The corona pandemic threatens to shatter the public finances of the EU member states.

The states are helping with rescue packages worth billions, and the EU has also launched an aid program with the reconstruction fund.

Support is also coming from the European Central Bank, which is intervening with the PEPP bond purchase program and further inflating its balance sheet.

WELT spoke to Jürgen Stark, the former chief economist of the ECB, about demands for debt cancellation, the monetary policy of the international central banks, inflation risks and the digital euro.


Mr Stark, David Sassoli, President of the EU Parliament, in an interview with the Italian newspaper “La Repubblica” called for the cancellation of national debts to be considered in view of the corona pandemic, the reallocation of the ESM, which is subject to strict conditions, and the Change European Treaties.

Does the corona pandemic justify such ideas?

Jürgen Stark:

The corona pandemic has resulted in a debt pandemic.

In view of the uncontrolled explosion of national debt in the euro area, calls for debt cancellation, the amendment of the European treaty and the reallocation of ESM funds are of course inevitable.

There isn't much new about that.

But now the catastrophic financial situation as a result of the Corona crisis in countries with chronically unsound finances is being used as an opportunity to make these demands even more emphatically.

This shows once again that we have accepted politically and economically unqualified member states into the monetary union.



Well you could say that historical circumstances such as the corona pandemic justify special means.


Nobody can seriously deny that the pandemic calls for solidarity and even risk-sharing among EU countries.

But that must not be an occasion to permanently reorganize the EU and the Economic and Monetary Union in this direction.

This would give up the crucial principles of solidity and stability with the individual responsibility and liability of the member states.

This would not only lead to considerable problems of acceptance in the northern states, but also to new conflicts and deeper division of Europe.

It is not just the ECB that is dramatically expanding its total assets


Do you remember how high the balance sheet total of the European Central Bank was at the beginning of 2012 when you left office as chief economist?



That should have been around 2.5 trillion euros.


That works out fine.

Today, less than nine years later, this value is almost three times as high.

What do you read from this development?


Central banks have become big players in the financial markets, buying and holding bonds and pushing interest rates to zero.

It is not only the ECB that has expanded its total assets so drastically.

If you look at them together with the US Fed, the Bank of England and the Bank of Japan, these four central banks have expanded their balance sheets to a total of 20 trillion euros and have taken many risks.

In doing so, of course, they also change the character of the large economies.



A milestone on this path in the euro area was July 2012, when Mario Draghi suppressed speculation that the euro would break up with his whatever-it-takes promise.

In doing so he calmed the markets ...


... yes - and politics too.

That promise was the game changer.

From then on it was clear: there is an institution here that will hold the euro area together - at all costs.

Politically one can understand that.

The question, however, is: Is it still within the mandate of a central bank to issue such a guarantee, or would it not have been referred to politicians and said: The ball is in your field!


But this development was not inconvenient for politics.

What the savers missed as a result of the ECB measures, the state had to spend less on its debts, Germany even earned money from it and could even be celebrated for its solid budget management.

Is there still a separation between monetary and general politics?


Yes, there is a huge redistribution from creditors to debtors.

The fact is that the boundaries between fiscal and monetary policy are blurring.

We are in a new episode in which the independence of the central banks is no longer guaranteed.

It is even being sacrificed to the current crisis situation in the expectation that one will return to the status quo ante, i.e. independence.

I make a big question mark.

Once you fail, you don't necessarily come back on the path of virtue.


Is this dissolution of the borders also related to personnel policy?


Indeed, this development is manifested in the staffing of many central banks.

Take the Governing Council, for example.

European governments tend to appoint politicians instead of monetary policy experts for the posts at the top of their national central banks.

We have that in five cases: ECB President Christine Lagarde, her Vice-President Luis de Guindos, Olli Rehn, Peter Kazimir, and Mario Centeno, the former head of the Eurogroup.

These are not monetary policy experts who want to limit themselves to the narrow mandate.

This is a visible personified sign of the politicization of the ECB.



Even before the Corona crisis, Italy had a debt ratio of 135 percent of economic output.

The pandemic is pushing many highly indebted countries to the limits of debt sustainability.

Was there an alternative to the new PEPP purchasing program?


As recently as March, it was communicated that fighting pandemics was a matter for governments and not for the ECB.

Other central banks have also signaled this.

When the debt levels exploded, the ECB said that we could not allow the spreads to widen, that is, the increase in risk premiums, and we had to intervene now.

What has this led to in the euro area?

A leveling out of the interest that governments have to pay on their bonds and thus a leveling out of the risks.

Of course, this extraordinary crisis calls on both fiscal and monetary policy, the central banks primarily to keep the markets liquid, but not necessarily to reduce the refinancing costs of states so dramatically that risks from the consequences of the sharp rise in debt can no longer be seen.

Incentives for even higher national debt


Greece is happy to now pay less than one percent interest on ten-year bonds.

That’s a win for the Euro peace project.


The low interest rates hide the risks.

Greece pays less than the US for its treasuries.

This clearly shows that we have gone too far here.

It is an incentive for the already heavily indebted governments to get even more indebted.

Public finances in many countries were only partially sustainable even before the crisis.

This also applies to Germany, as this year's 5th sustainability report by the Federal Ministry of Finance has shown.

Of course, the current crisis situation required special central bank measures, but I doubt whether a doubling of the pandemic emergency program (PEPP) from 750 billion to 1.35 trillion euros or even a further increase is justified.


Can interest rates rise at all without the heavily indebted countries quasi choking on debt service?


It's worth taking a look back at history.

When the United States entered World War II, the Fed pledged not to let the long-term interest rate rise above 2.5 percent.

It maintained this course, with which it controlled the so-called yield curve, from 1942 to 1951.

After the war, this led to the US debt falling significantly relative to economic output.

Only when inflation rose to over ten percent did the Fed abandon this monetary policy.

With this model of financial repression or fiscal dominance over monetary dominance, the time was used to reduce the debt ...


... inflated it away ...


... yes, right, and that is a model that may still be in some heads today.

But that would mean giving up the central bank's independence for good.

And the difference from then is that the US and other countries had strong economic growth.

ECB should explain monetary policy in a more understandable way



Is there a conceivable scenario in which the central banks lose control of the yield curve?


Yes, that is conceivable if you lose confidence in the central banks that they can really hold out for a long time, especially if the risk of inflation increases.

The financial markets could charge higher risk premiums or a country could lose market access entirely.


Would monetary policy be better accepted if the ECB openly agreed with its critics on points that can hardly be argued away, such as the increases in asset prices induced by its measures?

Shouldn't she have to say: Yes, there is this connection, but this monetary policy saves jobs and the euro as a peace project?


The ECB has to stick to its mandate and not look for excuses in other policy areas.

There are communication deficits.

The ECB would have to explain its policy more and better in a language that is understandable for the general public and not just through the typical central bank

- “talk”.

That is also a task for the national central banks.

In particular, the unintended consequences of their policies should be addressed, instead of just referring to the positive effects that hardly anyone can understand.

The ECB certainly admits the connection between its policy and the development of asset prices - in its stability reports, but these are barely noticed by the public.


The ECB points out that the natural interest rate has fallen continuously over the last 30 years and that it does not find itself so far removed from this rate at zero percent.


That's right.

But the natural interest rate is not directly observable; the values ​​are model-based estimates.

There are many economists, including Stanford economist John Taylor, who say the natural interest rate has fallen, but the meaning of that fall is over-interpreted.

Germans hang on to cash



What the ECB has said is the digital euro.

In Germany, where people are very attached to cash, this triggers worries.

Above all, there would be no more chance of escaping negative interest rates within the monetary system.

Are the fears well founded?



Great caution is required when proceeding here.

Of course, a central bank cannot ignore technological innovations.

The advantages and disadvantages, which are not yet fully understood, must be carefully weighed against each other.

There are negative effects, some of which are wanted.

With the abolition or reduction of the currency in circulation, savers who keep their sight deposits at the bank should no longer have the opportunity to avoid negative interest rates by hoarding cash.

Savers can still do that today, even if they don't do it to a particular degree.


Does the massive increase in Bitcoin in recent months indicate an escape from paper currencies to crypto currencies?


You shouldn't overestimate the latest developments.

There have been soars and crashes in recent years.

I don't think that reflects a lack of confidence in the current monetary system.

But what could be a vote of no confidence, especially with a view to future inflation risks, is the development of the gold price in recent years.

About the person: Jürgen Stark was a member of the Executive Board and the Council of the European Central Bank (ECB) from 2006 to 2011, responsible for the areas of economics, statistics and information systems.

At the end of 2011 he resigned from these functions.

Before moving to the ECB, he was Vice President of the Deutsche Bundesbank, after having held various positions in the Federal Ministry of Economics, the Federal Chancellery and the Federal Ministry of Finance for over 20 years.

Stark studied economics at the Universities of Hohenheim and Tübingen.

Since 2005 he has been an honorary professor at the Eberhard-Karls-Universität Tübingen.

Today Stark works as an independent consultant.

He is a member of various advisory boards and curator of several German foundations.