Hans-Werner Sinn, President of the German Ifo Institute that issues the closely watched Business Climate Index, is a thorn in the side of bailout politicians and eurocrats. When asked in an interview, published today in the Handelsblatt, if the Eurozone crisis hadn’t calmed down thanks to the promise by ECB President Mario Draghi to buy the debt of Spain, Italy, and other crisis countries, he sneered: all Draghi had done was explain to investors—from banks to hedge funds—that taxpayers in “sound countries” would make good on that debt. “That reassurance worries me,” he said.
In early July, he’d already irked the euro bailout establishment when he and over 170 economists warned in an open letter about a Eurozone banking union. It would collectivize bank debts that were “three times as large as sovereign debts.” Creditors should take the losses, not taxpayers, retirees, and savers of “still solid countries.” Banks should be allowed to fail. A banking union would “save neither the euro nor the idea of Europe” but would only benefit “Wall Street, the City of London, even some investors in Germany, and ramshackle domestic and foreign banks” that would continue doing business “at the expense of citizens in other countries,” all “under the mantel of solidarity.”
Rabble-rouser was the collective response from the red-faced German government.
And for a couple of years, he’d been raising a stink about the mushrooming Target-2 balances at the Bundesbank. These claims against the European System of Central Banks, he argued, now in the hundreds of billions of euros, could cost the German taxpayer dearly if the Eurozone fell apart.
He was accused of exaggerating and making gross mistakes in his analysis. The government tried to ignore him. The Bundesbank brushed him off; these balances were, despite their magnitude, “irrelevant,” it said. But plot twist: late February, Bundesbank President Jens Weidmann himself wrote Draghi a letter, warning him of the risks that these Target-2 balances posed.
Sinn has carried out his battle in the media. On TV even. Which irks the government even more. So, in the interview today, he didn’t mince words either. He was worried most about Spain, with its external debt that was “greater than that of all other crisis countries combined,” and with its unemployment problem that was as bad as Greece’s. A “dreadful combination,” he said.
And Italy? Let’s wait and see if Prime Minister Mario Monti runs in the elections, he said. “That would be a blessing.” But he pointed out that Monti’s reforms had gotten bogged down the moment Draghi uttered his bond-buying promise, which “suggested another solution.” The printing press. With the pressure off, unions blocked the reforms, he said. But the lack of competitiveness cannot be solved “with Draghi’s promise of protection.”
He painted a harsh reality. Since these crisis countries cannot devalue their currency to become competitive again, they have to go through the “painful process” of internal devaluation to produce goods at lower prices relative to other countries in the Eurozone. “With the exception of Ireland, this has not yet happened,” he said; and it’s not going to happen as long as the bailout money keeps flowing. But in the end, he said, “those countries that don’t want to become cheaper will have to exit the euro.”
He’d help the exiting countries with debt forgiveness and new money for their banks. But “the longer you delay the radical measures, the more private investors are able to sell their toxic paper without haircut to governmental bailout funds, and then hightail.” Taxpayers and retirees in sound countries would pay the price.
“Investors gain time, taxpayers and retirees lose time,” he said. The fact that the German government talks about implementing measures “to gain time” allows for only one conclusion, he said: “it has taken the side of the investors.”
How was this even possible? “The firepower of the financial industry” has been highly successful in influencing public opinion, he lamented. “That’s why politics has come to consider it a solution when creditors of southern countries are reassured with money from taxpayers in northern countries.”
He predicted that 2013 would remain calm up through the federal election because the ECB would continue its low-interest-rate-policies. Chancellor Angela Merkel’s government is counting on “this general calm” to get reelected. “Afterwards there will be new decisions,” he said. But he didn’t venture into details; too difficult. “Because the government, to take the wind out of the opposition’s sails, usually does the opposite of what it announces.”