Former Federal Reserve Chairman Paul Volcker said he’s concerned that the euro area may break up after the Greek fiscal crisis that sparked an unprecedented bailout by the region’s members.
“You have the great problem of a potential disintegration of the euro,” Volcker, 82, said in a speech in London yesterday. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”
European leaders pledged a rescue package of almost $1 trillion this week to counter a mounting debt crisis and restore confidence in the currency. Former U.S. Treasury Secretary John Snow said this week the euro may need a common fiscal policy to survive, a comment echoed by Norman Lamont, who was U.K. finance minister when Britain opted out from the euro in 1992.
“Will economic and financial distress finally be resolved by looking toward more integration in a closely integrated Europe, politically as well as economically?” said Volcker, who chairs President Barack Obama’s Economic Recovery Advisory Board. “I do have my hopes, as a believer in the euro.”
The aid package also involved the European Central Bank, which intervened in debt markets after a rout in bonds across the euro region’s periphery. The European Commission in Brussels said it would “strengthen” its deficit oversight and “align national budget and policy planning” under a system of economic policy coordination.
Fiscal Union
“For the euro to be able to survive long term, fiscal consolidation of some kind -- tax policy consolidation, fiscal policy consolidation -- is probably necessary,” Snow said. Bank of England Governor Mervyn King also commented on the crisis, saying two days ago that it is “very clear” that the currency region needs a fiscal union “to make the monetary union work.”
Soaring bond yields on concern that Greece’s fiscal crisis would spread threatened to shut Spain and Portugal out of debt markets and sparked a weekend of talks with euro-region finance ministers and central bankers.
While the resulting 750 billion-euro ($940 billion) financial aid package has calmed bond markets, the euro today broke through the 14-month low reached last week before European leaders unveiled the bailout plan. The euro, which dropped as low as $1.2457, traded at $1.2564 at 7:46 a.m. in London.
Greek Doubts
Deutsche Bank AG Chief Executive Officer Josef Ackermann said in an interview with Germany’s ZDF broadcaster aired late yesterday that Greece may not be able to repay its debt in full, arguing it would require “incredible efforts.”
The extra yield that investors demand to hold 10-year Spanish bonds over German bunds, Europe’s benchmark, has narrowed to 99 basis points from 164 basis points on May 7. Spreads on Portuguese debt have fallen by more than half to 163 points. The Greek spread was 442 basis points yesterday after touching 973 points last week.
Volcker expressed hope that the euro will survive. “There is strong opinion to keep it going,” he told journalists after his speech at Mansion House, the residence of the lord mayor of the City, London’s financial district. “That does require, I think, changes in the structure of European economic policy.”
Closer fiscal union is unlikely to be welcomed in some countries. Ireland’s largest opposition political party said this week the commission proposals give the EU a “final veto” over Irish fiscal policy. Prime Minister Brian Cowenrejected the comments and said that there “will never be a threat” to national tax control.
Well Served
Europe has so far been well-served by the euro, Volcker said. “If you didn’t have that common currency in Europe, they would have bigger problems than they have now.”
He declined to elaborate on what European governments should do as he left and walked across the street to visit the Bank of England.
“That is up to European governments,” he said. “The nature of the problem does not lend itself to one-word sound bites.”
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