migration problems that have nothing to do with it.

Is this a fear of strangers or a feeling that people who do not deserve it would be destroyed?

There is, of course, a lot of skepticism about whether a prosperous country can withstand immigration, and it is true that immigration for people who do not really want to be here, almost no labor market opportunities, and fleeing from war and persecution, complicates the welfare state. But we also have other immigrants who are very successful here. Especially in East Germany, many people seem to feel that they have the impression that the policy responds to immigration problems, rather than problems associated with people in East Germany.

Why is this? Almost no other region of the world has received the same support as East Germany.

However, many eastern regions in Germany have a poor prospect. The idea that politics could flourish in the economy for all regions is unrealistic. Politicians should honestly tell people rather than make big promises. What can you do: Reduce overcapacity, improve infrastructure for people to stay in economically weak regions, but can quickly go to work in a city such as Dresden or Leipzig.

Do you think that this is enough to convince the disappointed people?

It is important to seriously perceive people. You must have the courage to tell people the truth. You can not tell them tales. We have a well-developed welfare state. We have labor market programs. And there are subsidies for companies that want to build something in the East. However, experience has shown that it does not work at national level, but only focusing on growth centers.

Many people are involved with migration problems with Angela Merkel's policy. Do you expect the mood in the country to improve when Merkel takes place?

This paradise stands out when Angela Merkel leaves, I do not expect.

Mr Fuest, thank you for the interview.

Prof. Dr. Dr. H.C. Clemens Fuest is a professor of economics at the Ludwig-Maximilian University in Munich, where he leads the Department of Economics and Public Economics. Fuest is a member of the Scientific Advisory Board of the Federal Ministry of Finance, and since April 2016, the president of the Ifo Institute – Leibniz eV, Institute of Economic Research at the University of Munich. and Director of the Center for Economic Research (CES).

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