The Wages of Sinn and the Euro Crisis

Today I went to the launch meeting in the City of London for the latest book from Hans-Werner Sinn, entitled Euro Trap: On Bursting Bubbles, Budgets and Beliefs. Sinn is probably best known as the President of Germany's Ifo Institute, as a well-informed, critical commentator on the European Central Bank and as someone who delivers withering critiques of economic and financial policies in the euro area. I have read some of his papers on the ECB's TARGET payments system - ones that explain the economic disaster of the euro project more clearly than one might expect - and have seen a video of an earlier speech on the euro crisis. So, I was intrigued to attend this meeting. The comments here are from my notes of his presentation. They will lack some detail, although they should nevertheless give the gist of what was said. I have ordered his new book, and will correct any misrepresentations once I have read it.

Professor Sinn's skill is in expressing his views very clearly, and with an abundance of supporting empirical evidence. Those who disagree with him may claim that he has got it wrong, but often they will be addressing a different question and not confronting the essence of what he is saying. This is certainly the impression I have had reading 'expert' spokesmen for the euro elite who criticise Sinn. Radicals, who consider him part of the reactionary establishment arguing for austerity, do not usually attempt to address his views at all.

Sinn's view of the (euro economic) world is straightforward. He admitted that he was initially a supporter of the euro project, with some reservations, and that he did not anticipate how badly it would turn out. He then focused on the facts that cannot be denied: most, if not all, of the crisis-hit euro countries went through a decade or more of falling competitiveness before the global turmoil (for the richer countries) began in 2007-08.

This falling competitiveness was based upon a growth of real incomes, consumer demand and public spending that outran the productive capacity of the individual countries. It was fed by falling interest rates that encouraged borrowing and, for the weaker countries, by a euro system that appeared to make lending to borrowers (Greece, Spain, etc) with much weaker economies have more or less the same risk as lending to those in the richer, stronger euro countries. The 'irrevocable exchange rate' of the euro, and the denial that any individual state would ever exit the system, covered up the gap in the euro project's construction: there was no agreed mechanism for rescuing insolvent states, in particular there was no unified fiscal policy, something that would have to have depended upon a political union of member countries, not simply a monetary union.

So, the euro system had no mechanism for dealing with the economic effects of divergent competitiveness reflected in the mounting levels of external debt (via current account deficits) for weaker countries. What happened instead was that the TARGET payments system for interbank transfers within the system simply led to ever-increasing liabilities of the uncompetitive and ever-increasing assets of the competitive, with the ultimate risk being put on the relevant national central banks. In practice, Germany's central bank has taken on the asset risk that German companies have in Spain, Greece, etc. The German companies get paid, but via a credit issued by the German central bank to its central bank counterparts in Spain, Greece, etc. This means that the German central bank, the Bundesbank, has questionable assets in its lending to the central banks of Spain, Greece, etc, while the Spanish and Greek central banks have liabilities to the Bundesbank offset by questionable assets from securities (and promises) delivered to them by their own domestic banks and companies.

That is bad enough, but things got worse. In recent years, the credit quality of collateral accepted by central banks from private banks in the euro system was reduced, the ECB embarked upon a series of measures to buy government and private sector securities and, in the latest measures, the ECB will also buy junk assets to 'rescue' private banks from their ownership of rubbish. Six crisis countries, claimed Sinn, have received more than €1,300bn of credit in this way, of which more than 80% has come from the ECB.

These points should make one ponder a while.

For all the protests about austerity, the euro system has invented new funds for crisis-struck countries in a way that has clearly transgressed the supposed neoliberal policy regime. Sinn noted that the US Fed, for example, would never have bought Californian state bonds. Instead, he complains, the risks of the economic disaster have been transferred to euro states and, hence, to the (German?) taxpayer.

Radicals will complain that the banks have been bailed out and rescued, while austerity continues. However, the real point is that Europe is an economic disaster area and there has been, so far, great reluctance by governments to force a market reckoning upon the mass of the population. Sinn is more conciliatory on this issue than one might think. He fears that mass unemployment, especially youth unemployment above 25% in several countries, will lead to political turmoil and extremism. He worries that 'productivity' is only rising in some countries because jobs are being shed, not because there is any productive investment. If one were to argue that yes, there has already been enough austerity, he will present statistics to show that there is another 10% to go in Italy, 20% in France and 30-35% in Spain and Greece before competitiveness is restored.

I do not necessarily agree with Sinn's numbers, but his case is clear and a few percentage points here or there make little difference to his main argument: the economics of (euro) capitalism demands austerity. All this, of course, raises bigger questions.

Sinn, despite appearances to the contrary, hopes that the euro system will survive, but he argues that it can only do so if it recognises its fundamental flaws. He proposes a 'temporary' exit of crisis-hit countries, who will then devalue their currencies and later re-enter the euro system, as of right. His solution is quaintly optimistic, but one should recognise that he favours European integration and political stability. The only problem here is that he insists that this must be on sustainable terms if it is to work. Critics of his position often focus upon Germany's benefits from the system, but he correctly notes that Germany itself had a long phase of labour market austerity in the 2000s, which is why the country has become very competitive. Above all, he wants a viable capitalist system, although with European capitalist stability high on his list of priorities.

Questions confronting those who are less concerned with saving the capitalist system, in the euro area, or elsewhere, are as follows. Firstly, it does not make sense to argue against austerity by making this an anti-German argument, as if German workers did not also have their own phase of austerity before. Secondly, an attack on 'austerity' must recognise the privileges of those in the EU/euro area who have benefited from their own countries' domination of international markets, through the control of trade links, patents or owning many of the key monopolistic companies. Fighting austerity at home is hypocritical if it does not recognise the way that the economic system subordinates others.

Thirdly, recognise that Sinn's arguments are the logical consequence of a clear-sighted capitalist perspective, and one that is also ameliorated by a concern for social stability. He has much better arguments about what is needed by capitalism today in Europe than the nonsense of 'alternative policies'. The proponents of the latter know they are dead in the water, but they might still attract some external funding, whether in advocating wind farms or whatever else. Sinn's position is to advance a policy that he recognises is a 'dismal option' - and one that he does not really expect to succeed, still less to make people happy - but he hopes it would be better than the current euro political decision to do nothing and instead to hope something will turn up.

It is unlikely that his policy recommendations will be followed, partly because euro politicians correctly see the barriers to any proposal that highlights what is really going on. Confronting an intractable capitalist crisis is something that the current generation of politicians cannot manage. The crisis has blown their legs off, yet they still dream of strolling down the road as in the good old days. Even if Professor Hans-Werner Sinn were to become the new arbiter of euro policy, that would still leave the system he seeks to sustain in question.

Tony Norfield, 9 October 2014