A founding father of monetary union has given a damning assessment of the euro bloc, saying that not incorporating an exit strategy was a mistake.
Prof Otmar Issing told the BBC’s Wake up to Money that faultlines across the eurozone remain, citing economic weakness in Greece, Portugal and Italy.
The European Central Bank’s first chief economist also warned about the impact of negative interest rates.
And he said political pressures threatened central banks’ independence.
Prof Issing told the BBC that structural problems in the eurozone and dwindling public support in some countries were still major problems.
The euro currency was “stable and performing much better than expected”, he said. “But I wish I could say the same about the euro area.”
Countries that tipped the bloc into recession during the global financial meltdown were still in serious economic trouble. Greece was in “permanent crisis”, and economic reforms in Portugal and Italy were either on hold or being reversed, the professor said.
‘Blackmail’
Prof Issing, a former adviser to Germany’s Chancellor Angela Merkel, has in recent years become suspicious of the euro project he helped to create, warning that it would collapse without reform.
He told the BBC that it was “mistake in the construction of the whole arrangement that once a member, you remain a member for eternity”.
It meant that countries not complying with the eurozone’s economic and budgetary rules “can blackmail the others”.
Allowing a temporary exit would, for example, have helped Greece to reform its economy so that it could then return later in better financial health.
However, some countries should never have joined the euro in the first place, he said, without naming names. They “were not yet ready to thrive under a single monetary policy and one central bank”.
Prof Issing is also increasingly concerned about central banks’ use of zero or negative interest rates in a bid to stimulate growth. The policy has been used by, among others, the ECB, Japan, Switzerland and Sweden.
It is hindering the recovery of banks, he said, adding: “If it persists for longer, then I think we will see dramatic consequences for insurance companies and pension schemes.”
Furthermore, “the longer zero interest rates continue, the more difficult it will be to exit from this situation”. A gradual increase in interest rates would not stop companies investing for growth, he believed.
Threat to London
Prof Issing is worried that central banks are straying onto “political turf” and damaging their independence.
He would not discuss Bank of England governor Mark Carney, who has faced criticism from EU Leave campaigners.
The professor is more concerned about the ECB. Because it “is the only game in town” it wields huge power. “This does not foster independence, but undermines it,” he said.
On Brexit, Prof Issing said there were too many issues to be resolved before he could speculate on its impact on the eurozone.
But he was certain about one thing – London’s position as Europe’s financial capital is now under threat.
He thinks the capital’s financial centre will not be able to keep the same benefits and freedoms outside the EU. “It will not happen,” he said.
Wake up to Money is broadcast at 05:15, or listen to the interview later on the podcast.
Join GhanaStar.com to receive daily email alerts of breaking news in Ghana. GhanaStar.com is your source for all Ghana News. Get the latest Ghana news, breaking news, sports, politics, entertainment and more about Ghana, Africa and beyond.