Critics slams Europe's rescue mechanisms as a threat to social peace

BRUSSELS - A member of a German quintet of professors that is currently challenging the legality of Europe's recently-devised support measures has said they threaten to create enormous tensions between EU citizens if allowed to stand.

In a telephone interview with EUobserver on Thursday (22 July), Wilhelm Nolling, professor of economics at the University of Hamburg, said the idea that Greece would be able to pay back its loans to EU states was simply "ridiculous," given the country's level of indebtedness and lack of competitiveness.

As a result, EU citizens in lender countries would increasingly begin to question the merits of this implicit system of wealth redistribution, he predicted.

"A transfer union will destroy the social peace in Europe," he said. "Do you think the Germans will be able to keep quiet?"

The group of German economists recently extended their legal case in Germany's constitutional court against the EU-IMF €110 billion bail-out for Greece to include the eurozone's €440 billion support mechanism and the ECB's sovereign bond purchases, the latter two announced in the early hours of 10 May.

Their complaint is that they breach the EU's no-bailout clause, a ban on fiscal transfers between richer and poorer member states that many Germans feared would be inevitable when giving up the Deutsche Mark in 1999.

In addition, Mr Nolling is amongst those that believe that the various support measures have bought nothing but limited time to a eurozone system that is inherently flawed.

"If you start with a makeshift operation you will never get to the real cause of the malaise. That cause is that a currency area of this size needs converging economies but the opposite has happened.

Writing in a blog on this webiste back in February, Edin Mujagic, a monetary economist at Tilburg University, also noted these divergences had increased over the eurozone's 11-year history.

"Whether you take a closer look at unit labour costs, unemployment, welfare, productivity, fiscal deficits, debt and so on, the differences have increased since 1999," he wrote.

A smaller euro area?

Europe's politicians are rapidly striving to reduce these differences by devising a system of macro-economic indicators that member states would be forced to comply with.

A recent European Commission paper suggested financial sanctions should be applied to states that fail to meet the grade, a system similar to the bloc's theoretical rules on debt and deficit limits.

Some, however, fear this is merely too little too late, arguing that the eurozone's forefathers were blinded to the inherent economic impossibility of the project by political motivations.

"We need to form a new heart of the euro, France, Germany, Finland, Austria and the Netherlands," offered Mr Nolling as the only solution to overcoming divergences without using the forbidden system of fiscal transfers.

"All the other states should be given their freedom back. That would give them a real opportunity to increase their competitiveness through currency devaluations."

"It is currently impossible for them when they are 30 percent out of line. Salaries and cost structures are way out of line."

At present, no one is sure when the German constitutional court will come to its decision, but a rejection by the powerful group of judges is likely to have explosive consequences.

"I expect the decision before the winter starts," predicted Mr Nolling. "I want the court to tell the German government to stop giving money away."