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Ifo Istitute: German economists voice skepticism over Euro reforms

This is the full text of Ifo Institute press release:

Many German economists surveyed in the latest Economists Panel conducted by ifo and the Frankfurter Allgemeine Zeitung were sceptical about the monetary skeptical reforms recently adopted by EU heads of state and government. In the panel, 56 percent of survey participants stated that they were dissatisfied with the reforms, versus just 29 percent who were satisfied and 15 percent who were undecided. A total of 124 German economics professors participated in the survey.

"Many European countries remain too heavily indebted," warned Niklas Potrafke, Director of the ifo Center for Public Finance and Political Economy, which conducts the survey. "The Council of European Finance Ministers is supposed to punish deficit sinners, but Finance Ministers whose home countries do not meet the Maastricht criteria also sit on this Council. An independent body is needed that can credibly impose sanctions." According to the latest Panel, many economists believe that the Maastricht budget rules are not effectively enforced.

Just over 20 percent of survey participants do not believe that recent decisions have made the monetary union more crisis-resistant, versus only 20 percent who do. The opinions of the remaining majority were divided on this issue. A relative majority supported the approach proposed by 14 German and French economists in January to reconcile more risk sharing with greater market discipline within the monetary union. This Franco-German group of economists included ifo President Clemens Fuest. The introduction of a European unemployment insurance system, supported by some EU member and Germany’s Federal Finance Minister Olaf Scholz (SPD), was greeted very sceptically by the economists surveyed. 60 percent fear that a euro unemployment insurance system could create false incentives in EU member states. A very large majority of survey respondents believes that the problems of some euro countries stem from structural flaws that cannot be resolved by financial transfers.

Opinions on monetary union were divided. Some German economists fundamentally oppose the construction of the euro, while others are prepared to go down the French road. Isabel Schnabel of the University of Bonn and member of the German Council of Economic Experts, endorsed the reforms: "I welcome the latest decisions on monetary union reform. They will empower the Single Resolution Board and facilitate the orderly restructuring of public debt." Schnabel expressed concern over excessive risk sharing between banks and states. By contrast, Wolfgang Scherf, a public finance expert from Giessen, is dissatisfied with the direction that the Eurozone is taking. "More centralism is not the solution to the Eurozone’s problems, states need to take greater responsibility for themselves instead.” The Kiel-based economist Rolf Langhammer wrote: "All reform proposals suffer from the politically justified inability to effectively sanction a lack of national fiscal discipline. Ultimately, only the financial markets can do this by adding risk premiums to unsustainable national financial behaviour."

The ifo trade expert Gabriel Felbermayr, who is also designated President of the Kiel Institute for the World Economy, criticised the proposed reforms: "The political debate over a Eurozone budget is particularly irritating. As long as it remains unclear which public goods are to be financed by it, talk of a European finance minister and EU taxes is fairly pointless.”

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