Navigating Unchartered Waters

• Author: Camilla Andersen interviews Otmar Issing
• Position: Senior Editor on the staff of Finance & Development

Many people can take credit for the idea of a single currency in Europe, but one man in particular was responsible for making it a reality. Otmar Issing, the first chief economist of the European Central Bank (ECB), recalls the daunting challenge of implementing monetary union. "The degree of uncertainty we were confronted with was extraordinary," he says. "Even during the best of times, monetary policy is an uncertain undertaking. Add to that the impact of the regime shift triggered by the introduction of the euro and the lack of reliable data, and I found myself asking, only seven months before the launch of the single currency: 'What is the euro area all about?'"

Today, most people take the euro for granted. But in the 1990s, many economists thought that monetary union might fail. Issing admits he would not have dared make the decision to launch the euro, but he agreed with the political logic behind the plan. "The status quo of fixed exchange rates in Western Europe was no longer viable," he says. Germany's central bank was de facto conducting monetary policy on behalf of the other European countries, and many of Europe's central banks spent billions of dollars in the early 1990s defending their currencies' peg to the deutsche mark. "So the choice was either to risk another currency crisis or to move forward," Issing says. He decided to apply his formidable intellect and what his friends and colleagues describe as an iron will to turn the vision of a common currency into reality.

Seven years later, most economists agree that monetary union represents a tremendous achievement. The euro is now the second most important currency in the world after the dollar. Inflation in the euro area (which includes the 12 countries that have so far adopted the euro) has held steady at about 2 percent despite a sevenfold increase in the price of oil. Thanks to these achievements, the ECB is now one of the most credible and powerful central banks in the world-although it has come in for its share of criticism, especially on inflation goals and how to achieve them. While Issing is proud of the ECB's accomplishments, his instincts as a central banker and economist make him cautious about claiming victory for monetary union. "Only history can tell whether it will be a success," he says.

Early years in academia

Born in Würzburg in 1936, Issing's views on Europe were shaped by his experience of growing up in war-ravaged Germany. Before the start of World War II, Nazi teachers taught him that "the enemy lives just across the Rhine." After the war, he had to walk through the ruins of his hometown on his way to school, witnessing firsthand the consequences of conflict. Once he was old enough, he started traveling in Europe and made many friends across the continent. "My personal experience convinced me that European unification matters for our common future," he says today. His views strengthened further when he began studying economics and learned about the growth potential of free trade.

Before becoming a central banker, Issing spent more than 30 years in academia, teaching and doing research at the universities of Würzburg and Erlangen-Nuremberg. In 1988, he became a member of the council of experts for the assessment of overall economic trends, a panel of wise men advising the government. Two years later, he joined the board of the Bundesbank, Germany's central bank. His experience as a university professor defined who he was as a central banker. "Once an academic, always an academic," he says, with one caveat: "As an academic, you can write a new paper if the first one is badly received. As a central banker, one misguided decision may have an impact on millions of people."

Issing's identity as a German national also colored his views on central banking. "There can be no stable society without a stable currency," he says, referring to Germany's experience with hyperinflation during the Weimar Republic, which paved the way for Adolf Hitler's election as chancellor in 1933. West Germany's new leaders took this lesson to heart, setting up a central bank that became a cornerstone of the country's economic success. "The deutsche mark was extremely important for postwar Germany. It was a symbol of stability but also a substitute for national pride. That...