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German economist: ‘There is no alternative but Greece’s euro zone expulsion’

Hans-Werner Sinn is making headlines with inflammatory remarks again. This time, German newspaper Die Welt has him on record as saying Greece must be expelled from the euro zone. My translation is below.

Welt Online: Almost one year ago I asked you if you regretted the introduction of the euro – and you said: "If I’m honest, yes, but we have it now, so there is no alternative." And now?

Hans-Werner Sinn: The yes is a little more hesitant, but I do think that the euro can be saved because most member countries are still quite competitive. But one must certainly wonder whether one or two countries belong.

Welt Online: How can such a small country like Greece cause all these eruptions at all?

Sinn: Greece is a textbook case. During this financial crisis, the capital markets have raised only one question: Will Germany pay or not? And if Greece is cut loose, it is feared that Germany will not pay in the other countries.Then a lot of rich people will lose a portion of their wealth. This is precisely the point. That’s what this is all about.

Welt Online: Should Germany pay?

Sinn: it has already paid a lot. We have to end this soon. Investors will have to forgo some of their money. Greece cannot be helped with continual transfers. Rather, Greece must get back on its own feet.

Welt Online: Are there any alternatives to leaving the euro zone?

Sinn: No. I said a year ago already that it is not terrible if Greece leaves. Its problem is not just the debt. The real problem is the lack of competitiveness. And there are only three possibilities there. Greece could receive transfers permanently. The consumption of this country is 17 percent higher than its national income! I do not think the community wants this nor that they should. And I also do not think that’s good for Greece. The second option is to devalue Greece from within the euro area, by reducing wages and prices by 20 to 30 percent. But that’s a push and shove that puts the country on the brink of civil war.

Welt Online: The third remaining option is rehabilitation outside the euro area.

Sinn: Exactly. They move to the drachma and devalue. In this way, Greece would be competitive again very soon. Of course, there are problems associated with this solution. If the country leaves, there would immediately be a bank run. Then the banks’ balance sheets would burn up. But if it stays in and devalues ​​to the same degree, then even the bank buildings would burn. That’s the difference.

Sinn macht Sinn; the logic makes sense. What Sinn is making plain is that Greece’s balance of payments problems would not go away if Greece were to remain in the euro zone. And this would mean more indebtedness and further transfers to Greece down the line when they get into trouble again – even if Greece defaults. So, if Greece stayed in the eurozone, it would have to go through the harsh internal devaluation route to competitiveness – and that mean depression, social unrest and potentially civil war. The alternative is leaving the euro zone completely.

EU leaders are now trying to figure out how to finagle a solution to this almost intractable roach motel of a currency union trap they have set up for themselves. Roaches check in but they don’t check out.

Source: "Griechenlands Euro-Zonen-Austritt ist alternativlos" – Die Welt

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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

11 Comments

  1. David Lazarus says:

    I agree with him. It is far better for Greece to leave force the banks to take massive losses and rebuild Greece. Otherwise it will just end in violence. A revolution in Greece will panic markets and cause far greater losses.

  2. Bernd says:

    I completely agree with the first comment, as well as your/Sinns analysis, that the problem is not just the current level of debt, but persisting balance of payment problems(due to differences in competitiveness) even after a potential default.
    The same is true however for Spain, Portugal, Italy and to a lesser extent France too. I fail to see how a default and exit of Greece will change these problems. In the grand scheme Greece after all is a bit of a side show, given the size of it´s economy.
    At the same time the ECB is currently following a policy of buying up government bonds, which is questionable under EU treaties and has led to the resignation of 2 german board members(Weber, Stark).
    The author you quoted argues, that Germany leaving the Euro would not be a disaster for its economy( http://www.handelsblatt.com/politik/konjunktur/nachrichten/-d-mark-eignet-sich-nicht-als-drohkulisse/4600146.html ) and also advocates a boycott of the ECB by Germany, as well as non ratification of the EFSF as long as a return to stricter rules are not agreed to and ratified by all other Euro members (“Nicht länger tolerabel sei das, sagt Sinn, und fordert Deutschland auf, die EZB zu boykottieren, bis man zu neuen Regeln gefunden habe. Weder sollte Staatssekretär Jörg Asmussen in die EZB wechseln, noch sollte Bundesbanker Jens Weidmann weiter an den Sitzungen teilnehmen, bis man zu neuen Spielregeln gefunden habe. Auch solle der Bundestag die Beschlüsse zum Rettungsfonds EFSF vorher nicht ratifizieren. Man gebe sonst ein Faustpfand aus der Hand.”; https://www.faz.net/artikel/C30638/schuldenkrise-der-verrat-am-euro-30684254.html). If implemented, such a policy would pretty much amount to blackmail vis a vis the currently dominant/majority fraction in the ECB.
    I do agree with most of Sinns analysis, and most Germans are definetely not happy with the overall direction of ECB policy/indirect risks(/transfers)(which Germany can´t influence) and a growing reluctance to commit to more direct risks(/transfers) via ESFS/ESM. Both of which are starting to play a larger political role.
    Contrary to what Sinn advocates, I find it hard to believe however, that Germany will attempt to impose it´s will against the majority of other Euro countries. The most likely outcome in my opinion, will therefore be Germany leaving the Euro(possibly with a few other countries).

    • David Lazarus says:

      I do not see Germany leaving. I see the eventual exit of the periphery and possibly even France but that is a long shot. It will end up as a few core nations whose economies are broadly similar.

      As for Germany I do think that the problem has been presentation. This is primarily a bail out of French and German banks, via Greece and the periphery. So they “lend money” to Greece who have to repay the French and German banks. The scapegoating of the Greeks as lazy is misdirection when the problem is much closer to home.

      France has expanded south into Greece Spain and Portugal, and now these banks are in trouble, so we are now bailing out the shareholders of the French banks that made these poor investments. That is wrong.

      Germany made bad loans across the whole of Europe yet we are bailing out its banks. What should happen is that these losses should be taken by the german banks and if they then need re-capitalisation then that is the time the state should get involved. Though as we have it the banks are being bailed out without any oversight of their business that would happen in a restructuring.

      Providing liquidity for a temporary crisis is fine but providing trillions on an ongoing basis is fraud. The banks will need to change their business models, and if that means de-leveraging that is what is needed. Banks should not be dependant on wholesale financial markets for their survival and if they do they need to be closed down.

      What I think would help the situation is a euro equivalent of the US’s McFadden Act of 1927, which banned interstate banking. This would force Germany to find some other way to invest their trade surplus. It would stop French banks expanding abroad, as well as British banks. The cross border status of banks has meant that they regulation arbitrage. If they want state protection and support then they should be a domestic bank only. If the Irish or Greeks default on the debts then that does not require bailouts.

  3. Lexis says:

    Greece might appear to be the root cause of this crisis, but it is really only the leader of the pack. All advanced economies are heavily indebted. The average level of public sector indebtedness is now 100 percent of GDP as this IMF video starkly points out:

    http://www.youtube.com/watch?v=j9lJbDjxDqM

    Germany is right in the middle of the pack. Like other advanced economies, it has large adjustment needs. So, the question might appear like one about whether Greece should stay in the Euro. In reality it is one about the shocking prevalence of government debt in advanced economies.

  4. Steve Roberts says:

    JMO but I don’t think there is a political will to kick someone out of the EU. Why kick Greece out when all the PIIGS need help? The troubled EU countries are going to need financial assistance for 10+ years. Either you sign up for that now and get on board or someone leaves. Germany isn’t going to take the PR hit of kicking out 4-5 countries, they’ll just leave on their own.

    • David Lazarus says:

      I doubt that will happen. They benefit greatly from the weakened euro, which is boosting their exports considerably. Add in the fact their new currency would rocket against the euro and it would significantly impact on exports within the EU because of the currency. Exports to countries outside the eurozone would also fall because of the strength of the economy. The immediate impact is that they would probably have a significant drop in exports. Also by exiting the eurozone they would not avoid most of the costs. If Greece were to exit their new currency would fall in value against the euro so would benefit from exit. The new german currency would appreciate against the euro so there would be no benefit for trade.

  5. certainly Sinn is not my favorite economist since he analyzes the Greek problem as an issue described by his name (sin)! Howvwer, he is right about Greece returning to the drachma but for different reasons and not because of the advantages of devaluation! The main advantages is that Greece will take control of a) its own monetary policy that would provide liquidity, b) fiscal policy that will fund public investment and c) would be able to denominate its debt in its own currency! The rest is the usual nonsense than Sinn preaches who is a strong beleiver in the protestant ethic and strict austerity measures!

  6. Linus Huber says:

    Didn’t we have enough of bailing out the banks while they are being looted by their management?

    Before we stop the looting, nobody should be saved in terms of diluting currencies (punishing savers) or increasing government’s debts.

    First jail those bankers who made such loans to Greece because this was serious fraught as any banker with a pea of a brain should have been able to evaluate that Greece will never be able to pay back those loans.

    Second, let the banks eat their losses; we do not have to punish innocent tax payers again. Let’s restructure like 20% on the dollar and the rest is gone.

    Third, if any bank gets into trouble when this is executed, put those managers in jail for violating due diligence and close the bank while reimbursing savers and cash holders but not bond holders and share holders of the bank.

    Once this is done, the wind will change and banks become again what they always should have been. Conservative, cautious and diligent to a fault BUT solvent.

    • David Lazarus says:

      Going back to the original crisis in US sub prime if there had been criminal investigations into the banks, and much of the money had been repaid to duped investors then the rest of the economy would be in a much better shape now. The banks would have collapsed under litigation of claims for fraud. That was never going to happen because the banks make such large donations to politicians and without the banks funding many politicians would struggle to get elected.

      I do fully agree with you that the banks should have been forced to take their losses and been wiped out. The only people who should have been saved were the small depositor. Then the FDIC should have gone in and created new banks so that there is still banking to every community. Let the investment banks collapse and recover the last three years bonuses from all the top bankers as they were obtained by deception. The alternative should be long jail time for failing to had over bonuses. The other aspect which I have not seen commented by anyone else is that the big banks may have survived somehow but they now have such large bank losses that they will not be paying taxes for years, and that is why the deficit will stay large for years. By wiping the banks out the tax losses would have been eliminated.