Thursday, July 11, 2013

Prof. Hans-Werner Sinn's Four Solutions for the Eurozone

At the recent Annual Meeting of the ifo-Institute (of which Prof. Sinn is President), he offered the following four solutions for the North/South problem in the Eurozone:

1. Zero inflation (or even deflation) in the South;
2. Higher inflation in the North;
3. Transfer payments; and
4. Eurobonds.

He predicted that the EU would continue to muddle through and do a little bit of everything.

There is something missing, as far as I am concerned. Prof. Sinn assumes that all, say, Greece would have to do is to become cheaper ('more competitive' is the jargon) relative to the North and positive things would start to happen automatically.

That, it is my firm belief, would not happen automatically in Greece because that assumes that Greece has enough of a productive capability to start booming as soon as competitiveness is restored relative to the North. As I have pointed out on several occations, I don't believe that Greece has enough of a productive capability (yet) which could start booming.

I am amazed that Prof. Sinn would not address at all the need for the North's shifting investments to the South. The only way to strengthen the productive capability of the Greek economy is to steer investments into it. As the CEO of the Allianz Group said a couple of years ago: "We will have to shift some of our (Germany's) foreign investments from the East and Far East to Greece". That statement went by unnoticed.

Steering investments to Greece would require two things:

(a) the preparedness of the EU to implement the proper incentives (i. e. guarantees for the political risk including a possible Grexit); and
(b) the preparedness of Greece to offer a competitive economic framework for such investments. That could be either in the form of individual agreements with individual investors or in the form of Special Economic Zones where all investors have those terms. Either way could work.

Without new investments, there will not be new jobs and without new jobs there will not be new wage/income taxes, social contributions and revenue for the Greek state. And without all of that, the Greek state will continue to move along the path of bankruptcy without a light at the end of the tunnel!


  1. While what you say is true, it detracts our attention from the real issue. The real issue is that the Eurozone isn't sustainable. The experiment of a monetary union with a rogue central bank which has no Treasury to bow to has failed.

    Failed. Period.

    This silly crisis could've been handled so much better in any country which has a central bank to call it's own, and without the prodigious divisions which characterize the Eurozone.

    The monumental blunders done by the Europeans (too little too late monetary policy, contractionary fiscal policy) are going to be viewed with mock and spite in the not too distant future.

    At the heart of the issue is 18 countries that shouldn't attempt to unite, because they view each other with with mutual distrust.

    The European crisis is an example of incredible closed-mindedness. It reminds me how, in the beginning of the Greek crisis, middle-class people thought they could survive the depression because they were better off than others. In fact, what else has the Greek crisis been, other than a suicidal attempt to protect the savings of the middle-class who didn't want their euros turned into devalued drachmas? Well, now the fire is gonna burn us all.

    The European crisis is similar. Certain nations thought they could withstand the crisis, only to find now that the fire edges ever so closer to their door.

    Closed-mindedness at it's worst.

    Europe, please do us all a favor and dismantle this god-awful monetary union before things get even worse than they already are.

  2. It seems to me that "Internal Devaluation" within the context of a Political Union is slightly oxymoronic. As there is a "Union" there is not an isolated economic area in which to have an internal devaluation. There is free movement of labour so would there not be a movement of labour away from the low wage area exasperating the situation.

    Also internal devaluation is not the same as currency devaluation as the buying power of accumulated savings is not reduced as wages are reduced. This is a political differenctiation between saveres and earners that you don't get with currency devaluation.