FRANKFURT Aug 8 (Reuters) - Otmar Issing, one of the founding fathers of the euro and a former European Central Bank chief economist, says some states may not be able to remain in the currency bloc in the long term but Germany would be better off staying in.
In his book "How we save the euro and strengthen Europe", which was published this week and is written as a dialogue between the German economist and a journalist, Issing said a euro collapse would have severe consequences.
"Everything speaks in favour of saving the euro area. How many countries will be able to be part of it in the long term remains to be seen," he said.
Asked in the book how strongly he was concerned about the euro, he said: "Much more strongly than I could have ever imagined.
"We are still a long way off saying 'that's it, now we are sure to make progress'. Substantial reforms in almost all countries are still pending," Issing said.
Issing was one of the few founding fathers to have clearly articulated the euro's flaws and said he was among those who believed that a political union should have preceded the currency union or at least have been created at the same time.
But a political union has yet to be achieved, even though the severity of the currency bloc's crisis drove euro zone leaders in June to agree a push for closer integration, especially in managing government finances.
Issing said he increasingly understood why some called for a return to their national currencies, but it would be an illusion to believe that Germany, the bloc's largest economy, would be better off with its own currency.
"That is not the case," he said. Even in its short existence, the euro has been more stable than the mark, Issing said.
"One should focus on bringing the euro back to what it was meant to be, a stable currency, stabilised by an independent central bank, which follows a clear mandate, nothing else, and that the other protagonists, especially national governments, do their homework," Issing said.
Without explicitly referring to Greece, whose unsustainable debt burden triggered the bloc's crisis three years ago, Issing said it was legally impossible to throw a country out of the currency union, but giving money to a government which did not comply with rules and did not reform would put the bloc's credibility at risk and set a bad example.
"One has to consider whether one can keep giving money to a country that has not yet fulfilled an obligation, which is still non-transparent, more or less fudges things," he said.
The debt crisis has also sucked in Ireland, Portugal, Spain and Cyprus and is threatening Italy, the bloc's third biggest economy. Some now see the ECB as the only federal institution capable of rapid and massive intervention.
While the central bank said last week it was working on a plan to launch a new government bond purchase programme to hold down borrowing costs, it said it would only intervene once countries had requested assistance and accepted strict conditions and surveillance, and once euro zone governments had activated their rescue funds.
With a political union still a long way off, Issing said it was up to national governments to solve their own problems and not to rely on mutualising debt or on the ECB too strongly.
"There is no quick fix and anything in the direction of (jointly-issued) euro bonds or something similar would mean for me the end of the stability-oriented currency union," he said, emphasising the independence of the ECB, where he worked until 2006 and whose mandate focuses firmly on holding down inflation.
"The less politicians address the root of the problems, the more they look with their expectations and demands to the ECB, which is not made for this. It is a central bank and not an institution to rescue governments threatened by bankruptcy. A central bank always also acts as a lender of last resort for the banking system - but it does not rescue governments."
"Exaggerated expectations alone can harm the prestige of the institution," Issing said.