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Hans-Werner Sinn Fears Europe's "Very Messy" Easy-Money Endgame
Authored by Hans-Werner Sinn, originally posted at Project Syndicate,
The euro has brought a balance-of-payments crisis to Europe, just as the gold standard did in the 1920s. In fact, there is only one difference between the two episodes: During today’s crisis, huge international rescue packages have been available.
These rescue packages have relieved the eurozone’s financial distress, but at a high cost. Not only have they enabled investors to avoid paying for their poor decisions; they have also given overpriced southern European countries the opportunity to defer real depreciation in the form of a reduction of relative prices of goods. This is necessary to restore the competitiveness that was destroyed in the euro’s initial years, when it caused excessive inflation.
Indeed, for countries like Greece, Portugal, or Spain, regaining competitiveness would require them to lower the prices of their own products relative to the rest of the eurozone by about 30%, compared to the beginning of the crisis. Italy probably needs to reduce its relative prices by 10-15%. But Portugal and Italy have so far failed to deliver any such “real depreciation,” while relative prices in Greece and Spain have fallen by only 8% and 6%, respectively.
Revealingly, of all the crisis countries, only Ireland managed to turn the corner. The reason is obvious: its bubble already burst at the end of 2006, before any rescue funds were available. Ireland was on its own, so it had no option but to implement massive austerity measures, reducing its product prices relative to other eurozone countries by 13% from peak to trough. Today, Ireland’s unemployment rate is falling dramatically, and its manufacturing sector is booming.
In relative terms, Greece received most of Europe’s bailout money and showed the largest increase in unemployment. The official loans granted to the country by the European Central Bank and the international community have increased more than sixfold during the past five years, from €53 billion ($58 billion) in February 2010 to €324 billion, or 181% of GDP, now. Nevertheless, the unemployment rate has more than doubled, from 11% to 26%.
There are four possible economic and policy responses to this state of affairs. First, Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it. Second, the south can deflate. Third, the north can inflate. And, fourth, countries that are no longer competitive can exit Europe’s monetary union and depreciate their new currency.
Each path is associated with serious complications. The first creates a permanent dependence on transfers, which, by sustaining relative prices, prevents the economy from regaining competitiveness. The second path drives many debtors in crisis countries into bankruptcy. The third expropriates the creditor countries of the north. And the fourth may cause contagion effects via capital markets, possibly forcing policymakers to introduce capital controls, as in Cyprus in 2013.
European politics has focused so far on providing public credit to the crisis countries at near-zero interest rates, which eventually may morph into transfers. But now the ECB is attempting to break the impasse through quantitative easing (QE). The ECB’s stated goal is to reflate the eurozone, thereby reducing the euro’s external value, by purchasing more than €1.1 trillion worth of assets. According to ECB President Mario Draghi, the inflation rate, which currently stands at just below 0%, is to be raised to an average of just below 2%.
This would offer southern European countries a way out of their competitiveness trap, because if prices remained unchanged in the south, while the northern countries inflated, the southern countries could gradually reduce their goods’ relative prices without feeling too much pain. Of course, in that case the north needs to inflate faster than by just 2%.
If, say, southern Europe kept its inflation rate at 0% and France inflated at a rate of 1%, Germany would have to inflate by a good 4%, and the rest of the eurozone at 2% annually, to reach a eurozone average of slightly less than 2%. This pattern would have to continue for about ten years to bring the eurozone back into balance. At that point, Germany’s price level would be about 50% higher than it is today.
I do expect QE to bring about some inflation. Given that an exchange rate is the relative price of a currency, as more euros come into circulation, their value has to fall substantially to establish a new equilibrium in the currency market. Experience with similar programs in the United States, the United Kingdom, and Japan has shown that QE unleashes powerful forces of depreciation. QE in the eurozone will thus bring about the inflation that Draghi wants via higher import and export prices. Whether this effect will be sufficient to revitalize southern Europe remains to be seen.
There is a risk that Japan, China, and the US will not sit on their hands while the euro loses value, with the world possibly even sliding into a currency war. Moreover, the southern EU countries, instead of leaving prices unchanged, could abandon austerity and issue an ever greater volume of new bonds to stimulate the economy. Competitiveness gains and rebalancing would fail to materialize, and, after an initial flash in the pan, the eurozone would return to permanent crisis. The euro, finally and fully discredited, would then meet a very messy end.
One can only hope that this scenario does not come to pass, and that the southern countries stay the course of austerity. This is their last chance.
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Greece goin' Cyprus. News at 11.
Boom.
http://portal.ransquawk.com/headlines/reports-on-twitter-citing-market-t...
News Headline Summary
Reports citing market talk of Greece introducing capital controls either tonight or on April 10. Deposit flight said to be intensifying.
Analysis details (15:56)
- Recent press reports have speculated that the liquidity situation in Greece will become critical on the 9th of April and could lead to the country running out of funds on the 20th of April.
"Mr. Putin, welcome to Mykonos! Destroyer parking is to the right."
I have news for folks, Japans economy on a bad day is 10x stronger than Russia's economy on a good day. Commodity based economies are dependent on global growth, in a global recession commodities drop and those countries are the first to suffer financially.
So, Japan, with very little of its own commodities and little farmland, is better off than a country which has abundant resources? Japan's economic success (of the long-gone 1970s, for example) is based upon EXPORTS of manufacturing and high-tech, but Japan's competitiveness in these fields has stagnated and fallen. In the absence of global growth, how is resource-short Japan better off than a resource-rich country?
Oh Mykonos I miss you dearly! That island is literally paradise on Earth, spent 5 days there and it wasn't enough. Experienced real freedom for the first time in my life. Young, hot, super friendly crowds from all over the world there to just have fun, no bs about cultural difference and etc. I saw the good side of humanity, where humanity transcended all the social/cultural boundaries and didn’t see a single cop.
"Experienced real freedom for the first time in my life."
LoL! Living high on the hog was not real freedom, as the Greeks are now learning.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com
Though Japan will be the first country to blow up, the Euro will be the first currency to die...
I've been saying for years here that the Euro is finished. I don't feel bad for all the peeps telling me how they were selling all their soon to crash dollars for euros.
I agree with this. "The euro will simply disappear."
Everyone will return to their national currencies.
The euro is and always has been irrelevant. We'll see about the Yen as well.
The ruble still looks good to me actually.
Grease the skids for a sloppy Grexit.
"One can only hope that this scenario does not come to pass, and that the southern countries stay the course of austerity. This is their last chance."
What the hell is this nonsense doing on Zero Hedge????
Seriously.
"Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich, is President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council."
What the hell is this nonsense doing on Zero Hedge????
The only soution extend and pretend, keep kicking the can down the road forever.
WTF expect the greeks to pay taxes for their socialism, fuck that noise!!
ummmm... sorry to tell you this.. but the "messy end" is coming anyway.
Austerity? Where?
Some folks tried to balance the US budget and where accused of trying to shut down the gov. Austerity = shutting down the gov. no one does it willingly, it only happens by collapse.
Last chance for austerity? More like last chance to dance, baby!
Things are really screwed up and getting worse but don't worry, we're bringing in massive truckloads of 'fertilizer' right now......
"One can only hope that this scenario does not come to pass, and that the southern countries stay the course of austerity. This is their last chance".
Well I for "one" can tell you the euro will go down the tubes, it started when it began!
So hope on brother, that's about all there is for you.
And Putin needs do nothing, just get his popcorn and watch. The West's central banks are doing all the heavy lifting for a new yuan rubble gold backed reserve currency.
That's really what he's doing now, screw with their heads then enjoy the show.....
"There are four possible economic and policy responses to this state of affairs. First, Europe could become a transfer union, with the north giving more and more credit to the south and later waiving it. Second, the south can deflate. Third, the north can inflate. And, fourth, countries that are no longer competitive can exit Europe’s monetary union and depreciate their new currency.
Each path is associated with serious complications. The first creates a permanent dependence on transfers, which, by sustaining relative prices, prevents the economy from regaining competitiveness. The second path drives many debtors in crisis countries into bankruptcy. The third expropriates the creditor countries of the north. And the fourth may cause contagion effects via capital markets, possibly forcing policymakers to introduce capital controls, as in Cyprus in 2013."
Public resistance to implementation of a federalist transfer union is insurmountable. This solution can only be pursued via a subjugation of the EURO nation-states by a a dominant core block. It would entail a bloody european nation-state vs federalist EU superstate 'civil war' as was the case in the creation of the US federalist construct. At present no federalist superstate military aparatus exists with which to pursue this goal of constituent-state subjugation and forced fiscal integration.
"If, say, southern Europe kept its inflation rate at 0% and France inflated at a rate of 1%, Germany would have to inflate by a good 4%, and the rest of the eurozone at 2% annually, to reach a eurozone average of slightly less than 2%. This pattern would have to continue for about ten years to bring the eurozone back into balance. At that point, Germany’s price level would be about 50% higher than it is today."
There is no way in hell that the German manufacturing base is going to raise prices by 5% a year for a decade in order to force market share to abandon it's industry in favor of it's less competitive neighbor's products in an effort to salvage the odious debts incurred by corrupt Greek oligarchs, if for one simple reason: it would do nothing to encourage/force Greece/et.al to implement reforms or increase productivity but cement the status quo imbalances.
This is one of the most idiotic ideas for confronting the debt overhand and productivity/social welfare systems mismatch that ails the EU I have heard to date. Total rubbish.
Germany seems like the nation that just can't lose in the Euro game. First they lent to the PIG nations, and now have them as debt slaves under severe austerity pay back plans. And now the sinking Euro places the export giant Germany in the top position to export in the weak Euro. Meanwhile the USA is doing the heavy lifting in the project to bring Ukraine into Germany's orbit as a giant target to exploit for resources and replace all extraction companies with German firms.
It seems Germany can't lose. The EU, EURO and USA NATO March to the East is all in favor of Germany at this point.
It seems Germany can't lose??
Not getting back the money they lent to Greece constitutes losing in my book.
That is currency, not money.
Whereas the gold removed a few decades back was definitely money.
It seems Germany can't lose??
Not getting back the money they lent to Greece constitutes losing in my book.
POSSIBLY sliding into a currenty war? To quote a famous pirate....YOU'RE IN ONE!
"Possibly sliding into a currency war"......................WE ARE IN A CURRENCY WAR!!!!!
Europe versus "the world" is a trade war...no mere currency war.