Tuesday, 20 November 2012

Leading German economist on the euro: "We are destabilizing our political system with this excessive rescue policy ..."

Hans-Werner Sinn is one of the few European economists, who dare to speak out about the failure of the euro. Sinn was one of  the early supporters of the euro project, but in an interview for the German Der Spiegel he now admits his mistake:

Sinn: I was too quick to endorse the euro because I thought it would liberate the continent from endlessly fluctuating exchange rates. My mistake was that I believed that the nations of Europe would adhere to the Maastricht Treaty and not socialize the debts of Southern European countries. Older colleagues had already pointed to this danger at the time.

In the interview Sinn says that he still hopes that the euro can be fixed, and that Greece and Portugal after a temporary exit could return to the common currency. However, when one reads his analysis, it is quite obvious that he is all but hopeful about the future of the euro (and rightly so):

Sinn: I hope that it can be fixed. The euro crisis proceeds in phases, and we are always told that there is no alternative to the next phase, because otherwise the euro would crumble. So there was supposedly no alternative when the European Central Bank (ECB) granted its TARGET loans, when it forced the German central bank, the Bundesbank, to purchase sovereign bonds from Southern European countries against its will, and when increasingly larger rescue funds were approved. Now, they are planning to create a banking union to socialize the debts of banks in Southern Europe. The next step will be the introduction of euro bonds …
SPIEGEL: … which the German government vehemently rejects.
Sinn: By the time France is hit by the crisis, as everyone fears will happen, the German government will no longer be able to refuse this demand. This development will ultimately lead to a system that has little in common with a market economy. The ECB and the European Stability Mechanism (ESM), the permanent successor to the current rescue fund, will then direct the flow of capital -- with the approval of euro-zone governments -- into countries where it no longer wants to go. This will result in growth losses throughout Europe, and money will continue to be thrown out the window in Southern Europe. Furthermore, it will create considerable discord because it makes closely allied countries into creditors and debtors.

Sinn does not agree with those who say that Greece's and Portugal's exit would cause enormous turmoil:

Sinn: I don't agree with the prognosis. If Greece exited the monetary union, the Greeks would purchase their own goods again, and wealthy Greeks would return to invest. And if Portugal leaves, it will have similar positive experiences. The Ifo Institute has studied some 70 currency devaluations and found that recovery begins after one to two years. We are, of course, also suggesting just a temporary exit. Greece and Portugal have to become 30 to 40 percent less expensive to be competitive again. This is being attempted through excessive austerity measures within the euro zone, but it won't work. It will drive these countries to the brink of civil war before it succeeds. Temporary exits would very quickly stabilize these countries, create new jobs and free the population from the yoke of the euro.

In Sinn's analysis, the most serious danger with the euro is this:

Euro-zone member states have made available €1,400 billion ($1,780 billion) in bailout loans, €700 billion of which has been contributed by the Bundesbank through its TARGET loans. On top of this, there is the ESM with €700 billion, which is to be leveraged to €2,000 billion with the help of private investors. This stabilizes the capital markets, but it also destabilizes the remaining stable European states and wipes out the savings of retirees and taxpayers. We are gradually sliding into a trap from which we will no longer be able to escape. This risk is, in my opinion, the greatest risk of all.

SPIEGEL: But other economists arrive at different conclusions when they analyze the situation. Honestly, if you were the chancellor, wouldn't you also take the safest apparent route forward, just as she is doing?
Sinn: I understand very well that politicians always have to bridge the gap until the next election, even if long-term dangers increase as a result. But as an economist, my time horizon is longer.
SPIEGEL: Isn't it perfectly reasonable to be extremely cautious in this situation?
Sinn: You can't convince me that it makes sense to stand by idly and watch as we take on increasingly greater risks. We are destabilizing our political system with this excessive rescue policy ...
SPIEGEL: ... but not if the rescue succeeds.
Sinn: I think that is rather unlikely because it would give us the wrong prices and thus result in a lack of competitiveness in the countries that are receiving public loans. I can't save drug addicts by meeting their demands for more drugs.

Read the entire interview here

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