No getting around Grexit
According to Professor Hans-Werner Sinn, President of the prestigious German Ifo Institute for Economic Research, the Eurozone has to undertake four major steps in order to get out of the current crisis: introduce the American monetary system, downsize the Eurozone, create a banking union and accept write-off losses on the investor’s side.
"What we need is a US settlement system, rather than reinventing the wheel. We mimic the American monetary system", Professor Sinn said at the occasion of the Luxembourg Economy Days 2013 at the Chamber of Commerce. He said that the Eurozone couldn’t be kept together as it is now. "The path towards equilibrium of price levels and competitiveness for some countries is simply too far, for Greece and Portugal in my opinion even way too far. You cannot cut prices by 30% in an economy. If you try that with austerity programs, you bring these countries to the verge of a civil war."
Referring to the example of Greece, he said that indebted households and companies that have to repay loans are the victims of price cuts. "You drive them into bankruptcy. There is a wide gap between the level of price cuts in Greece in order to make the country competitive, and the level tolerated by the population without the outbreak of a civil war." Sinn insisted that the only possibility of making Greece competitive again would be higher inflation in the Eurozone’s core countries. "But this would mean Germany had to increase its prices by 50-60%. Will we do that? I doubt it. If we don’t accept more inflation in Germany and countries in a similar position, then the Eurozone will no longer exist in ten years’ time with the same number of member countries. It’s a matter of impossibility."
Rather than trying the impossible, professor Sinn thinks uncompetitive countries should be offered the chance to exit the Eurozone in an organised process while subsidising sensible imports and helping rescue the Greek banking sector. "Give them a chance to return later with a developed currency, so that they can have hope and don’t feel expelled. Help them with this process, rather than trying to achieve the impossible and pour endless sums of money without delivering any solution."
Professor Sinn also said that arguing about whether or not it was nonsense to say that if the Euro weakens, the Eurozone would break up, was a discussion that "leads us nowhere. What we need is pragmatic solutions. Take marginal countries out that can’t make it, then stabilise the remaining core: accept a little bit more inflation in the core to help those peripheral countries that stay in to regain competitiveness."
He stressed that banking union in the sense of a common supervisory authority and common regulation would be absolutely necessary because otherwise there would be a "race to the bottom" in the regulatory requirements. "We can’t recapitalise the banks. This is just too much. The bank debt of the six crisis countries totals 9,4 trillion Euros, nearly three times their government debt."
In Spain for instance, where 12% of the outstanding credit granted by Banco de Espana is supposed to be written off, investors, and not tax payers, have to prepare for loosing their money. "It’s the fundamental principle of capitalism that you are liable for your investment decisions", Sinn underlines. He said that countries could still offer covered bonds if they have difficulties in getting low interest rates. "Everyone has the possibility of convincing the investor of the fact that he will pay back while offering collateral."
Despite all this, the professor’s dream and hope would be the creation of the United States of Europe without socialisation of old debt. "It’s not a fiscal union, it’s not a finance minister, it is much, much more: a common army, a core centre, a common government and a parliament with a democratic representation." EA