"I think it would be smarter to continue to follow the European route"

Michael Diekmann: I see myself as German and European.

But what comes first?

The fact remains that I have German roots. I notice that in particular when it comes to soccer.

Will there ever be such a thing as Europeans who don't think of their countries of origin?

That will soon be the case. For my children and their friends the benefits of a unified Europe are already the norm, and they don't want to reverse what has been achieved up to now. And if you ask me as a manager, I have a thoroughly European perspective. Europe is our home market, not just Germany.

Corporations also profit from the EU, while the taxpayers carry the risk.

It's unfair to say that managers are pro-Europe only because they want to protect their revenue sources. You can't separate the interests of a company from national interests or those of the taxpayer. We don't want this structure to be destroyed because it would have unpredictable effects – not just for businesses but for the entire country, its social systems and our global competitive position.

On the other hand, Euro-skeptics say that right now we're taking on more risk every month, betting away the country – and that it would be better if we cut and run.

I don't believe that. The issue is not how much Germany is paying for what. In the debate over Europe you have to take the long view. Today, Germany has 80 million people, and France has 65 million. In 30 years they will be about the same somewhere in the middle. And some economists say that our economy has just reached its peak in productivity. So the strong position Germany has today will not be maintainable.

But it's clear that this Europe in its current form no longer works.

The question is what is the alternative. Should we really just say we made a mistake with European unification and the euro and turn it all back? I think that's profoundly mistaken.

Lots of people would like to have the deutschmark back. Is that possible?

Anything is possible theoretically – the question is what consequences that would have. We've calculated the economic effects of a return to the deutschmark. In this scenario, Germany would slide into a deep depression with GDP dropping by double digits for awhile, ultimately losing 25 percent of its GDP within four to five years.

Why do you make those kinds of calculations?

As risk managers, we have to be prepared, even if we consider something to be a huge mistake and very unlikely. Our calculation shows: Returning to the deutschmark would be irresponsible. So we should stop all this kind of speculation.

Michael Diekmann: "I think it would be smarter to continue to follow the European route"

That wouldn't be very credible considering the dramatic effects. No politician would want to risk it. I think it would be smarter to continue to follow the European route. In the last two years, we have already created two very valuable instruments, the rescue funds EFSF and ESM, to help overcome these problems.

But the market is not showing much faith in these instruments.

What is "the market"? That means investors who are sitting on trillions in liquid funds and would like to invest that money. But only in an environment that offers more certainty.

You yourself are one of these big investors. What would put an end to your uncertainty? 

The key issue for me is getting out of this state of permanent temporary fixes and having a clear vision. Right now we don't know the target view for 2020. What should the Europe of the future look like? Who will be in and who will be out then?

What kind of Europe do we need – one where every country is responsible for its own finances or one where they all pay together?

From my perspective, everything points to a stronger political union. That can only happen with more shared liability and finances. At the same time there have to be limits for how much one country is liable for another. If you help others you need some measure of control. Otherwise this kind of model can't get majority support.

And what should that lead to in the end: a fiscal pact in terms of the Maastricht Treaty or an actual fiscal union with a European budget?

I could live with both alternatives. The question is which model can persuade the people of Europe. For decades the EU was mainly a construction of the elites. That's over now. It won't get us any further.

Isn't part of the problem that the elites, to which you as a manager also belong, don't have a blueprint for Europe either?

You could certainly get an answer from the elites, if you want to call them that, about what a new Europe could look like. But I don't think that the Europeans would accept a master plan from academics and businessmen. We need a political process that involves the people.

But a process like that takes a long time. Europe doesn't have that.

All structural solutions take a long time. While the Italian prime minister Mario Monti is reforming the labor market, that won't show any effects overnight. That is why we have to build a bridge to be able to achieve the long-term vision.

The EU summit last week opened the door for financial aid without tough conditions. Was that right?

To tell you the truth, I'm still not sure if that really was the outcome of this summit. I have read a lot about it, but nothing is particularly clear. That's why I'm surprised about the initial euphoric reactions of the markets to the summit's outcome. Apparently investors believe that Germany in particular has gotten more flexible. Up to now the message was: Aid comes only with tough conditions, even if that drives the country into a recession. That was not a satisfactory solution.

But there is getting around budget cuts.

The main thing is for Europe to become an attractive location again. Part of that is also, for example, setting an upper limit for taxes. No one is helped when governments close budget gaps with massive tax hikes and then growth collapses.

These days no one seems to still believe in a strong Europe. Your bond expert Bill Gross recently even questioned Germany's security. Then you certainly couldn't buy eurobonds.

All Bill Gross said was that German bonds with their historically low yields are too expensive for the time being. And eurobonds right now would not convince investors, which I completely agree with the Chancellor about. That would just be another short-term fix for the capitalization problems of some countries without any structural change.

In an environment like this can you promise your customers that their life insurance is safe?

Absolutely, our German life insurance is safe – and attractive especially for all those who want to benefit from a safe investment product and the knowledge of a large investor like Allianz and who are also looking for insurance protection. 

Does this also apply to the return you have guaranteed to your customers?

The current extremely low interest rates are a challenge for life insurance. But we have calculated this out as well: even in the very unlikely case that interest rates remain this low for the next 20 to 30 years, Allianz would be able to fulfill all of its guarantees.

But what good are guarantees for a customer if the euro breaks apart and the economy drops by double digits as you have predicted? Then we'd see gigantic depreciations.

Nothing is certain, when everything is uncertain. I can agree to that. But not every extreme scenario is realistic. We don't expect either a breakup of the monetary union or the default of another country in the euro zone. In the worst case, the ECB would do everything possible to avoid liquidity squeezes like that.

So your motto is: in Draghi we trust?

Right now the ECB President has a very central role – that is correct.

Couldn't all this short-term aid by the central bank or the ESM result in no long-term structural change?

This is certainly a real danger. If we don’t have the courage to let something break down, we will never get past these emergency measures. This is a vicious circle. But at the moment this is not the right time to test how the economy will bear a second even bigger shock than the Lehman collapse.

Maybe it would take an even bigger crisis for things to really change?

That might help, but I sure don’t hope for it. We really should have been through enough crises in recent years to have learned from experience. Maybe we should have more realistic expectations regarding the timeframe. The United States wasn't founded in a few months. 

Four years ago you told us the risk of national deficits was being underestimated. You seem to have a certain prophetic talent. Where is the next crisis looming?

We're constantly talking specifically about national debt. But it's time we finally took a closer look at the additional demands countries will be facing in the future – especially surrounding their health care and retirement systems. 

If we deal with that now as well, it will make the financial crisis even worse.

Honest assessments and transparency are the first step towards really tackling problems. Governments have to be credible. That is the primary condition for regaining the trust of investors.

 
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Christian Kroos

Allianz Group
Tel. +49.89.3800-5043

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