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Greece Needs to Leave Euro: Prominent German Economist

Greece needs to leave the euro and reintroduce its own currency if it wants to get back on its feet and return to growth, Manfred Neumann, Professor of Economics at the Institute for Economic Policy at the University of Bonn said in comments broadcast on CNBC on Wednesday.

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European Union Flag

The country’s dominant tourism industry and exporters simply cannot recover by lowering prices and wages, he said.

“It has to be done by devaluation and therefore they need their own currency,” the professor of international economics who supervised German Bundesbank chief Jens Weidmann’s 1997 doctoral thesis said.

A decision on whether Greece will receive further aid from international creditors to cover its funding needs will be taken in October. The country needs to demonstrate it is committed to implementing a series of economic reforms.

Other countries may also need to leave, Neumann said, adding that under a very negative scenario in which he does not believe, the entire southern region could have to leave the euro.

“Now with respect to the other countries, I would say… if we are very negative… I’m an optimist, but if you [are] a pessimist, you would say possibly – over the next ten to fifteen years, the whole south has to leave,” he said.

Spain had not been governed well, both under its previous socialist government and under the current conservative government, he added. Its high level of unemployment – historically above many of its European peers and now at a staggering 24 percent – could have been tackled ten to fifteen years ago, according to Neumann.

He expressed concern over the European Central Bank’s response to the crisis in comments which showed his support for Weidmann, who clashed with the ECB’s chief Mario Draghi over a new bond buying program.

One newspaper report suggested last week that Weidmann was considering stepping down from the ECB board. The Bundesbank chief opposes the program, which is aimed at lowering borrowing costs for heavily-indebted countries facing high borrowing costs, such as Spain and Italy, arguing that the move amounts to a form of monetizing debt, which is illegal.

Echoing this view, Neumann said: “The problem is a change in the whole trend of policy making because up till now, it was forbidden. It was a rule not to buy bonds.”

“The understanding when they started in 2010 was… well we have to buy some bonds simply to keep the market floating, to keep them flexible, but meanwhile, it’s clear this is not the idea,” he said.

He believes the move now amounts to outright support for southern European governments and that it endangers the euro.

He also saw no reason to support the idea of a banking license for the new permanent european bailout fund, the European Stability Mechanism or ESM, allowing it to tap funds from the ECB.

“No, the ESM should not get a banking license because if the ESM gets this license, it would mean the ESM can borrow as much central bank money from the ECB as ESM wants to. And that would mean monetary policy would effectively [be] handed over from the ECB to ESM. That can’t be,” he said.

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