Former Federal Reserve chairman and advisor of the Obama administration is 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” Paul Volcker (82) said in a speech in London. “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 US 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 UK 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.
“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.
Deutsche Bank AG Chief Executive Officer Josef Ackermann said in an interview with Germany’s ZDF broadcaster that Greece may not be able to repay its debt in full, arguing it would require “incredible efforts.”
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.”
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.”