Former European Central Bank chief economist Otmar Issing, one of the architects of the euro, said Greece’s exit from the 17-nation monetary union is inevitable.
“There is no other way,” Issing told Germany’s Stern in an interview, according to a transcript supplied by the magazine. With Greece’s debt forecast to reach 160% of gross domestic product next year, the country needs to renege on at least 50% of its obligations and “that can’t happen within the monetary union,” Issing is quoted as saying.
ECB President Jean-Claude Trichet has said the suggestion that a country could leave the euro is “absurd” and insisted that Greece can solve its problems through fiscal reforms. Issing said it’s “too late for that” now and that “the country won’t get back on its feet without a drastic debt restructuring.”
That can’t happen within the euro area because it would be “a license for Greece and other highly-indebted nations to dispose of their problems through a reduction of their debt levels” and result in “the end of the monetary union,” Issing said.
European leaders have struggled to allay investor concerns that a potential debt restructuring in Greece will plunge the region’s economy into a recession. Greek bonds have tumbled and insurance against default has soared as markets put the probability of insolvency at more than 90%. Such an event may require the recapitalization of banks across Europe as they incur losses on their Greek assets.
Greek ‘Precedent’
“Markets see Greece not as a special case but as a precedent,” said Christian Schulz, an economist at Joh. Berenberg Gossler & Co. “A Greek exit would increase the cost for the euro-zone rescue significantly.”
Greece, which is locked out of financial markets, is struggling to the meet the terms of its European Union-led bailout. It has pledged to reduce its general government deficit to about 7.5% of GDP this year from 10.5% in 2010.
“The bitter truth, unfortunately, is that the Greeks have lived beyond their means for years and will now be set back many years by their artificially inflated living standards,” Issing said.
Issing, 75, designed the ECB’s monetary policy strategy. He retired from the bank in 2006 and is currently president of the Center for Financial Studies in Frankfurt. He was unable to be reached for comment.
Financial Post
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