Hans-Werner Sinn: Unless we create the United States of Europe or a confederation of Swiss type, we need an exit and reentry option for member countries of the Eurosystem
Interview by Jorge Nascimento Rodrigues, July 2014
© JNR, 2014
The present low sovereign rates of the Euro zone peripherals, like the ones for the Portuguese bond yields below 4%, are not sustainable and are nocive in the middle term for those European Southern countries in debt crisis since 2009, thinks the present most important German economist, president of IFO-Institute for Economic Research, a Munich-based think tank, considered one of the European most influent.
Instead of the bail-out strategies from Eurogroup, IMF and ECB, the so-called troika, since 2010, professor Sinn argues for an urgent European debt conference to write-off some ot the euro banking system and state debts.
In this interview for Expresso, Portuguese weekly newspaper, he stresses the importance to flexibilize the Eurosystem, allowing, if necessary, temporary exits and later re-entries, giving the debt crisis Southern economies the chance to depreciate.
Original Interview in English authorized by Hans-Werner Sinn for Janelanaweb.com. Interview published at Expresso in Portuguese version (19 July 2014).
«We need a European debt conference to write off some of the debt of and with banks, the state debt and the debt of the local central banks vis a vis the Eurosytem to help the southern European countries breath again
«I was not surprised in general [with the Espirito Santo crisis], as I have always been pessimistic about the ECB’s policies
«All southern European countries are trapped in the euro. Some will be able to make their living there after painful reforms, others will suffer for a long time, unless we take more radical measures
«The sovereign rates are only low, because the investors believe that the European tax payers will eventually foot the bill by way of providing help through the ECB or the rescue funds
«Limited debt restructurings as in Greece are seldom unique. We need a more fundamental approach to reschedule the Eurosystem
«I propose a breathing currency union, with the possibility of exit and reentry. A house that you can only enter but not exit is a prison
«I share the opinion of the German supreme court that the ECB has overstepped its mandate.
Hans-Werner Sinn, 66, is president of the IFO Institute for Economic Research, a Munich-based think tank formed in 1949, considered one of the most influent in Europe. He is also professor for Economics and Public Finance at the Ludwig Maximilian University of Munich and Director of the Center for Economic Studies (CES) and managing director of CESifo. He is author of several books, like Can Germany be Saved?, The Green Paradox and Casino Capitalism. The influent German newspaper “Frankfurter Allgemeine Zeitung” in 2013 placed Sinn first on its list of economists with most political influence in Germany. He can be considered one of the present most relevant economists of the academic School of “ordoliberalism”, a term coined in the 1950s by Hero Moeller for a current of Economics also known as the Freiburg School, that influenced the concept of “social market economy” in post-war democratric Germany.
Q:Despite the ECB monetary easing policies since end of 2011 and the specific measures for the Eurozone banking sector – particularly in Ireland, Spain and Portugal -, the financial turmoil just returned last week with an epicenter at a Portuguese financial group. What went wrong?
A: The financial turmoil has deeper roots. I see them in the reduction of interest rates in southern Europe that happened after 1995 when the euro was firmly announced at the Madrid EU summit. The rate reduction created an inflationary credit bubble in southern Europe that deprived the economies of their competitiveness. The appropriate counter-measure would be a currency depreciation, but that is not available in the euro. All southern European countries are trapped in the euro. Some will be able to make their living there after painful reforms, others will suffer for a long time, unless we take more radical measures.
Q: In the second category you include Portugal?
A: I am not sure, but Portugal might belong to that category.
Q: You were surprised with these recent financial episodes?
A: Suprised insofar as I did not expect the problem to emerge with Espirito Santo in particular. But I was not surprised in general, as I have always been pessimistic about the ECB’s policies. They are just pain killers, but no measures that can re-establish competitiveness.
Q:This recent financial turmoil, particularly in the stock exchanges, and the panic it reveals, are justified?
A: No, financial markets always over-react. They were by far too confident the last one and a half years, and now they may be too pessimistic.
Q:The historical all-time lows of sovereign bond yields in Ireland, Spain, Italy and very near in Portugal (below 4%) are sustainable?
A: No. The rates are only low, because the investors believe that the European tax payers will eventually foot the bill by way of providing help through the ECB or the rescue funds. Low rates lead to excessive borrowing. That helps for the moment, but it drives the economies deeper and deeper into the mess.
Q: Recently you talked to Bloomberg suggesting a European sovereign debt conference granting partial relief to the Eurozone Southern countries. Your proposal means the bail out and budget consolidation programs from the troika failed to solve the problem of those over-indebted Eurozone members?
A: Bail-out programs usually mean that tax payers foot the bill. I find it more appropriate if the creditors face the truth and acknowledge that they would not get all of their money back. We need a European debt conference to write off some of the debt of and with banks, the state debt and the debt of the local central banks vis a vis the Eurosytem to help the southern European countries breath again. I would also make the eurosystem more flexible, allowing for temporary exits and later re-entries that give overpriced economies the chance to depreciate.
Q: When you refer the need to face sooner the reality of the sovereign debt in the peripherals, you mean the European Summit and the Eurogroup needs to cancel the decision that the Greek Restructuring of 2012 was “unique” and “extend” the debt restructuring strategy?
A: Yes. Limited debt restructurings as in Greece are seldom unique. We need a more fundamental approach to reschedule the Eurosystem. Otherwise markets would not believe in the solution and countries like Portugal would suffer for a long period of time.
Q: Regarding the Conference debt you have in mind the London Conference of 1953 about the German over-indebted situation? Can you be more specific?
A: Yes, for example. At that London conference the German external debt of 20% of GDP was waved. But I also think of the World Debt Crisis in the early 1980s and the Asian crisis in the late 1990s. That crisis was not resolved with taxpayer money, but by hair cuts alleviating the burden of the debt.
Q: There’s a lot of proposals for European sovereign over-indebted management. Some German economists suggested a Redemption Fund for a mutualization, Varoufakis, Holland and Galbraith talked of a “modest proposal” and Charles Wyplosz suggested a one-off debt restructuring of 50% of all the Eurozone sovereign debt. These are useful proposals to be discussed at the Conference you suggested?
A: Not the redemption fund, as it again involves tax payer money. I have more sympathy for the proposal of Charles Wyplosz, althouth the percentage would have to be negotiated.
Q: In your suggestion regarding the partial debt relief you include the possibility of a way out of the Euro for some of these indebted countries?
A: Yes, I propose a breathing currency union, with the possibility of exit and reentry. A house that you can only enter but not exit is a prison. Unless we create the United States of Europe or a confederation of Swiss type, which I would endorse, I would turn the Eurozone into a more flexible currency arrangement, something between the dollar and the Bretton Woods system. But we need a prior currency realignment under all circumstances.
Q: The ECB is being acting outside its mandate? Mario Draghi is doing more than monetary policy since end of 2011 and particularly since the OMT decision in summer 2012?
A: The ECB has carried out a bail-out policy at the risk of tax payers rather than just monetary policy. I share the opinion of the German supreme court that it has overstepped its mandate. It has helped the creditors more than it was allowed to. It is now time to help the population in the crisis stricken countries with a debt moratorium as well as exit and re-entry options. In my opinion this is the only way to re-vitalize the labour markets and consolidate the public budgets.