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
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