Sunday, November 23, 2014

Should Germany Exit the Euro?

MUNICH – Last summer, the financier George Soros urged Germany to agree to the establishment of the European Stability Mechanism, calling on the country to “lead or leave.” Now he says that Germany should exit the euro if it continues to block the introduction of Eurobonds.

Soros is playing with fire. Leaving the eurozone is precisely what the newly founded “Alternative for Germany” party, which draws support from a wide swath of society, is demanding.

Crunch time is fast approaching. Cyprus is almost out of the euro, its banks’ collapse having been delayed by the European Central Bank’s provision of Emergency Liquidity Assistance, while euroskeptic parties led by Beppe Grillo and Silvio Berlusconi garnered a combined total of 55% of the popular vote in the latest Italian general election.

Moreover, the Greeks and Spaniards are unlikely to be able to bear the strain of economic austerity much longer, with youth unemployment inching toward 60%. The independence movement in Catalonia has gathered so much momentum that a leading Spanish general has vowed to send troops into Barcelona should the province hold a referendum on secession.

France, too, has competitiveness problems, and is unable to meet its commitments under the European Union’s Fiscal Compact. Portugal needs a new rescue program, and Slovenia could soon be asking for a rescue as well.

Many investors echo Soros. They want to cut and run – to unload their toxic paper onto intergovernmental rescuers, who should pay for it with the proceeds of Eurobond sales, and put their money in safer havens. The public already is being misused in an effort to mop up junk securities and support feeble banks, with taxpayer-funded institutions such as the ECB and the bailout programs having by now provided €1.2 trillion ($1.6 trillion) in international credit.

If Soros were right, and Germany had to choose between Eurobonds and the euro, many Germans would surely prefer to leave the euro. The new German political party would attract much more support, and sentiment might shift. The euro itself would be finished; after all, its primary task was to break the Bundesbank’s dominance in monetary policy.

But Soros is wrong. For starters, there is no legal basis for his demand. Article 125 of the Treaty on the Functioning of the European Union expressly forbids the mutualization of debt.

Worst of all, Soros does not recognize the real nature of the eurozone’s problems. The ongoing financial crisis is merely a symptom of the monetary union’s underlying malady: its southern members’ loss of competitiveness.

The euro gave these countries access to cheap credit, which was used to finance wage increases that were not underpinned by productivity gains. This led to a price explosion and massive external deficits.

Maintaining these countries’ excessive prices and nominal incomes with artificially cheap credit guaranteed by other countries would only make the loss of competitiveness permanent. The entrenchment of debtor-creditor relationships between the states of the eurozone would fuel political tension – as occurred in the United States in its first decades.

In order to regain competitiveness, the southern countries will have to reduce their goods prices, while the northern countries will have to accept higher inflation. Eurobonds, however, would impede precisely this outcome, because relative prices in the north can be raised only when northern savers invest their capital at home instead of seeing it publicly escorted to the south by taxpayer-financed credit guarantees.

According to a study by Goldman Sachs, countries like Greece, Portugal, and Spain will have to become 20-30% cheaper, and German prices will have to rise by 20% relative to the eurozone average. To be sure, if Germany were to leave the common currency, the road back to competitiveness would be easier for the southern countries, since the rump euro would undergo devaluation; but the crisis countries’ fundamental problem would remain as long as the other competitive countries remain in the eurozone. Spain, for example, would still have to cut its prices by 22-24% relative to the new eurozone average.

From this perspective, the crisis countries would not be spared painful retrenchment as long as they remained in a monetary union that includes competitive countries. The only way to avoid it would be for them to exit the euro and devalue their new currencies. But, so far, they have not been willing to go this route.

Politically, it would be a big mistake for Germany to exit the euro, because that would reinstate the Rhine as the border between France and Germany. Franco-German reconciliation, the greatest success of the postwar period in Europe, would be in jeopardy.

Thus, the only remaining option, as unpleasant as it may be for some countries, is to tighten budget constraints in the eurozone. After years of easy money, a way back to reality must be found. If a country is bankrupt, it must let its creditors know that it cannot repay its debts. And speculators must take responsibility for their decisions, and stop clamoring for taxpayer money whenever their investments turn bad.

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    1. CommentedDavid Donovan

      The bizarre case of Ireland's acceptance of private debt on to the public balance sheet is the strangest event in world financial history. It serves to illustrate the nature of this crisis. It is a process of impoverishing the many for the few.

    2. CommentedKaren Williams

      Has anyone here read Michael Pettis, either his blog or his latest book ("The Great Rebalancing")?

      I think he is mostly right that Europe’s (and the world’s) best hope for an adjustment that is not more painful than it needs to be lies with the willingness of trade-surplus countries like Germany and China to recognize their role in creating this problem, understand that the policies that have seemed to serve them well in the past are unsustainable and will not serve them well in the future, and change their policies to make it easier for the deficit countries to begin to run trade surpluses with them.

      Pettis argues that after reunification Germany instituted a group of policies to repress wages in order to combat a large unemployment problem and reduce the large trade deficits it had at the time, and that these policies have outgrown their usefulness and are causing harm to all of Europe now that Germany runs consistent trade surpluses.

      He makes the more general point that ANY economic policy that reduces the household share of national income both reduces consumption and increases savings in that country, and if the country trades with other countries, such a policy will shift that country’s trade balance towards surplus. This is true no matter how “lazy” or “hardworking,” “thrifty” or “profligate” the people or government of that country are.

    3. CommentedFrank O'Callaghan

      The truth is rarely simple.

      States within the eurozone each took advantage of lower price money for different specific reasons. Each selectively benefited the minority that controlled that state. In the Irish and Spanish cases these were property developers. All enriched their public servants.

      The bizarre case of Ireland's acceptance of private debt on to the public balance sheet is the strangest event in world financial history. It serves to illustrate the nature of this crisis. It is a process of impoverishing the many for the few.

      The costs are being borne by others.

    4. CommentedSteven M. Calascione

      The current orthodoxy is finding it hard to accept that there is a point at which austerity budgets, like antibiotics which are over-prescribed, will no longer work.

      The Maastricht criteria worked reasonably well in good times, indeed, it seemed as if economic convergence might be attainable within a generation.

      Unfortunately, the global economic crisis has proved to be stubbornly resistant to traditional remedies.

      In the absence of convergence, it seems right to at least question the orthodoxy if not put it to the test.

      In any case, realpolitik may soon override purely economic considerations -- a far cry from the Konrad Adenauer's vision of reconciliation with France.

    5. CommentedJose araujo

      Can Hans-Werner Sinn demonstrate what he claims? Was there massive inflation and wage increases due to cheap credit?

      "The euro gave these countries access to cheap credit, which was used to finance wage increases that were not underpinned by productivity gains. This led to a price explosion and massive external deficits."

      This is a silly explanation derived from the Austrians, cheap credit and easy money are the root of all causes, but are they? We have now cheap credit and no wage increases in many countries. Also isn't he causation the inverse, isn't a fact that trade deficits are the reasons for debt increase?

      In fact we have a competitive problem in the Euro periphery, but that isn't caused by cheap credit (its silly to think that), its caused because all the natural stabilizers were stripped - exchange rate and interest rates.

      This is the problem of Free Trade and fixed exchange rates, its not the cheap credit, silly, its because a less competitive economy suffers with free trade and free capital movement.

      We don't have economies of scale in southern Europe and we don't have localization economies, so with no barriers businesses will flow to central Europe because wage levels don't matter to determine productivity, but technology and scale does.

    6. CommentedGunnar Eriksson

      One helpful path would be to increase wages of the lowest paid workers in the richer EU members.
      Economic activity would pick up and fuel a modest inflation.

      Gunnar Eriksson

    7. CommentedGunnar Eriksson

      In reading Mr Soros propositions in New York Review I did not get the impression that he intended neither Germany nor Grece should leave the Euro, but rather be preared to discuss the EURO problem in a more intelligent way.
      He appear to me have some success as Professor Sinn's article and many good comments was triggered.

      If we compare the US Dollar; It would not be sustained without transfer of Federal funds to less affluent States.
      Gunnar Eriksson

    8. CommentedGuillermo Fernandez

      The fact stated by professor Sinn its hard to be argued, its pretty clear Southern countries have loose competitiviness while raising their dependancy on northen neighbours. This result from the tandem bad leadership and uncontrolled subdisidies. This funds originally provided to help our countries to converge with the leading ones have been spent with a complete lack of control from european authorities who didnt want to face the problem until it´s been late. The recipe of austerity has result on a recrudescence of the situation which hasn´t fix which is, in my opinion, the main problem, the generally extended core idea of privatising profits and extend to everyone the consequences.

    9. CommentedWilliam Wallace

      In the case of Spain, it was the massive inflow of bank funds and speculative investors from northern Europe that vastly exacerbated the housing bubble. Barring that, Spain had all its finances in order. That the intro of the euro tended to make wages and prices converge a great deal was also to be expected. For example, across Europe there was competition for construction workers during the bubble, raising wages everywhere in that industry.
      But in general, this sort of moralizing based on ideology and lacking in any sort of true effort to overcome our common issues in Europe will be the demise of not only the EU, but of the hard-gained respect for Germany over the last several decades. Misguided swagger leads to bad places.

        CommentedCarol Maczinsky

        That is right but it failed in financial regulation of the banking sector, simply because Spain didn't have ordoliberlism but the Irish Commissioner Charlie McCreevy who massively liberalised the banking sector, and the US regulatory failure cascade. So now it is the time to get the order right.

    10. CommentedJames Ross

      Dr. Sinn, whether one agrees with his position or not, is simply stating exactly what will happen in Europe. The Cypress solution, which is nothing more than the standard U.S. method of resolving insolvent banks, is going to be implemented. The German government is not going to use the savings of the German people to bail out the owners, bond holders, or large depositors of insolvent banks. He has never wavered from this position.

    11. CommentedRamón García Fernández

      To remind you why monetary policy is necessary (central bank buying government bonds or equivalent inflationary mecanism), let me remind you the experiment of Worgl .

      This small town made the equivalent of an inflationary monetary policy, using money with decreasing value. They created notes, that one must place a stamp every month in it to be valid. These stamps have a small cost. In this way, the encourage people to spend the money rather than keep it.

      The experiment was a complete success. No unemployment.

      Unfortunately, the experiment was stopped by the central government. Because it went against the established orthodoxy. Austria went deeper into the crisis, which helped Hitler being welcomed.

      The Hitler of yestarday is the Syriza, or Beppe Grillo or Alberto Garzón of the present.

      Let us not repeat the same mistakes again.

    12. CommentedRamón García Fernández

      Let me explain what is wrong with the position of Germany.

      Germany is correct that as net lender, and as other countries are net borrowers, they need to increase their competitiveness.

      But the expectation that future wages and prices are lower than present is highly poisonous for the economy. People do not buy. And we have a liquidity trap, like described in keynesian economy. In Spain, those who have savings do not spend them.

      The lesson is that internal devaluation, if necessary, it should be very quick. And this is exactly the opposite of what is happening. The policy of the Spanish government is to slow as much as possible the decrease in the price of estate, and thus nobody buys.

    13. CommentedGeorge Silver

      What Mr Sinn fails to acknowledge is that his country is causing AGAIN for the thrid time in history global turmoil!

      Should Germany exit the Euro?

      Difficult to answer this question since last time Germany was ''alone'' the world turned into Hell.

    14. CommentedPaul Peters

      Politically... is everyone caught up in large scale derivative trade that no single individual can exit without suffering irrepearable damage. One bad hair day with derivative trade and the monetary system of an entire continent can be devalued. That is however something that can be corrected. What cannot be corrected is the fact that trade is moving so incredibly fast nowadays that all these quadrillions are trading impressions, the news, and do not need to deal with actual reality anymore. The algorithms which underly these trade systems gradually trickly through in the stock market motions, and these again enter the news, are read by people and gradually become the "common sense". Politicians and EU countries are doomed to act as cartoonified versions of themselves until these trade systems become smart enough to collectivelly spin away from this mutually sustained race condition. And that is only going to happen sometime 2020 and 2025, when these trade systems are smart and complex enough to actually realize that they are creating the rules of the economy themselves. "The market" is nothing more than a collective behavioral convention...

      I wrote about that some 7 months ago, if interested in the reasoning and obviously i agree that rewarding hypocrysy and corruption is not efficient.. but even worse is form without substance. These people need to be glad about such 'gentile revolutions' like undertaken by Beppe Grillo and the millions of voters. These people are taking action instead of just trying to reason with the unreasonable.

    15. CommentedDavid Silverman

      on Art 125 of the TFEU and its abusive use - There is not conclusive evidence as to whether this does not allow the introduction of Eurobonds (this would depend on their definition, characteristics, conditionality, purpose and use...). The case has still to be tested to the European Court of Justice(ECJ).
      However, there is something for which Art 125 does provide a legal basis... under certain conditions. And this something is a European Redemption Fund. That IS compatible with EU Law as interpreted by the ECJ in its "Pringle" case.
      – See the legal advice commissioned by your compatriot MEP Mr Sven Giegold

      I would therefore strongly argue Mr Sinn in favour of starting with the Redemption Fund, where the existing Treaty does provide the legal basis for the Fund's establishment.

      Eurobonds can wait a bit. The only answer is more Europe, Prof., according to Chancellor Merkel. And Eurobonds are a part of this.. But she is right, step by step. First the European Redemption Fund.

        CommentedCarol Maczinsky

        Sven Giegold is a radical leftist, Attac Germany founder, and no legal advisor, a leftist public economist by profession.

        But even he understands that a functioning financial order is the precondition for eurobonds. those who cry and hue "austerity" in reality oppose the fiscal coordination that would make it possible to overcome the crisis with euobonds.

    16. CommentedWalter Gingery

      What Professor Sinn presents here is essentially a moral argument. Ultimately, it's not about economic logic, but about who's morally superior. He will never agree to further sacrifice for the sake of the greater good, because he will see it as a con game with him and the Germans as the victims.

    17. CommentedVan Poppel charles

      Herr Sinn forgets an important macro-economic principle of which the germans shall not escape IF: the other euro-zone countries succeed to reduce their commercial and budget deficit and reduce unemployment by applying the german deflationary policy, meaning the will import less & export more , the german export business will crash leading to rising unemployment. And?

    18. CommentedHugh Cameron

      The southern countries will have to reduce wages to regain competitiveness, because their economic output is largely services whose prices are mainly based on wages. Reducing wages will also allow the prices of locally produced goods to drop.

    19. CommentedKubilay M Öztürk

      This hot debate, to some extent, is related to the failure to understand that Keynesian version of Say's law, which posits that 'supply creates its own demand', could not work at all times. Germany as a nation is prosperous at the moment thanks to hard-working; yet without a market enduringly absorbing their excesses, this would be no more the case. Now is the time to comprehend that the supplier needs to step up and assist her buyer to find his feet again. Otherwise, the consequences would be much more detrimental than currently envisaged sacrifices, which are ignorantly based on narrowly conceived national interests.

    20. CommentedRoger Koelbener

      The fact that mutualization of debt is now forbidden (Art 125) is obviously no argument against the idea to do it and, alas, change that law, even if difficult. Legal positivism at it's best from Sinn!

        CommentedCarol Maczinsky

        If you change the fundamentals of an order, then you need to make fundamental concessions. Right now we see those who break the fundamentals play stupid and blame the creditors. That indeed makes them appear immature.

    21. CommentedKathy Holland

      I didn't get the sense from Mr. Soros' April 9, 2013 article that he was telling Germany to leave the euro. I think it important remind ourselves that what we are attempting to accomplish overall -- a global society -- the challenges in the euro are really nothing more than the ongoing discovery of opportunities through preservance. No pain, no gain. These are exciting times that we are witnessing....the expansion of a unified nation.

      There is a premium normally attached to junk bonds based on the risk. I think we have learned something valuable moving forward. I didn't interpret Article 125 as Professor Sinn has, however, I think maybe more important is to not close the door on exploration of new means of raising capital with increased financial flexibility.

      All countries suffer from varying degrees of competitiveness -- that is private enterprise at its best. If we are to do it right, we need to implement strategies/projects that broaden economic participation under policies written to enhance and support productivity as well as wealth formation for the greater good.

      I, too, wonder whether Germany has been put in a more compromising position than necessary. Chancellor Merkel should be free to negotiate/collaborate with her peers on behalf of Germany. There appears to be a conflict of interest otherwise. Infrastructural realignment at this juncture should be taken under consideration.

    22. Commentedcaptainjohann Samuhanand

      The Germans worked hard and saved and the rest of europe spent the savings and splurged.They just want this to continue.Americans have undestood this and got over the fiscal cliff. the loaggrds in Europe have to wrk hard but then there are no jobs. they have to emigrate to Britain which welcomes white labour in covert way.

    23. CommentedKen Fedio

      "it would be a big mistake for Germany to exit the euro, because that would reinstate the Rhine as the border between France and Germany"

      So that explains the logic behind this experiment: the Frankencurrency.

      But peripheral Europe's problem is Asia. Rogoff got that right. Just as globalization was gaining traction Peripheral Europe was asked to compete against the likes of the PRC. I guess timing is everything.

    24. CommentedDouglas Leyendecker

      What's the most logical way to solve a very very large and very very complicated problem? You generally do so by breaking it down into smaller more manageable parts. The developed market economies have both traditional growth drivers...population and productivity growth...working against them. Birth rates are flat at best and median age is moving further away from prime time spending years. Productivity, via technology, is moving labor to the most cost effective markets or replacing it outright with automation. We are trying to solve these enormous issues by lumping everyone together, when what may be needed is to push things down to smaller environments that can figure out their own sustainability formula. But since we have developed a massively interconnected global economy we are now interdependent. If one link in the bicycle chain breaks the whole bicycle stops working. To add to the challenge we seem to believe that monetary and fiscal policy are our only available tools. Today they are aggressively accommodative. But how is regulatory and social policy? Are they economically accomodative or restrictive?

    25. CommentedMarco Saba

      @Carol Maczinsky:

      "we want to spent money we don't have and you ought to give it to us" = current banking cartel policy vs. taxpayers, isn't it ?

    26. CommentedGerald Silverberg

      Maybe Germany could make the first step on the road to recovery by issuing a "Merkel Moratorium" suspending international debt payments, analogous to the Hoover Moratorium of 1931 that was the first step out of the Great Depression (followed by abandonment of the Gold Standard and rearmament Keynesianism). This suspended not only Germany's WWI reparations but also the private American Dawes Plan debt that was actually financing them, and was then fully repudiated by Hitler. The Allies had learned their lesson from the Versailles Treaty and did not reimpose the 675% prewar debt level on occupied Germany, allowing it to start the Bretton Woods era practically with a clean slate (more than was vouchsafed the UK - see Robert Kuttner in the NY Review,

      The US, as net world creditor, could afford to absorb these losses and even went on to recycle its export surpluses in the Marshall Plan. Now the world has come almost full circle and Germany is a major net creditor. Does it have any alternative to debt forgiveness and recycling its trade surpluses with the Eurozone periphery? That austerity, deflation and forcible debt extraction are self-defeating is something we already learned in the 1930s. And a Eurozone breakup would be an even bigger debt write-off for Germany. So it's time to unclench the fist in the current account cookie pot and start doing something constructive.

    27. Commentedudi cohen

      I agree with Hans Werner Sinn argument regarding the importance and crucial role currency constitutes (- as of independence when implementing austerity policies).
      the eurozone need to keep is unification regarding everything but monetary (economic) issues- on the contrary,it need to strive to independent policy that can cope and adapt to the needs of the hour of each member. Members should engage to implement joint projects of infrastructures and other projects but retaining and strengthening the advantage of each of them individually especially when the tools as the scope are limited in this competitive environment. So, continuing constraining itself obviously aint gonna help the Eurozone .

    28. Commentedgeorge sos

      and even though most people are doing it for communication purposes,it would be nice of you all to stop referring to the peoples as germans or greeks or whatever ,since you are talking really about the capitalists that have no country ,just the profit as religion...not that most germans do not deserve to be classified together with these perverts who seek profits and nothing else in life ....but this is a different debate

    29. Commentedgeorge sos

      I dont know about the finances but the people of south europe will revolt is only a matter of time.and even if the pressure eases,still the young of europe dont have jobs or money ,and they want to change this.Not to menton that more people evey day realise that this whole system is not going to be around for much longer even if the media propaganda tries to maintain an image of all going well....The maturing is coming slowly ,but it is coming.

    30. CommentedIgnacio Munoz-Alonso

      Mr. Werner-Sinn is right, the problems of southern countries is loss of competitiveness. But fuelled for over a decade with cheap credit provided by northern countries lenders who, irresponsibly, perpetuated and deepened that malady with unacceptable lending practices. Budget tightening, as Mr. Werner-Sinn suggests, seems now from that perspective as a way to pass on potential credit losses in the portfolio of northern lenders to the tax payers in southern countries. by creating enough cushion in their public accounts. It is just transforming a bank crisis in the North into a fiscal crisis in the South.

    31. CommentedPaul Peters

      As more and more holes appear as the monetary web stretches out to its limits, autocannibalism takes over to fill the gaps. Obviously the EU economy is a scale free network with some 60 centers, but no exchange rate fixes are going to solve any of the problems being faced in modern Europe. That is like rewarding stupidity for its brute force capacity to become unethical in times of need. For one these problems are due to ongoing automation which increasingly reduces the need for employees. Second, we are passing into an age where information flow outspeeds the resource flow and it becomes more profitable to invest in impressions raised in the news than in actual deliverables and tangiable results. Or better, these possibilities are now becoming accessible to just about every fund manager who in its own right would perform worse than random chance or a blindfolded monkey with a dart. Third, the only cure for learned helplessness is action.. all this powerplay is only moving air, and hollowing out the value of currencies.

    32. Commentedfrancesco totino

      No absolutely not but the weak Western countries need to restructure the political system!/2013/02/the-weak-western-countries-need-to.html

    33. CommentedLennart fredrikson

      The introduction of the Euro was a flawed mistake.
      With such differences between North vs South members economies. Instead of Germany leaving Euro a redsign of Eurozone could be next step. Now with public confidence for EU at record lows a change of route is URGENT! Kick Can down road is at end.The new born AFD party "Alternative fur Deutschland" brings a joker into political scene.As Prof. Sinn states introducing Eurobonds at this time will only engrave the mess. Banksters demand for ever more money printing will not create new Jobs or a growth jump just pump up Banks balance sheets.Banksystem must be redesigned in way described in recent book by Anat Admati &Martin Hellwig."The Bankers New Clothes".Present fractional reserve banking with high risk leverage is not sustainable over time.Capital requirement must be strongly elevated.Banking means acess of Capital for Industrial Jobcreating expansion at reasonable rates and hard down on speculation with toxic assets.Mr SOROS is misleading clearly.After German election expected a new approach for ENDING Crisis.

    34. CommentedAlfonso Siri

      To Carol Maczinsky:
      You said "What germans want is compliance with the rules"...really? Do you need to be reminded which country has been the first in breaking Maastricht rules regardin the 3% deficit threshold?

        CommentedCarol Maczinsky

        Thanks Alfonso! I think that is a misconception. It is no problem when people drive drunk, get caught and get santioned, and the rural police might even tolerate drunk drivers. When you drove drunk that doesn't mean that the law against drunk driving is obsolete.

        It is no issue when nations cannot meet their targets. But that does not mean the targets are irrelevant. We have a hard currency and if currency union members think they don't have to care for price stability and raise the prices for shitty quality and salaries they undermine their competititveness.

        CommentedAlfonso Siri

        To Carol (again): so, following your reasoning, breaking the rules is OK as long as you don't question them...Coming back to your original comment, what do Germans want: compliance or lack of questioning? You said compliance, but you can't demand compliance from others when you have broken the're bound by your acts.

        I'm afraid that the whole thing is being reduced as a Germany/northern countries vs. the rest. But that is a false and reductionist argument. The problem here are the right wing policies, embraced by the European right, no matter its nationality. And following them blindly at our own peril...Europe is being destroyed by this policies...extreme right is on the rise...we can imagine now how Europe fell into the abyss in the thirties...a combination of mediocre politicians and a bunch of extremists.

        CommentedCarol Maczinsky

        But never questioned the agreed rules. It is fundamentalist rhetorics to believe that non-compliance invalidates the rules and the either-or nonsense.

    35. CommentedAlberto Santos

      Should Germany exit the Euro? my answer is "NO". Austerity in Southern European countries is a consequence on years of misspending. At the same time we adopted the Euro, there was the Lisbon Strategy, were governments agreed in investing in R&D, education and so on to create "the jobs of the future" in 200 or "the jobs of the present", that is the cause of the high unemployment and the current economic situation. I miss an EU commission that can be less diplomatic and can call the national governments "liars". Since the "90's" there has been a tradition among Southern European countries in which Brussels was used as scape goat by politicians "Brussels forced us to do this and that" now are the "troika" or Germany or Merkel. Spend more, in what? more concrete and bricks?. Spain was the 45% of the building and construction sector of the EU, that was the "engine" of the Spanish economy, spend more, who and what? more people going into debt? Government money that does not have and is the people who o has to payback with their taxes?. Eurobonds is a bad idea. I prefer different interest rates according to countries (could be lower in Spain, higher in Germany for example, allowing in one place lower IR for recovery, higher in other place to facilitate the formation of capital, can be expend or lend, with the same currency) and direct investments of the EU "structural funds" to invest in R&D and technology and education/formation to increase the economic activity and reduction unemployment, under the strict supervision of the EU institutions or even an specific investment programs in those areas using the EBRD. Structural reforms are not achieve financing the very same people that live from the no implementation of those structural reforms.

    36. CommentedVictor Beker

      Productivity gaps and external deficits exist within each country. All American states have the same productivity? What about East and West Germany? Who cares what their external balances are?
      A region within a country can run a current account deficit indefinitely as long as there is a transfer of resources from the rich to the poor region. Therefore, this should not be a problem for the eurozone provided those who, thanks to the euro-zone, benefit of external surpluses are ready to transfer resources to the backward periphery. This is the real issue at stake as far as the productiviy gap is concerned.

        CommentedTomas Kurian

        You are so right.

        But, unbelievable as it may sound, it seems that some countries in Europe want only to take and are not willing to give.

        The root of this is that we are not ALL Americans as Americans are, but individual nations who are not willing to send permanently money to some other, clearly defined nation ( even it is mathematically perfectly correct and necessary for sustainable future)

    37. CommentedJoshua Ioji Konov

      Even in principal Mr. Soros is correct to call for alleviation of the current austerity policies, for quantitative easing and pro growth policies, he underestimates the dysfunctionallity of the European Union itself, the ideologically founded economics fiscal and monetary policies of VAT, subsidies, and oligopolies that benefit the very few and in many countries do not protect the consumers, policies that in the conditions of expanding globalization, rising productivity, and the ongoing outsourcing and moving of manufacturing, and the China's industrialization are pro-business cyclical. The Euro's strength is an extra burthen on many EU economies, too. However, cheap financing of struggling economies would not help them improve…. The microeconomic structures and monetary and fiscal policies, the consumer protection, and etc are the issues, indeed.

    38. Commentedniels kristian schmidt

      Soros is consistent in his argument and Sinn is consistent in his argument. But Soros assumes a will to reform without any crisis as incentive. And Sinn assumes a will by unions to accept deflation. But, rather than make debt less specific through euro-bonds (like it was done with US housing debt by pooling various qualities), it is necessary for stability to make debt more specific. That way a unit can default without the whole country or system defaulting.

      That of course implies that the European Union should continue as a decentralization project rather than a centralization project. Banks would be backed by municipal governments only, if by anybody at all - why backstop banks? Taxes would be raised by municipal governments only. Companies would be subsidized by municipal governments only, if any. As Goethe explained before it occured, assembling Germany as a political unity ruined German culture, stability and variety. The same is happening with the European Union.

      The government backed, violent unions will not accept deflation as assumed by Sinn. And the central governments of so-called nations or the bureaucracy of the EU, will not cut down on them selves without a gun at their head, as assumed by Soros. The incentive of central government leaders is to muddle who owes and pays for what and to centralize.

      Debt must therefore become more decentralized and more specific. And politics must be put almost solely at the municipal level.

      As for the euro; why should such a dictated kind of money be accepted at all voluntarily? It is only backed by politics; it is not the voluntary choice of money of the European citizens. Such a currency leads only to corruption of the monetary system and it's leading agents.

      Money and debt types must be valued on a voluntary basis in competition with other money and debt.

    39. CommentedChris Parry-Davies

      Hans-Werner-Simm is well known for his anti-Euro views and the incredibly simplistic analysis he uses to back this up. The problem is that beneath such simplifications there are indeed a series of problems where unstoppable economic dynamics intersect with intractable political constraints. Here George Soros' analysis is ever acute but still fails to adequately address the problems. Perhaps the best solution might therefore be to split the Euro in two. To explain:-

      Despite all the defects, Germany has in fact gained massively from the Euro - indeed has been and continues to be its greatest beneficiary. The problem is that the German politicians have stolen all the credit (attributing all the upside to their polices rather than the benefits of the Euro). As a result the German people now, mistakenly, see the whole project as a one-sided equation, where they pay and everyone else takes.

      * The Euro was/is built on deeply flawed foundations, where the inherent structural problems of the lack of economic convergence/equivalence were papered over by merely political will (heavily driven by the Germans themselves). As we have seen with the on-going crisis in Southern Europe, these structural problems have not gone away but rather have been compounded by the poor economic and political responses (a endless succession of too little too late).

      Trying to solve the problems by austerity measures and fiscal consolidation have demonstrably failed, based as they are on deeply flawed misunderstanding of the interdependence of the public and private sectors in an advanced economy (simply put trying to balance the books through just slashing public expenditure, particularly while many of the Euro economies are locked into what is for them an over-valued currency, is doomed to fail as demand and growth chase their own tail in a downward spiral - as is now all too clear across Europe). Conversely, trying to solve the problems by yet more debt without resolving the structural problems is equally doomed to failure. Equally, there are limits to how far Germany can indeed keep bailing out the whole sorry system, even if it were not already up against the political buffers with the German voters (as per 1 above).

      George Soros's solution of issuing Euro-bonds might help in as much as it would it defray some of the burden (or at least perceived risk burden) across a broader base - and if the European Articles are the only problem, he's quite right in saying we should simply change the Articles. The problem is that this is that broadening out the credit base is all that this does: it still fails to address the real structural problems. Similarly, while further integration is a necessary pre-condition to trying to deal with the problems, it will not in itself resolve the underlying

      Conversely, Germany actually leaving the Euro would be monumentally retrograde, defects or not - even assuming it was now actually possible (which is extremely dubious given the web of interdependence that it has now created). It would simply result in a massive appreciation in the new currency, in turn triggering am massive reverse in the German economy (my models suggest something like a 10-12% contraction of GDP, and unemployment soaring to circa 5 million - not to mention the German public finances going massively into the red). And this is before we get into this meaning the Euro would all but inevitably collapse generally, at very least fragmenting the European economies and seriously risking a continent wide economic and political collapse.

      Taken together we - as in Europe as well as Germany - can't continue with the Euro as it is but, equally, can't afford to lose it. The only workable solution I can come with is to split the Euro into two - a Euro North and Euro South. This would enable the southern economies to make the necessary structural adjustments through currency depreciation; while enabling the Northern economies to continue to benefit from the essential benefits of convergence and common currency. Politically the support for the Southern economies could then be sold to the Northern electors as a one-off reverse dowry that would solve the problem instead of the present drip feed of support that fails to solve the problem and electors rightful fear as never ending.

    40. CommentedMargaret Bowker

      Euro bonds and an unlikely German exit are issues on the debate horizon, but for now, hopefully Germany will be a supportive observer while Eurozone policy is changing so that reduction is balanced by multiple growth measures. Greater certainty and improved confidence are needed in the Eurozone and in the EU in general; a clearer path is essential involving fewer issues - perhaps FTT and challenging OMT can be removed from the list to assist the way forward.

    41. CommentedAndrew Purdy

      I don't see how you can have mutualization of debt in the EU without a true EU Federal Government. If Germany agrees to Eurobonds, this simply creates massive moral hazard as the Greeks, Portuguese, Spanish, Italians, etc... will just go hog wild in their borrowing. And don't say that the rules will forbid this..., because the rules will be ignored as they have been before. How did the limits on indebtedness in the Maastricht Treaty work out... If debt is mutualized, it is mutualized, and any EU State will be able to borrow as much as it wants to. If the EU is to mutualize debt, that mutualized debt should to be owed by the EU itself and not by its member States, the powers and responsibilities that cost the big money (social security, welfare, health care, defense) need to be transferred to the EU Federal level, and the EU itself will need to lay and collect direct taxes so it can service its debts. Transferring these kind of powers to the EU as presently constructed would just result in a USSR-like dictatorship, as the EU level has no Democratic checks and balances. It seems to me that a step this big requires a new constitution, and not just another treaty - at least if it is going to be done right. Doing it by another patchwork treaty will ultimately result in another USSR or a 4th Reich, and neither outcome is desirable.

        CommentedCarol Maczinsky

        Remember the Schäuble proposal for EU control competences for national budgets, and the moronic sovereignty debate that quickly demonstrated who was a real enemy of European integration and principles. Germany puts the underlying order first. Whoever panders to Southern "imposition" talk and polemisizes against "austerity" rewards irresponsible actions.

    42. CommentedMelanie Friedrichs

      Actually I think this is a fantastic idea. I only first heard it a week ago from a professor. The whole problem with the Euro is that the countries in crisis- the PIIGS- can't inflate/devalue by themselves, and Germany/ECB doesn't want to inflate/devalue the whole zone because it will negatively affect the savers- the Germans. If the Germans leave, their independent currency will appreciate, correcting the massive current accounts surplus they've accumulated in the last decade at the expense of the PIIIGS, and the Euro will depreciate. When they've all evened out they can get back together with a better mechanism for monetary compromise.

    43. Portrait of George Soros

      CommentedGeorge Soros

      Hans-Werner Sinn has deliberately distorted and obfuscated my argument. I was arguing that the current state of integration within the eurozone is inadequate: the euro will work only if the bulk of the national debts are financed by Eurobonds and the banking system is regulated by institutions that create a level playing field within the eurozone.

      Allowing the bulk of outstanding national debts to be converted into Eurobonds would work wonders. It would greatly facilitate the creation of an effective banking union, and it would allow member states to undertake their own structural reforms in a more benign environment. Countries that fail to implement the necessary reforms would become permanent pockets of poverty and dependency, much like Italy’s Mezzogiorno region today.

      If Germany and other creditor countries are unwilling to accept the contingent liabilities that Eurobonds entail, as they are today, they should step aside, leave the euro by amicable agreement, and allow the rest of the eurozone to issue Eurobonds. The bonds would compare favorably with the government bonds of countries like the United States, the United Kingdom, and Japan, because the euro would depreciate, the shrunken eurozone would become competitive even with Germany, and its debt burden would fall as its economy grew.

      But Germany would be ill-advised to leave the euro. The liabilities that it would incur by agreeing to Eurobonds are contingent on a default – the probability of which would be eliminated by the introduction of Eurobonds. Germany would actually benefit from the so-called periphery countries’ recovery. By contrast, were Germany to leave the eurozone, it would suffer from an overvalued currency and from losses on its euro-denominated assets.

      Whether Germany agrees to Eurobonds or leaves the euro, either choice would be infinitely preferable to the current state of affairs. The current arrangements allow Germany to pursue its narrowly conceived national interests but are pushing the eurozone as a whole into a long-lasting depression that will affect Germany as well.

      Germany is advocating a reduction in budget deficits while pursuing an orthodox monetary policy whose sole objective is to control inflation. This causes GDPs to fall and debt ratios to rise, hurting the heavily indebted countries, which pay high risk premiums, more than countries with better credit ratings, because it renders the former countries’ debt unsustainable. From time to time, they need to be rescued, and Germany always does what it must – but only that and no more – to save the euro; as soon as the crisis abates, German leaders start to whittle down the promises they have made. So the austerity policy championed by Germany perpetuates the crisis that puts Germany in charge of policy.

      Japan has adhered to the monetary doctrine advocated by Germany, and it has experienced 25 years of stagnation, despite engaging in occasional fiscal stimulus. It has now changed sides and embraced quantitative easing on an unprecedented scale. Europe is entering on a course from which Japan is desperate to escape. And, while Japan is a country with a long, unified history, and thus could survive a quarter-century of stagnation, the European Union is an incomplete association of sovereign states that is unlikely to withstand a similar experience.

      There is no escaping the conclusion that current policies are ill-conceived. They do not even serve Germany’s narrow national self-interest, because the results are politically and humanly intolerable; eventually they will not be tolerated. There is a real danger that the euro will destroy the EU and leave Europe seething with resentments and unsettled claims. The danger may not be imminent, but the later it happens the worse the consequences. That is not in Germany’s interest.

      Sinn sidesteps this argument by claiming that there is no legal basis for compelling Germany to choose between agreeing to Eurobonds or leaving the euro. He suggests that, if anybody ought to leave the euro, it is the Mediterranean countries, which should devalue their currencies. That is a recipe for disaster. They would have to default on their debts, precipitating global financial turmoil that may be beyond the capacity of authorities to contain.

      The heavily indebted countries must channel the rising their citizens’ discontent into a more constructive channel by coming together and calling on Germany to make the choice. The newly formed Italian government is well placed to lead such an effort. As I have shown, Italy would be infinitely better off whatever Germany decides. And, if Germany fails to respond, it would have to bear the responsibility for the consequences.

      I am sure that Germany does not want to be responsible for the collapse of the European Union. It did not seek to dominate Europe and is unwilling to accept the responsibilities and contingent liabilities that go with such a position. That is one of the reasons for the current crisis. But willy-nilly Germany has been thrust into a position of leadership. All of Europe would benefit if Germany assumed the role of a benevolent leader that takes into account not only its narrow self-interest, but also the interests of the rest of Europe – a role similar to that played by the US in the global financial system after World War II, and by Germany itself prior to its reunification.

        Portrait of George Soros

        CommentedGeorge Soros

        Hans-Werner Sinn’s response confirms my fear that the euro will eventually destroy the European Union. The longer it takes, the greater the political damage and the human suffering – and it may take a long time. Given that the way the euro is currently managed puts the “peripheral” countries at a serious competitive disadvantage in terms of their access to capital, they are condemned to a lasting depression and a continuing decline in their competitive position.

        As Sinn says, Germany will not accept Eurobonds. The German Supreme Court has indicated that Germany will require a referendum before Eurobonds can be introduced, and it is currently considering whether the European Central Bank has exceeded its powers. The Bundesbank has submitted a brief that criticizes the legitimacy of some of the ECB’s recent actions. It argues that, under the German constitution, the ECB is prohibited from making any decisions that impose potential liabilities on German taxpayers, because it is not subject to German parliamentary control.

        A decision in favor of the Bundesbank would put the periphery position in an even more dire position. It is bound to strengthen anti-European sentiment. If current policies persist, they are bound to lead to the disorderly disintegration of the EU. Surely that is not what Germany wants.

        I do not agree with all of Sinn’s arguments, but there is no point in getting bogged down in the details. The point is that the current state of affairs is intolerable. Sinn claims that the root cause of the euro crisis is that the Mediterranean countries are not competitive. If he represents German public opinion correctly, a mutually agreed breakup of the Eurozone into two currency blocs would be preferable to preserving the status quo.

        The division of the euro into two blocs would cause serious dislocations. Germany assuming the role of a benign hegemon would benefit everyone, but that seems to be unattainable. The division of the euro could save the EU, provided that the periphery retains possession of the euro. Given that their debt is denominated in euros, this would enable them to avoid a default that would destabilize the global financial system. And France, in its current competitive position, would be better suited to act as the eurozone’s leader, rather than to remain a passenger in a car driven by Germany.

        Portrait of Hans-Werner Sinn

        CommentedHans-Werner Sinn

        Germany will not accept Eurobonds. The exclusion of debt mutualisation schemes was its main condition for giving up the deutschmark and signing the Maastricht Treaty (article 125 TFEU). Moreover, the German Supreme Court has indicated that Germany will require a referendum before Eurobonds can be introduced.

        The Bundestag does not have the right to make that decision, because it would change the constitutional basis of the Federal Republic of Germany. And even if a referendum on Eurobonds were held, it it would never find a majority, unless it is coupled with the foundation of a common European state, which is strongly objected to by France. Angela Merkel, who will in all likelihood be re-elected in September, has said that Eurobonds will not come in her lifetime. George Soros should know all that. By suggesting that Germany choose between Eurobonds or leaving the euro, he effectively advocates the euro's destruction.

        Even if Germany exits the euro, the competitiveness problems of some of the Eurozone’s southern countries vis-à-vis the economically stronger countries in the north would still be substantial, and they still would have to undergo a process of real devaluation via austerity. George Soros dodges the competitiveness problem by concentrating on the financial side of the crisis. But calming markets by offering public guarantees for investors will not solve the competitiveness problem. On the contrary, it will strengthen the euro and thus exacerbate the competitiveness problems of the south.

        In all likelihood, however, Germany’s exit would also trigger the exit of the countries of the former deutschmark bloc (the Netherlands, Austria, Finland and perhaps Belgium). When France proposed in 1993 that Germany leave the EMS, a forerunner of the euro, the Netherlands and Belgium immediately declared that they would also be leaving, and France withdrew its demand. Thus, should Germany be forced to exit, the result would be northern and southern euro blocs, the only question being which bloc France would choose to belong to.

        That said, Soros’s suggestion that a sub-group of euro countries could issue joint Eurobonds if they wished to do so is good. Every country should be free to organise a two-speed eurozone if it so wishes. Whether that would improve the credit ratings of the jointly issued bonds is another matter.

        His accusation that Germany is imposing austerity is unfair. Austerity is imposed by the markets, not by those countries providing the funds to mitigate the crisis. By now the overall sum of credit via intergovernmental rescue operations and the ECB has reached €1.185 trillion (€707 billion in GIPSIC Target liabilities minus GIPSIC claims from under-proportional banknote issuance, €349 billion in intergovernmental rescue funds, including those from the IMF, and €128 billion in GIPSIC government bond purchases by non-GIPSIC national central banks; see, not counting the unlimited guarantees the ECB has given to the states of southern Europe through its OMT programme at the expense, and to the risk, of the taxpayers of Europe’s still-sound economies.

        Should the euro break up and the GIPSIC countries default, Germany alone would lose about €545 billion euros, nearly half of the aggregate sum mentioned, since the Bundesbank has carried out most of the net payments on behalf of the GIPSIC countries that are reflected in the Target balances. Germany has the biggest exposure by far among the countries rescuing the eurozone’s crisis-stricken countries, and thus helps to mitigate austerity more than any other country.

        George Soros underestimates the risks that debt mutualisation would pose for the future of the eurozone. When Alexander Hamilton, the first US finance minister, mutualised state debts in 1791, he thought this would cement the new American nation. But the mutualisation of debt gave rise to huge moral hazard effects, inducing the states to borrow excessively. A credit bubble emerged that burst in 1838 and drove most of the US states into bankruptcy. Nothing but animosity and strife resulted.

        The euro crisis arose because investors have mispriced the risks of investing in southern Europe. This was the reason for the inflationary credit bubble that deprived a number of countries of their competitiveness. Eurobonds are a way of perpetuating this mispricing, keeping the markets from correcting their mistakes. Eurobonds would imply lingering soft budget constraints and huge political moral hazard effects that would destroy the European model.

        Soros says countries that fail to implement the necessary reforms after the introduction of Eurobonds would become permanent pockets of poverty and dependency, much like Italy’s Mezzogiorno region today. Indeed, this is what will happen. There will be quite a number of countries of this sort, given the cheap financing available. They will become like the Mezzogiorno, or like East Germany for that matter, and will permanently suffer from the so-called “Dutch Disease,” with chronic unemployment and underperformance but an acceptable living standard.

        Soros says that Germany will suffer from exiting the eurozone, because of the revaluation of the deutschmark. This is not true. First, Germany is currently undervalued and would benefit from a limited appreciation via the terms-of-trade effect. The advantage of imports becoming cheaper more than outweighs the losses in export revenue.

        Second, the Bundesbank can always prevent an excessive revaluation by selling deutschmarks and buying foreign assets, following the successful Swiss example of last year. Germany would be far better off than now because real foreign assets would replace the Target claims it holds under the present system. Such assets would be safer and generate a higher return. That said, I reemphasise that in my judgment Germany should not exit the euro, because of the political value of the euro as a European integration project and because of its potentially beneficial implications for trade should the current crisis be resolved.

        Soros claims that the exit of southern countries would exacerbate their external debt problems, leading them to default on their debt. This is also not true. While exiting and devaluing the new currency would increase their debt-to-GDP ratio, remaining in the euro and cutting prices to enact a real devaluation would do exactly the same. Except for producing inflation in the eurozone, a depreciation, whether external or internal via price cuts, is the only possibility for an uncompetitive country to regain competitiveness and generate a structural current account surplus, which is the only possibility for orderly debt redemption.

        Seen this way, a temporary increase in the debt-to-GDP ratio is unavoidable if a country wants to repay its debt and attain a sustainable foreign debt position. In my opinion we should tolerate more inflation in the northern euro countries to help make the eurozone south competitive. But if we try to escort the northern savings via Eurobonds to the south, exactly the opposite will happen. We would destroy the German building boom, which is beginning to lead to higher wage demands and that has the potential for inflating the country.

        On another point Soros raises, I do not see why Italy should exit the eurozone, and why it would be “infinitely better off” if Germany exited. Italy has a very low level of foreign debt and a highly competitive economy in the country’s north. According to the study by Goldman Sachs that I cited, it only needs to depreciate against the eurozone average by 10% or less. Italy’s problems are manageable.

        If it was true that Germany would suffer after its own exit, Italy would suffer too, because Italy and Germany are extremely closely interlinked via supply chains. The two countries are complements rather than competitors.

        George Soros points to Japan’s unsuccessful attempts to solve its problems by monetary austerity of the German kind, and warns against repeating that experiment. Japan clearly did not choose austerity after its banks collapsed in 1997. The BoJ has kept the rate of interest at close to zero since then, while the government debt-to-GDP ratio has increased from 99% (1996) to 237% (2012) because of permanent Keynesian deficit spending. Apart from that, the ineffectiveness of austerity in a country with a flexible exchange rate does not apply to the situation of a country in a currency union. While the flexible exchange rate would sterilise all attempts at increasing competitiveness via deflation, price cuts in a currency union do work wonders, as the Irish example has shown. Ireland has cut its prices relative to the rest of the eurozone by 15% since 2006, and it succeeded in saving its economy.

        One final word. George Soros said I “distorted and obfuscated” his argument. If that was the case, I apologise, for the public discourse would make no sense if the antagonist’s view were purposefully distorted. But I still do not see where, and in what sense, that could have been the case.

        CommentedFrank O'Callaghan

        The background issue is that the Euro was created as part of the "European Project". It used to be the "Common Market". Now it is revealed to be what it always was: Germany's market.

        It is unthinkable that Germany would give this up.

        CommentedMarco Saba

        In my opinion, the EU member states should simply get a share of the REAL seignioriage outcoming from the two processes of euro paper-money and credit creation. In Italy alone this amount is around 100,000 billion euros, i.e. 50 times the Italian so-called public debt (with the old fractional reserve requirement of 2%). The ESBC must also evaluate the alternative of establishing a monthly Basic Income for all EU citizens of at least 1,200 euros monthly. This way EU citizens will stop to investigate why the banks obfuscate the real monetary rent by writing it in the liabilities side of their balance. I would like to have a possibility to explain to Mr. Soros directly the great benefit the system will get that way. He will agree, I bet.

        Commentedotto ruthenberg

        soros analysis is correct in so far as the status quo cannot prevail, convergence is nowhere in sight and buying time for it looks increasingly ridiculous, however his conclusion to create eurobonds and a banking union is absurd, eurobonds have moral hazard written all over them, no sane german, austrian, finn or dutch would pool his debt with governments who follow completely different policies on spending discipline, eurobonds with the current legacy of southern countries are simply unsellable to the northern public! yes, the euro is likely to break over this division of policy, the trigger might be southerners wanting their scope for action back, or northeners stopping the transfers, it will come to the same. but europe will still survive, as no county has a viable alternative, we will just not share our money.

        CommentedAvraam Dectis

        Reply to George Soros: Eurobonds are a great longterm solution, but, if that is politically impossible should we not try to get something done quickly that at least ends the crisis and the multiple Depressions?

        I suggested earlier in the comments that a Central Bank Dividend would have that effect and be less entangling, thus possibly somewhat more possible. Would this not make an excellent Plan B that at least solves the immediate crisis?

        CommentedMarco Cattaneo

        The most appropriate solution is neither Soros' nor Sinn's. It is (1) to introduce a parallel monetary instrument in less efficient countries (2) to use it to reduce taxes on labor, so to realign competitiveness vs Germany and, meanwhile (3) to support demand. As currently those economies are depressed, this would not create inflation; rather, it would trigger a strong recovery.

        CommentedCarol Maczinsky

        "The German position of demanding the imposition of policies that have proved to be counterproductive seems insane."

        We have agreed principles and framework. If you break the contract underlying the Euro, you can't insist on the rules you broke. What germans want is compliance with the rules. Policies are not "imposed" but nations manouvred themselves into bankruptcy and other nations are just willing to lend them if they change course. That's not "imposition" but "soft landing". Creditor blame games and moral hazard games show intellectual immaturity and unreliability.

        Portrait of Michael Heller

        CommentedMichael Heller

        George - Actually I would be quite convinced, were it not for four critical counter-caveats:
        1. Blame for the impasse is shared by indebted countries unwilling to do structural reform (history suggests benign environments are not conducive to structural reform).
        2. Various European countries have resisted and impeded implementation of a rules framework which Germany understandably views as a precondition for Eurobonds and/or other collective measures.
        3. What country has ever been benevolent? Germany’s responsible leadership is displayed its maintenance of economic incentives to reform (as IMF conditionality did in Asia and Latin America).
        4. A counter-argument is that the reason Japan had 25 years of stagnation was not its monetary policy but rather its refusal to undertake structural reform.

        CommentedFrank O'Callaghan

        The German position of demanding the imposition of policies that have proved to be counterproductive seems insane.

        Soros is correct, both technically and in principle. There is a further point that can be made: growing inequality within and between the countries of the zone threatens Europe.

        Increasing productivity generates increasing unemployment given a constant level of production and consumption. Efficient growth in demand requires redistribution.

        The QE and liquidity flood are not being used in the real economy but are financing further speculation. This is paving the way to more financial bubble crashes. It is to oppose this that partly explains the German conservative stance but a strong currency in a weak economy prioritizes the means at the expense of the ends.

        CommentedCarol Maczinsky

        The simple principle is trust. Member of the Eurozone agreed to a currency model which makes you like Ulysees tie yourself to the ship and ignore the Sirens. And it would be fatal to command the crew to steer towards the Sirens. Gemans demand a restoration of their trust, a stable ordoliberal financial order and mechanisms. The current problems of Eurozone partners to comply with agreed currency rules show why we can't risk eurobonds. As simply as that, you can't pander to anarchic financial governance and reward non-compliance - or the whole system would blew up. Of course we require that first the order is created and thn we might consider debt pooling but not on the base of irresponsible financial governance and pandering to stupid blame games which put the Germans in the role of a "new jew", persons held liable and accountable for just sticking to previously agreed financial rules. The Schäuble proposal of European compentences for fiscal surveillance clearly tested the reliability of our partners. Some simply don't intend to comply with agreements made and thus oppose further European integration.

    44. CommentedAvraam Dectis

      There is one other option that would pay off all the creditors, end the Depressions and do so without inflation. It would require Central Bank Dividens instead of Eurobonds, thus avoiding debt mutuialization.

      This is how it would work, as briefly as possible:

      1) Declare a Euro zone "Central Bank Dividend" ( CBD ). A CBD is a dividend from the Central Bank allocated to each citizen, but, in this
      case, held by the central bank for debt repayment. Yes, it is printed

      2) Amount: Greek debt is almost 200% of GDP. Per capita GDP is about $27000 so per capita debt is about $50,000. The useful CBD would be $50,000.

      3) Implementation: The ECB would open an account for each euro zone country and deposit $50,000 per citizen. To be paid out only on outstanding debt when requested by the country and only when inflation was below a specific threshold, perhaps 2.9%.

      4) Fairness : Each country in the euro zone would be treated equally because the CBD would be allocated on a per citizen basis for each citizen in the euro zone.

      5) Price: The CBD would only be in force as long as the receiving country was taking mesaures to ensure future budgets were not excessive.

      So it is possible to make everyone happy. Perhaps when enough countries threaten Euro Zone secession, they will realize this.

      Avraam J. Dectis

        CommentedAvraam Dectis

        Stamatis Kaavadias: Thank you

        Andrew Purdy: That would be better than nothing but inadequately controlled and metered.

        CommentedAndrew Purdy

        Why not simply authorize the European Commission to mint trillion Euro coins so they can monetize the debts of all the member States?

    45. CommentedRichard Barlow

      This seems to be the best argument yet to end the Euro and restore southern european competitiveness through devaluation.
      I guess the German government may not like that because a VW would become more expensive than a Fiat and they would sell less VWs.
      Still, they would control inflation at least.

    46. CommentedStamatis Kavvadias

      "..the only remaining option, as unpleasant as it may be for some countries, is to tighten budget constraints in the eurozone. After years of easy money, a way back to reality must be found. If a country is bankrupt, it must let its creditors know that it cannot repay its debts. And speculators must take responsibility for their decisions, and stop clamoring for taxpayer money whenever their investments turn bad."

      Mr Sinn is trying to introduce a "code of financial ethics" in the eurozone. When private banks create the "money supply", responsibility goes to both the creditor and the borrower. Losses should be split, as he argues, but nothing is done to make institutions in this direction. Instead, motives are expected to emerge by the force of an "invisible hand" --the "code of financial ethics". This is, at best, a delusion that is bound to destroy the euro!

      The tales about bad debtor countries, not offset by a narrative of irresponsible banks, is an attempt to close our eyes to the lack of appropriate motives for private money creation and risk taking. This can only work in a context of prosperity for those around the median of eurozone income. This is the reason it works for northern countries.

      The expectation that the southern countries will accept their GDP squashed, is the opposite side of this same delusion. Southern countries will not accept for long the role of the supplier of cheap labor for the north. This view of the common currency as a trap of treaty-based compulsory competitiveness race (also supported by the ECB), is the bound to fail.

      The game of putting the real problem of private banks irresponsible creation of the "money supply" under the carpet, can only work with mutualization of associated costs (at least for a while). This is the proposal of Soros: euro with or without Germany, and eurobonds.

      Dealing with the problem, requires deep changes in banking institutions: taxing of derivatives at the sovereign level, compulsory diversification of bank loans to sovereigns, overseen by the ECB, and sovereign/ECB oversee of limits to bank lending of specific parts of the economy in domestic/cross-border investments (respectively). Another alternative, that also addresses the wrong structure of bank motives, is full-reserve banking, as proposed by IMF researcher Michael Kumhof, or Positive Money UK. Policy makers in eurozone are miles away even of discussion of such sound institutions.

      Uninteresting and void of perspective, Mr Sinn and eurozone policy makers, do not even deserve counter arguments... Euro is bound to fail.

        CommentedStamatis Kavvadias

        I am not pro eurobonds. I only see a path to prosperity for european societies in full reserve banking --by the way, this does not include increased prosperity for bankers and the 1%; to the contrary.

        Eurobonds are the solution for those who protect the interests of bankers, and support the perpetual subsidy of bank "risks" with taxpayer (or depositor) money!

        CommentedCarol Maczinsky

        You don't get the prerequisites of eurobonds, and that is full financial reliability, checks and controls. Otherwise eurobonds simply fuel irresponsible behaviour, leading to an even bigger crisis. Compliance is a prerequisite.

    47. CommentedC. Jayant Praharaj

      Mr. Sinn needs to explain better what he means by " competitiveness ". Is he using a technical term ? If not, what exactly makes a country " competititive " according to him ? Is his use of the word " competitive " consistent with useful technical concepts in trade theory, for example ? Does it add anything to useful technical concepts in trade theory, for example ? How does his use of the word " competitiveness " distinguish between cause and effect ?

        CommentedCarol Maczinsky

        Mr Sinn here uses the term competitiveness as its meant to be, as a comparison of the relative economical weight of nations.

    48. CommentedJan Smith

      This author is right that many European nations have experienced a loss of competitiveness.

      But he fails to mention that Germany retained its competitiveness by stealth adoption of the east Asian model, to wit, using the power of the state to transfer wealth from households (consumers) to certain firms (export producers).

      If every nation did that, the world economy would crash and never revive. By comparison, the current depression would be mild.

      In short, Germany has been taking a free ride on more liberal nations (Ireland, UK, Italy, USA, etc). Nice ride while lasted, hmm? And this author merely wants Germany to keep on free-riding right through the ongoing depression.

    49. CommentedPaul A. Myers

      The premise of this article is that there is no strategy of convergence possible for the eurozone. I would think that a program of structural reform could put Europe on the path to convergence by having less competitive countries adopt programs to reduce structural deficits while the stronger countries provide external support. Ultimately successful neighbors make for better markets.

        CommentedAndrew Purdy

        The only "strategy of convergence" that can possibly work is a complete transfer of the most expensive core powers and responsibilities of individual States to the EU Federal level, and to do it in the context of a new EU constitution. If the EU is to be fully integrated, then the core powers and responsibilities must be exclusively exercised by its central government. The debate and discussion should center around issues like EU federal powers, representation, checks and balances, separation of powers, and how the EU should elect a chief executive - not "Eurobonds". Putting economic unity before political unity is putting the cart before the horse. With political unity economic unity comes naturally. But the details of political unity matter a great deal, and if proper discussion and debate is not made on the real issues, a slapdash and rushed political unity that is cobbled together in the middle of a banking crisis could end up as an epic disaster for the whole world. Since the Eurozone States are already stuck in the Euro, and time is running out, they should either start a constitutional convention immediately, or come up with a plan to disband the Euro in an orderly manner.

    50. CommentedMarc Sargen

      I always hear that the profitable north needs to accept higher inflation. What they are really saying is that Germany must get less competitive so they should pay their employees more for less work & put more restrictions to artificially drive up cost.
      Stupid is as stupid does.

        CommentedP. Foofootos

        bigger and more efficient economies, especially with big industries and less SMEs like Germany, mean people work less, not the other way around. The farmer with a small field he tends to himself using animals works more than the one with huge industrialized fields tended to by machines. It's also obvius when you look at the hours worked data that the periphery workers work more, much more, than the core, and are less productive for it. You can say many things about the periphery's uncompetitiveness, but the "lazy" charge, is pure slander.

    51. CommentedSantiago Rouco Rodríguez

      Hah Hah Hah

      "Article 125 of the Treaty on the Functioning of the European Union expressly forbids the mutualization of debt."

      A Treaty, in all the ages, is something that can be changed or denounced... Must I remember any example?

      Why not? Why to keep on? Creating the euro was a political decision, then break it down would be a political decision as well. Why should we fear to make that decission? Currencies are just a tool not a religion. A tool to help countries and citizens not to harm them. Gold standard was dismissed and that was good for the countries and citizens. Euro is becoming the new gold standard and is hurting the economies and societies of most europan countries. Bankers and politicians are very happy with it, but not the citizens. In southern countries the euro brought inflation first and now depression. But bankers are happy then and now. They got bonuses then and now bailouts.

      Current situation is so bad for us and there is no hope to improve it. The promise of Germany and Brussels is pain over pain. Why? To avoid what? Germany or France crazy again? Fear again! EU and € should bring hope or better leave us.

      I'm not sure if it's better than Germany would leave the euro or the countries in trouble. Anyway let's break it down.

        CommentedCarol Maczinsky

        You can change a contract and make concessions to get the contract changed but you cannot change the validity of the contract. So the questions is, what has Europe to offer the "germans" if they want to different rules and how to regain the trust of undermined agreed rules.

    52. CommentedFrank O'Callaghan

      There is one important truth in what Sinn says. When he states that investors want to exchange their worthless lost bets for Government bail outs he is entirely correct.

      There are things that he does not say. The root of the crisis is low tax on the large mobile wealth "generated" by cheap money and the growing inequality in society. It is compounded by the wild benefits for those who control the State paid by most governments.

    53. CommentedAlfonso Siri

      A nice article for Sunday mass preaching about virtous and sinners. Please, talk economics here. I'm appalled how people lik Mr. Sinn decide to ignore history, evidence to ratify the current economic policy. As if we have learned nothing from the Great Depression or, closer, Japan. And by the way, if a bloody article gets in the way of recovery, just change it.

    54. CommentedFrank O'Callaghan

      Erudite nonsense. The purpose of the €uro was to create a captive market. It worked.

      Germany is the overwhelming beneficiary of this. It would not have it's current position without the EU or the €uro.

      Without the €uro Germany would have an appreciating currency that caused unemployment and de-industrialisation. The €uro is the only thing that keeps them from that. The burden is borne by the other €uro economies. Soros is right. Sinn must know this but doesn't like it.

      There is a separate problem within the zone of an erosion of social solidarity and an expansion of inequality. This is by far the greatest threat to Europe. It is the real danger.

        CommentedFrancesco Ferrelli

        I disagree with the commenting the article as erudite nonsense. I would recommend commenting these articles by Sinn plain vanilla nonsense.
        I suggest Sinn spends a bit of his time reading through sensible analyses of what has happened and what is now happening in the EZ instead of making flawed policy recommendations here and elsewhere.
        A crash course in De Grauwe, Krugman, De Long et al. is badly needed for you dear Prof. Sinn.

    55. CommentedTomas Kurian

      Is it really the competitiveness problem? Who is more guilty: country with lower productivity but capable to live on its own albeit at slower pace or workaholic party that built hugely excessive production capacities of their industries with the aim of exporting to someone ? Those that pursue this predatory export led growth model are not capable to live within their own territory at peace and are constantly dependent on some host to generate income. I believe that those should be the party to correct its deeds.

      Soros is right. As you too mentioned the USA debtor-creditor relationships in its first decades, these were indeed corrected by federal taxes, paid by creditor countries, and they pay until today without hesitation and amounts hugely in excess of current Europe ESM loans. These loans should be transfers, and permanent ones. If Germany and friends with trade surpluses want to keep these and benefits associated with such organization of production, they should also accept to pay the federal taxes, going south. If they do not, they should quit.

      The biggest mistake is to expect, that by rebalancing the trade differences through Austerity the problems will disappear. They will not, especially with fiscal pact in place and impotence of ECB to conduct expansionary monetary policy. The economic system needs deficit, monetary policy or trade surpluses to function, otherwise deflation settles in, as we can see today. Only countries surviving today with trade surpluses do not see it as they have the helping crutches of these trade surpluses. Why it is not possible, see in my work: Genom of Capitalism (, mainly chapter 6.

    56. Commentedradek tanski

      Won't germany just lose their captive inefficient "rest of europe" customers if they leave?
      All of a sudden German companies will have to have a floatign currency against theeuro which will price its own exports right out of reach of Europe?

    57. CommentedTom Resom

      A lot of this "easy money" came from german and french banks. they too should take responsibility but instead get "bail outs".

      In addition, the low interest rates the ECB instituted to save the german economy from deflation in the early 2000s was a fatal monetary policy for some southern countries which were still in an economic upturn.

      Back then, when the EMU was finalized, the german government and the Bundesbank where the main forces to set the inflation target rate at 2 percent. However, Germany, with its Agenda 2010 (financed in part by breaking, and thus watering down, the Stability and Growth Pact), was aiming at a rate just above 1 percent.

      By this "over-competitiveness" Germany the accumulated a constant current account surplus forcing southern countries to their knees, and turning around the about the "counter-convergency" trend.

      Germany is now meeting criticism not only from peoples in southern european countries, but also the European Commission, IMF, USA, and others. It should do her part and get her act together: give more time to southern countries, stop neo-mercantilist export policy, get domestic demand going, push for a deeper institutional integration of the EU (especially EMU).

        CommentedCarol Maczinsky

        Stamatis, you believe the cuirrency is going to fail. I don't want to let it fail but a reluctance to stick to agreed rules undermines it. So the way out is to create the stable EUI framework, which means put people who want to make it fail in a ship of fools. "Austerity" criticism = we want to spent money we don't have and you ought to give it to us.

        CommentedStamatis Kavvadias

        The comment was for Carol Maczinsky.

        I agree with Tom Resom, though I do not think what he suggests is enough, or there is any motivation for Germany to reverse 2000s' gains or course.

        CommentedStamatis Kavvadias

        It does not "imply" anything, because the euro is going to collapse, and you better think twice before you set your terms. Memorandi are not enough and you want official fiscal intervention? Permanent submission to non-elected, non-accountable, undemocratic elite? Deeply flowed treaties that axiomatically demand prosperity, be enforced in time of recession? 20+ year austerity fault of Japan repeated in EZ? Or what?

        CommentedCarol Maczinsky

        That implies that principles and order are followed and previously agreed trust of Germans is restored. As long as we hear this immature rambling about growth policies it is difficult to take such positions seriously. the schäuble proposal of EU fiscal intervention was spot on.