”It pays off defending the Euro.”
Interview: Hans-Werner Sinn in Frankfurter Allgemeine Zeitung.
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27.04.2013 Star Economist Hans-Werner Sinn speaks up for a monetary union of the strong and demands higher sacrifices from savers and banks.
Professor Sinn: A new party in Germany demands leaving the euro. Are they right?
The arguments of the party are mainly sensible. Bernd Lucke and many of his co-fighters are recognized economists that know what they are talking about. In spite of that I do not belong to the party and will give the euro still more chances than my colleagues.
Do you think a return to the D-mark unrealistic?
I think it pays off to defend the euro as such, but I consider it a major error to bend and break the weaker countries in southern Europe just to keep them within the euro. It doesn’t help these countries and you diminish the chances of survival of the euro.
Isn’t the crisis calming down somewhat?
Only apparently. That is because taxpayers in the still sound countries have entered into enormous credit and liability risks through the ECB and the EMS. That helps private creditors in the southern countries getting out of the dust, but it does make the states of the north the creditors of the south. That is pre-programming bickering and bad blood between the populations.
In what way do you help the creditors out of the dust?
Take f.i. Cyprus. The ECB has allowed the Cypriote CB to extend emergency credit on a large scale to the private banks. Due to this they could pay out to depositors although they in reality were already broke. That bordered on bankruptcy fraud. Many large investors could bring their fortunes in safety just before they closed the doors. When you make debt cuts – then better right away. The later the cut the more losses are stuck on the taxpayers of Europe.
Was Cyprus the historical turning point for the saving of the euro?
In the case of Greece we had asked the creditors to pay a year before. In spite of that Cyprus was a turning point. Only in June last year the EU had declared there would be no more creditor loss in bank rescues until 2018. That was a scandal that 480 German economist had protested against in two proclamations. In politics facing facts takes longer.
Do you act as in Cyprus from now on?
Yes. The amounts are far too great for the taxpayers. The debt in the banks of the crisis countries is about 9 trillion euro or nearly three times the public debt and it is estimated that a tenth of it is toxic. Only one group can carry that burden and that is the creditors of the banks.
Then you think it is right for savers in other European countries to bleed in bank rescues.
When the bank is broke, sure. Who else? There should be a clear pecking order in the future so everybody knows where he stands in the seniority as a creditor in case of a bankruptcy.
That makes savers insecure and they ask themselves if their money is still safe.
Gracious God is not available to make the necessary guarantees. It is good that small savers are guaranteed to the detriment of the major. But the state depositor guarantee can go broke as well. Nothing is perfectly safe. In the case of Cyprus, foreign taxpayers saved depositors with up to 100,000 EUR though they had no involvement in the matter.
Do You think the limit fair?
It is too high. Who has 100,000 EUR on their bank account? That is not poor people. The taxpayers of the rescuing countries generally have far less. Consider that the middle fortune of a German household is half that amount according to ECB figures. I hold it simply unacceptable that normal German savers are pressed into pay for Cypriot bank deposits twice as large as theirs. But that is what Brussels wants to force through in the Banking Union with all means. Germany has up to now not entered into an insurance agreement to take on banking risks of other countries. And you can’t insure against fire after the fire rages.
Have the European banks been treated too leniently after the Financial Crisis?
Unfortunately yes. Hundreds of banks in the U.S. have failed in the Financial Crisis. Their creditors have lost a great deal of money, which was a healthy process. Up to the Laiki on Cyprus nearly no bank had gone bankrupt. In Germany we have rescued distressed banks for 280 billion EUR in 2010 as well, chiefly HRE and Commerzbank. Not even the banks’ hybrid capital with the task of paying such losses was touched. On those occasions normal taxpayers, pensioners, long term unemployed and security recipients bailed out rich depositors.
In Germany life goes on quite well despite the euro crisis. Will it remain so or will the crisis catch up with us at some point?
The paradox is: We are well off, not in spite of, but because of the euro crisis. Before the crisis Germany was considered the sick man of Europe. There had been red lights on for a long time in terms of growth rate because we had carried our savings abroad instead of investing them nationally. Now the investment capital stays at home. That has initiated a housing boom, cranked the economy and lowered unemployment.
But of course the crisis carries enormous future risks for Germany. We have work, but we lose still more of our hard earned money through the expansion of the liability.
You have brought the so-called Target-system that clears the payments of the European CB into the debate and called it a great danger for Germany. Is there any less tension now?
It is about those credits the Bundesbank extends to other CB’s when they pay the balances on their request. The credits have diminished somewhat lately because the taxpayers have been burdened with even greater liability risks. The ECB has told the investors in southern European sovereign bonds that they shouldn’t worry about their money: The ECB will buy the securities before a country goes bankrupt and lead the impairment losses on to the taxpayers of the still sound countries. The ECB assurance has lowered the Target-credits of the Bundesbank because now more private money is loaned to the southern countries. The southern CB’s do pay out for the Bundesbank again. The taxpayers’ risk did not go down due to the guarantee, but up.
How large is the debt on the Target balances today?
Bundesbank still has Target-assets about 600 billion EUR on their books. If the euro-system goes bust, that money is gone. Bundesbank with equity of 140 billion EUR would be bankrupt several times over. That would mean that the taxpayers would have to forfeit profits from Bundesbank for a very long time or Bundesbank would have to be recapitalized by the taxpayers – one way or the other the 600 billion would be gone if you calculate actuarially correct.
The CB’s of many countries flood the markets with money at the moment. Is printing money a possibility to get out of the debt-crisis?
The interest rate in all those countries is already nearly zero. Then you arrive at a hard limit where monetary policy loses effect.
Why is there no inflation in Germany at the moment despite loose monetary policy?
The growth in money supply in Europe is limited, as – metaphorically speaking – the money printed in Southern Europe is shredded in Northern Europe.
Will inflation stay so low if the economy starts up stronger?
You can’t exclude the possibility that there will be more inflation at some point. There is no sign of that at the moment.
Former Bundesbank chairman Thilo Sarrazin will hand in his diploma if the loser monetary policy doesn’t lead to inflation. Will he lose his degree?
We have the risk that the ECB don’t get their outstanding loans honoured and the Bundesbank goes insolvent. That is the real danger, not the inflation. Inflation is a side issue.
Dispite the risks You mention You will hold on to the euro. What solution do You suggest?
I’m pro a temporary exit of the weaker countries. They could regain competitiveness through an adjunctive depreciation and could later lower prices and wages to get back in. The return should be on conditions of reforms. That would stabilize the political systems of the exit countries that are now threatened with an overwhelming unemployment. The monetary union is too rigid generally. Until a United Europe is achieved we should have a solution between the rigid Bretton Woods and fixed currency area like the USD. Only in this way will the euro survive.
What exit countries do you think of?
Principally Cyprus and Greece. If Cyprus left the euro now it wouldn’t have dramatic effects. The flight of capital held up to intimidate us is already behind us. The control of capital movement and limits to withdrawals from deposits will stop further run. As soon as Cyprus has left the controls could be rescinded.