Eurozone crisis as much a result of poor decisions in Berlin and Frankfurt as in Athens, Madrid and Lisbon, says Adam Posen
A senior member of the Bank of England has warned Berlin to be lenient with indebted eurozone countries or risk the breakup of the currency union.
Adam Posen, who steps down as a member of the bank’s monetary policy committee (MPC) later this month, said Germany’s government and banks were culpable in lending to Greece, Spain and Portugal and should recognise that the debt crisis was as much a result of poor decision-making in Frankfurt and Berlin as Athens, Madrid and Lisbon.
He said the Germans would be shooting themselves in the foot if they imposed politically destabilising austerity on Greece and other struggling countries.
“It is in Germany’s commercial and economic interests, not just its foreign policy and idealistic interests, to restructure the debt that other countries owe them,” he said.
In a swipe at Angela Merkel’s handling of the crisis, he argued that the German chancellor should tell the truth about the culpability of successive German governments and the negative impact from a breakup.
Posen, a US economist, also called for the Bank of England to take extra measures to ease credit conditions in the UK and encourage lending.
He told the BBC Hardtalk programme that the double-dip recession was “entirely predictable” after the coalition accelerated the austerity measures adopted by the previous Labour administration.
He repeated his condemnation of the Bank’s governor, Sir Mervyn King, for giving public support to the policy change, though he praised him for reacting quickly to deteriorating economic conditions, especially after the collapse of Lehman Brothers in the US, which precipitated the banking crisis in 2008.
Posen is renowned for favouring interventionist policies to support economic growth. He lobbied for an increase in the Bank’s quantitative easing policy, which he said had been under-used in 2010 and 2011. He argued that an earlier expansion of QE, which involves creating money to encourage bank lending, alongside more direct efforts to promote lending to small and medium-sized businesses, would have increased consumer demand, investment and economic growth.
In a sweeping criticism of the limited measures taken by the Bank of England, he said it should buy up mortgages and the debts of non-banking lenders to free up the financial system of overwhelming debts burdens.
Too often the MPC had focused on persuading high street banks to lend more rather than considering setting up new banks with a mandate to lend, said Posen.
“We should be buying things other than just gilts, such as bundles of private sector debt and special bonds to finance infrastructure.
“The funding for lending scheme set up by the Bank is a step in the right direction but I think the central bank should do more to go around the existing banking system.”