The Euro Lacks a Stable Basis: Deutsche Bank Economist
The euro does not have a stable basis even after the "Pact of the euro" agreed by leaders of the member states, Thomas Mayer, chief economist at Germany's biggest lender Deutsche Bank, told CNBC Thursday.
"The intrinsic problem with the agreement is that it only tackles future debt crisis. It remains unclear what will happen with the debt piles of the past, if the market is not willing to finance anymore”, Mayer told CNBC in a telephone interview.
While he called the European Stability Mechanism (ESM) “true progress”, he warned that the mechanism of the rescue pact has still the substantial flaw that “politicians have to judge themselves”.
Neither the Stability and Growth Pact nor the Euro Pact are not at all waterproof, Mayer added.
Expanding the European Financial Stability Facility (EFSF) is useless for the moment, he said.
“Why do we need more money in the pot? Even if now Portugal most likely will ask for help, there is enough money. Nobody wants Spain to get to a point to tap the fund. It is just a big figure but without any reason”, Mayer said.
Debt Restructuring Not Avoidable
The existing debt crisis centering around Greece, Ireland and now Portugal can only be resolved by debt restructuring, he said, echoing views expressed earlier this year by other analysts.
“The EFSF should be designed more flexible. One could think of a debt swap between say Greece and the EFSF with a haircut of 30-40 percent on Greek debt,” he explained.
"That would help those countries.
With the mechanism now in place, what happens is only a rolling-over of a problem which keeps on existing," Mayer added.
The longer politicians keep on postponing the problem, the more both countries receiving aid and countries giving aid such as Germany are facing the risk of more anti-euro sentiment among their population.
“The perfect example right now is Finland. The crisis is playing into the hands of euro-skeptical political parties such in this case, the True Fins,” Mayer warned. “And at the same time we have countries such as Portugal where the population starts to protest against all these austerity measures.”
Essentially, the longer politicians wait to really tackle the debt crisis, i.e. to start debt restructuring, the more dangerous it becomes for the euro, at least in the long run, according to Deutsche Bank’s chief economist.
He called for an independent institution that supports the ECB, monitors the euro zone countries, could give financial assistance and at the end of the day could as well restructure the debt of insolvent sovereigns.
“Only with such an institution … we could get rid of the biggest flaw in the new euro rescue pact that the states themselves decide on their own performance”, he reiterated.