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Issing's views seen as recipe for break-up of euro

THE new essay by the former ECB chief economist Otmar Issing laid bare the difficulties facing the eurozone. All agree that the crisis is serious and complex, but they do not agree on what it is.

Mr Issing, like most of the German public, sees the root cause as budget indiscipline. He, and the public, cannot understand how countries could borrow to cover retirements before 60; large public subsidies; and inadequate tax systems.

To this list can be added Ireland's decision to increase public spending by more than 10pc a year for several years, while cutting taxes.

So far, it has proved very difficult to reverse any of that enormous public spending, and only a bit less difficult to raise new taxes.

In the long run, a change in public attitudes to tax and spending in the stressed economies -- including Ireland -- could be a beneficial effect of the crisis. But we may not get to in the long run, unless something more is done in the short run.

Other eminent economists say budget austerity, however severe, cannot of itself solve the eurozone problem.

Tomorrow, Portugal faces the bond market as it tries to borrow 10-year money.

Most observers expect a poor result, which may force Portugal into the rescue mechanisms, just as a poor bond auction in October forced Ireland.

The guns will swing on Spain, which makes up 10pc of the eurozone economy. Mr Issing is certainly correct that we have not yet reached the moment of truth for the euro, but it may not be possible to postpone it much longer.

Mr Issing, who is said to have the ear of German Chancellor Angela Merkel, is worried that really strict rules on budget discipline -- such as removal of voting rights or even expulsion from the single currency -- have already been all but ruled out.

But even if there were such rules, he does not link them to the possibility of financial transfers from richer countries to poorer ones. This is what happens inside nation states, but Mr Issing's opposition to such a system for the monetary union seems absolute.

Those who believe that budget discipline cannot solve the problem on its own will see Mr Issing's policies as a recipe for the break-up of the euro. Some will think that he takes the same view himself, but regards it as the lesser of two evils.

Irish Independent