'Euro won't survive unless there is U-turn'
THE Cyprus crisis is another wake-up call to European politicians that the euro will not survive without a major change in policies, Germany's leading 'Keynesian' economist said in Dublin.
Prof Peter Bofinger (pictured) is a member of the German Council of Economic Experts – 'The Wise Men' – an independent body which gives advice to the German government.
He told a meeting at the Institute of International and European Affairs that his views on less austerity and more collective eurozone borrowing were very much a minority in Germany.
"When I suggested a one-off pay rise in Germany to help stimulate the European economy, even the head of the biggest trade union criticised me, saying it would lose jobs to China," he said.
Prof Bofinger believes the eurozone is still trapped in a vicious circle where banking troubles damage government finances, which then damages the whole economy.
"In principle, a private debt 'bail-in' is a good idea but in practice the Cyprus deal is very, very dangerous.
"The rules of the game have been changed and the behaviour of depositors will change. One is really playing with fire."
He said fiscal consolidation in the eurozone had been excessive and had a more damaging effect than the official forecasters expected.
The US deficit of 7pc of GDP was more than twice the overall deficit in the euro area. The results could be seen in better growth and employment.
He recommends a €3trn fund backed by the creditor countries which could be used to make loans for up to 30 years to debtor countries.
The German ambassador to Ireland, Dr Eckhard Lubkemeier, took issue with some of Dr Bofinger's points. He asked what would happen to Germany's AAA rating if it borrowed the kind of funds needed for the rescue mechanism.
"If the creditor countries did do this, how can we make sure that the debtor countries keep their part of the bargain?," he asked.
Dr Bofinger warned that something would have to change. "Unless there is a U-turn, the euro will not survive. My very strong conviction is that continuing like this will lead to disaster."