Below are excerpts from a very powerful interview which Prof. Sinn gave the FAZ.
"Greece has no chance to become competitive in the Eurozone. She would have to deflate prices by 31% in order to reach the price level of Turkey".
"Greece must leave the Eurozone. If we expect Greece to reach competitiveness through deflation, the country will break apart. European politicians can say the oppositve ten times but certain things are not possible economically".
"The insistence on wrong prices is the Eurozone's foremost problem. That can break the Eurozone apart. The debt problem is minor in comparison. The South European countries have not come any closer to the solution of their problems. They should take Ireland as an example where prices vis-à-vis their trading partners fell by 16% in the last 5 years. Ireland had a current account deficit of 4% and now the current account is in surplus!"
"Greece lacks an export lobby which would pressure for deflation so that competitiveness returns. Instead, Greece as a strong import lobby which resists defaltion because that would ruin their business".
"It would be better to give the 130 BN EUR to Greece as transition aid for a return to the Drachma".
"There are 3 options: (a) we continue to finance the current account deficit of about 10% (which will eventually convert to gifts); (b) Greece exits the Eurozone; or (c) Greece deflates dramatically. The latter will never be accepted by the unions".
"The Target-2 financings have made Germany subject to blackmail because everyone knows that the Bundesbank would presently lose 500 BN EUR should the Eurozone fall apart; and that number is increasing. Germany is condemned to save the Eurozone".
"Mrs. Merkel is being pressured from all sides to assume all the risk. Against that pressure she has developed the strategy of muddling through. She opens her pocket book when the pressure gets too much but she doesn't give everything she has because she knows that her friends would lose interest in her if she did. She tries her best but were are trapped, nevertheless".
"Greece has no chance to become competitive in the Eurozone. She would have to deflate prices by 31% in order to reach the price level of Turkey".
"Greece must leave the Eurozone. If we expect Greece to reach competitiveness through deflation, the country will break apart. European politicians can say the oppositve ten times but certain things are not possible economically".
"The insistence on wrong prices is the Eurozone's foremost problem. That can break the Eurozone apart. The debt problem is minor in comparison. The South European countries have not come any closer to the solution of their problems. They should take Ireland as an example where prices vis-à-vis their trading partners fell by 16% in the last 5 years. Ireland had a current account deficit of 4% and now the current account is in surplus!"
"Greece lacks an export lobby which would pressure for deflation so that competitiveness returns. Instead, Greece as a strong import lobby which resists defaltion because that would ruin their business".
"It would be better to give the 130 BN EUR to Greece as transition aid for a return to the Drachma".
"There are 3 options: (a) we continue to finance the current account deficit of about 10% (which will eventually convert to gifts); (b) Greece exits the Eurozone; or (c) Greece deflates dramatically. The latter will never be accepted by the unions".
"The Target-2 financings have made Germany subject to blackmail because everyone knows that the Bundesbank would presently lose 500 BN EUR should the Eurozone fall apart; and that number is increasing. Germany is condemned to save the Eurozone".
"Mrs. Merkel is being pressured from all sides to assume all the risk. Against that pressure she has developed the strategy of muddling through. She opens her pocket book when the pressure gets too much but she doesn't give everything she has because she knows that her friends would lose interest in her if she did. She tries her best but were are trapped, nevertheless".
A very good article! Not very optimistic, but convincing.
ReplyDeleteI would be interesting to see an expert comparison of the current problems as identified by Sinn with the predicted problems identified by Hankel, Nolling, Starbatty and Schachtschneider as far back as 1998.
ReplyDeleteFrom here their predictions seem to have been very accurate. With the possible exception of the problems created by the way payments are processed by the ECB and the Eurozone national central banks (commonly known as TARGET).
At some stage TPTB in Europe will probably have to admit the EMU has failed. They should look to how previous monetary union breakups have been (mis)managed - but I'm not hopeful they will, elites always think that everything they do is "new under the sun".
The demise of the Austro-Hungarian Empire, Ottoman Empire, French Empire, India-Pakistan, Pakistan-Bangladesh, USSR, Yugoslavia and Czechoslovakia would offer recent examples.
Naming the union after a large flightless Australian bird was prescient, it was never going to fly. And naming the currency after an Australian marsupial that's also known as a Swamp Wallaby may have been similarly unwise :)
Summary of Sinn's interview is available at WSJ
ReplyDeleteIfo's Sinn: In Greece's Interest To Leave Euro Zone
In this blog there is a lot of very sophisticated info about Target-2.
ReplyDeletehttp://twominutestomeltdown.wordpress.com/
Useful notes from your blog (hat tip).
DeleteProf. Hans-Werner Sinn point of view is significant, he is supporting real economics even if I dare to disagree with his opinion about Greece exit the euro.About the TARGET I II.
The real problem is whether the deficit of NCB ( eg Greek) have acceptable assets with which to settle their TARGET liabilities.
Euro system do not dictate NCB'S to set with surpluses. There in not any condition or specific rule.
For prof Sinn's opinion is that Target imbalances is a contradicted assessment as to whether occur in a currency system especially if we monitor the dramatic evolution (450b €)for Germany from transactions within euro system.
The point here for mr Zinn's research is that either the debts socialized in order to eliminate intl differences in interests rates, or TARGET balances are paid annually (as it made in US) with marketable assets keeping debt burdens under national responsibility and allowing countries defaults.
But this is real money with impact in real economy and second these imbalances ARE represent any risk related with MRO, LTRO and Tender Operation-Allotment?
The TOA happen during June 2010
http://www.ecb.europa.eu/mopo/implement/omo/html/20100091_all.en.html
Especially as LTRO plan to help TARGET.
What also was FED's balance sheet?
http://projects.propublica.org/tables/treasury-facilities-loans
http://money.cnn.com/2010/12/01/news/economy/fed_reserve_data_release/index.htm?hpt=T1
These money given back or partly being repaid as an overnight operation?
About Greece
The ability Greece to reboot is related with a real primary surplus and especially to regain in the same time competitiveness. Competitiveness can be calculated better if exports improved towards imports.
During 2011 this happen partly not desicively but the current account deficit improved significantly, although a lot need to change to re build competitiveness. In many things that troika don't pay attention. This is depends on how fast could we finish ktimatologio, a more simple legislation a clear in a few pages investment code,without KVS, faster justice award, a strict regulatory agency for prices check, open closed profession and develop far smaller with targeted structure public sector which will calculating its productivity and share good practices.
Troika should have insisted to these for 2.5 years!
I understand the importance of internal devaluation but this recipe implemented has some flows regarding the terms productivity and competitiveness.
The issue in line with productivity and competitiveness is the measure of competitiveness which is labor cost per unit but is not the determining factor.
So the minimum wage will make the economy more competitive in the short term but will not improve the productivity (which is labor intensive in Greece, with the use of law quality technology or innovation and primarily services based, with extremely less industries in compare to even Portugal )if not combined with changes in factors that independently of the labor costs give an advantage to countries that export more than they produce.
Such are the costs for research and development, university research and innovation , the number of researchers, etc.
The business is capital-intensive technology and producing goods with high added value should be the goal.
So the measures that targeting the salaries do not have the expected results so far but some crucial changes such as the re boot in business procedure.
For example the gasoline -diesel prices can not improve the cost of transportation or even the costs for a business to start as diesel is around 1,7E like gasoline.
For example by reducing the price to 1E for gasoline -diesel -diesel heat we improve all the related
sectors from better collection of the taxes to large costs and non legal gasoline-diesel transfer.
This will improve the environment not decisively but it will change the huge recession.