Euro Co-Creator: We Made Mistakes
Assistant News Editor, CNBC.com
The euro zone debt crisis is not the result of a lack of political will and economic consolidation in the 1980s and 90s before the euro was introduced, but rather the consequence of a gradual drift away from policies embedded in the original rules of the currency union, Niels Thygesen, who helped design the euro, told CNBC on Thursday.
"The run-up to the single currency...between the end of the 80s to the end of the 90s was a relatively good period marked by considerable convergence between the European economies. Inflation rates converged and even those countries that were thought to have difficulties in joining the single currency — Mediterranean countries — did quite well, because they benefited from the massive fall in interest rates that led to the introduction of the euro,” Thygesen, now Professor Emeritus of International Economics at the University of Copenhagen, said.
Interest rates in Italy, Greece, Spain and Portugal fell sharply in the run-up to the introduction of the euro. Many analysts agree that the loss of power to set their own national interest rates exacerbated these troubled European countries' problems. In a recession, they were no longer able to devalue their own currency to boost exports and were unable to cut rates amid fears of rising inflation.
Thygesen told "Squawk Box Europe" that the problems only became obvious after the euro had been introduced.
"And there the efforts to continue consolidation, to make structural reforms, petered out," he said.
He nevertheless admitted there was possible "some naivety" when the euro was created.
“It’s possible there was an over-estimation of the positive effects of the single market on economies," he said. "In that sense there was possibly some naivety."
But at the time it was hard to foresee when the rules were set up that the single currency would lead to the kind of financial interdependence we see today, he said.
Speaking from the IIF Conference in Copenhagen, Thygesen, who was a member of the Delors Committee that drafted the European Monetary Union (EMU) policy in 1988, told CNBC that the potential vulnerability of economies through monetary union had been ignored, when it was created.
“It was hard to foresee when these rules were set out that that it would lead to the kind of financial inter-dependence we see today. It shouldn’t be a surprise, but it is a surprise that it is so high in crisis times when contagion spreads from one country to the other.”
The contagion effect from Greece, Spain and Portugal in euro zone crisis is now repelling countries that had previously queued-up to join the currency. A survey released this week has revealed that belief in the euro is at a record-low, with only 12 percent of Poles, once the more ardent admirers of the currency, wanting to join the euro now.
The ECB has said that a further eight countries do not yet have the appropriate legal frameworks in place to join the currency - should they even wish to - with the foreboding prospect of long-term structural reform programs ahead, according to Thygesen.
“The current problems are mainly very long-term and structural; the structure of the economies has caused the financial instability that we have seen over the last months," he said.