Monday, November 24, 2014

Soros versus Sinn: The German Question

"Germany's Choice" by George Soros

FRANKFURT – The euro crisis has already transformed the European Union from a voluntary association of equal states into a creditor-debtor relationship from which there is no easy escape. The creditors stand to lose large sums should a member state exit the monetary union, yet debtors are subjected to policies that deepen their depression, aggravate their debt burden, and perpetuate their subordinate position. As a result, the crisis is now threatening to destroy the EU itself. That would be a tragedy of historic proportions, which only German leadership can prevent.

The causes of the crisis cannot be properly understood without recognizing the euro’s fatal flaw: By creating an independent central bank, member countries have become indebted in a currency that they do not control. At first, both the authorities and market participants treated all government bonds as if they were riskless, creating a perverse incentive for banks to load up on the weaker bonds. When the Greek crisis raised the specter of default, financial markets reacted with a vengeance, relegating all heavily indebted eurozone members to the status of a Third World country over-extended in a foreign currency. Subsequently, the heavily indebted member countries were treated as if they were solely responsible for their misfortunes, and the structural defect of the euro remained uncorrected.

Once this is understood, the solution practically suggests itself. It can be summed up in one word: Eurobonds.

If countries that abide by the EU’s new Fiscal Compact were allowed to convert their entire stock of government debt into Eurobonds, the positive impact would be little short of the miraculous. The danger of default would disappear, as would risk premiums. Banks’ balance sheets would receive an immediate boost, as would the heavily indebted countries’ budgets.

Italy, for example, would save up to 4% of its GDP; its budget would move into surplus; and fiscal stimulus would replace austerity. As a result, its economy would grow, and its debt ratio would fall. Most of the seemingly intractable problems would vanish into thin air. It would be like waking from a nightmare.

In accordance with the Fiscal Compact, member countries would be allowed to issue new Eurobonds only to replace maturing ones; after five years, the debts outstanding would be gradually reduced to 60% of GDP. If a member country ran up additional debts, it could borrow only in its own name. Admittedly, the Fiscal Compact needs some modifications to ensure that the penalties for noncompliance are automatic, prompt, and not too severe to be credible. A tighter Fiscal Compact would practically eliminate the risk of default.

Thus, Eurobonds would not ruin Germany’s credit rating. On the contrary, they would compare favorably with the bonds of the United States, the United Kingdom, and Japan.

To be sure, Eurobonds are not a panacea. The boost derived from Eurobonds may not be sufficient to ensure recovery; additional fiscal and/or monetary stimulus may be needed. But having such a problem would be a luxury. More troubling, Eurobonds would not eliminate divergences in competitiveness. Individual countries would still need to undertake structural reforms. The EU would also need a banking union to make credit available on equal terms in every country. (The Cyprus rescue made the need more acute by making the field even more uneven.) But Germany’s acceptance of Eurobonds would transform the atmosphere and facilitate the needed reforms.

Unfortunately, Germany remains adamantly opposed to Eurobonds. Since Chancellor Angela Merkel vetoed the idea, it has not been given any consideration. The German public does not recognize that agreeing to Eurobonds would be much less risky and costly than continuing to do only the minimum to preserve the euro.

Germany has the right to reject Eurobonds. But it has no right to prevent the heavily indebted countries from escaping their misery by banding together and issuing them. If Germany is opposed to Eurobonds, it should consider leaving the euro. Surprisingly, Eurobonds issued by a Germany-less eurozone would still compare favorably with those of the US, UK, and Japanese bonds.

The reason is simple. Because all of the accumulated debt is denominated in euros, it makes all the difference which country leaves the euro. If Germany left, the euro would depreciate. The debtor countries would regain their competitiveness. Their debt would diminish in real terms and, if they issued Eurobonds, the threat of default would disappear. Their debt would suddenly become sustainable.

At the same time, most of the burden of adjustment would fall on the countries that left the euro. Their exports would become less competitive, and they would encounter heavy competition from the rump eurozone in their home markets. They would also incur losses on their claims and investments denominated in euros.

By contrast, if Italy left the eurozone, its euro-denominated debt burden would become unsustainable and would have to be restructured, plunging the global financial system into chaos. So, if anyone must leave, it should be Germany, not Italy.

There is a strong case for Germany to decide whether to accept Eurobonds or leave the eurozone, but it is less obvious which of the two alternatives would be better for the country. Only the German electorate is qualified to decide.

If a referendum in Germany were held today, the supporters of a eurozone exit would win hands down. But more intensive consideration could change people’s mind. They would discover that the cost to Germany of authorizing Eurobonds has been greatly exaggerated, and the cost of leaving the euro understated.

The trouble is that Germany has not been forced to choose. It can continue to do no more than the minimum to preserve the euro. This is clearly Merkel’s preferred choice, at least until after the next election.

Europe would be infinitely better off if Germany made a definitive choice between Eurobonds and a eurozone exit, regardless of the outcome; indeed, Germany would be better off as well. The situation is deteriorating, and, in the longer term, it is bound to become unsustainable. A disorderly disintegration resulting in mutual recriminations and unsettled claims would leave Europe worse off than it was when it embarked on the bold experiment of unification. Surely that is not in Germany’s interest.


"Should Germany Exit the Euro?" by Hans-Werner Sinn

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.


George Soros responds:

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.


Hans-Werner Sinn responds:

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; 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.


George Soros responds:

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.

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    1. CommentedMK Anon

      Argentina in 2001 had it's currency pegged to the dollars. As in the case of greece, this wasn't backed by competitiveness and the market soon realized this: borrowing rate increased to 30%, the peg was attacked and could not be maintained. This triggered a debt/currency crisis. So far the story is the same.

      But Argentina devaluated 40%, the shock was hard and brutal, GDP fell by 40% as well. But the recovery was as sharp: almost 10% growth for 10 years.. 5 years after the crisis, real GDP per capita was higher than before the crisis !

      Southern Europe, on the other hand, owed money to fragile german and french banks that could not take another blow from a devaluation of these debts.. but would highly benefit from the high interest rate payed by southern countries. Greece, unlike Argentina, was also subject to stronger political pressure from European neighbors: they were forced to stay in the Euro and pay their debt in Euro without benefiting from the low interest rate that should come with it. The German and the French government always making the minimum to make these countries stay in the Eurozone, so the banks could leech these countries longer and heal from their own excesses, pay their CEO and reimburse the northern governments.. It should also be noted that northern export-driven economies manage to keep exchange rate lower thanks to the indebted south, which is another source of profit they make out of the situation. But what's the result for the Greek people?? 5 years down the line, there is no growth, misery spread everywhere, nazi parties are on the rise. What a contrast with Argentina !

      After reading here the german position defended by Hans-Werner Sinn, I can't really say if he really means that Germany wanted to help the southern countries (and was really bad at it)? Or if he's just being sarcastic and cynical about it. But based on the comparison with argentina, one thing is clear: the “help” they received to stay in the Euro was totally harmful.

      One thing is also clear: southern countries should put an ultimatum:
      - either the ECB mandate is changed to target 4-6% inflation for the following 5 years (instead of ZERO or negative) and the eurobonds are created (alternative: northern EU pay the difference in interest rate). This will help them alleviate their debt and adjust wages to competitiveness (instead of a long and painful and depressing deflation, i.e. the current condition imposed on them)
      - Or southern countries leave and pay their debt in the new currencies they will print, which would destroy the bank and financial institution in the north.. which will be bailed out anyway by northern governments. Southern countries will suffer a fast adjustment, but at least will be free from the current deadlock.
      Facing such a credible alternative (because the South would win with each proposal), I am convinced the bank lobby will pressure Brussels and Frankfurt to increase inflation and pay the interest rate difference. But the problem is that the bank lobby doesn't face that alternative, because they already convinced southern government (through corruption, threat or lobbying, I don't know) to not present this dilemma to northern EU.

    2. CommentedDavid Donovan

      The better way forward is to create multidimensional currencies that will capture productivity-gains and restore the purchasing-power to the global citizenry.

    3. CommentedChris Elliott

      This debate has taken place under a restriction that has defeated it before a word was written. The economies of the world are based upon the cost of energy and its logistical applications. That unjust and inequitable foundation is about to be replaced.

      I have a theoretical question for both Mr Soros and Prof Sinn.

      There have been new energy inventors in the past that appeared to threaten the global economic structure created by the 13 families ruling the planet. Nikola Tesla is a most prominent example and he was destroyed by a jealous Edison and a misled JP Morgan. Electro-magnetic energy, clean, bio-friendly energy is not dead along with Tesla, it is very much alive.

      This is the core of my question: Say someone, who could not be stopped, were to release a new low cost, fast ROI, off the grid, energy device which once installed drew an endless supply EM energy from the Sun 24/7. Say it was designed in such a way it was scalable from a domestic residence, through a commercial user size to large industrial applications, and provided all the energy the owner desired. Say that the same device modified accordingly could power all adapted existing and new forms of transport, with unrestricted limitless performance! What would happen to your present economy and what sort of economy would replace it?

      You can dismiss the question if you wish but you will be faced with it one day very soon!

      My prediction is that by 2030 EM Energy will be the only power source globally. As we stand here now, all this debate over investment in which fossil fuel or alternative energy under pinning which Eurobond or which monetary system is a waste of energy literally, because the technology is already redundant and it is already past its sell by date. Only the greed of the few and fear stops the re-deployment of labour and funding of a new energy source, economy and global community.

    4. CommentedKathy Holland

      All of you are talking about one isolated solution.  As I see it, this particular discussion merely addresses, albeit a critical one, structural blockage of capital flows.  There is, of course, much more activity that must occur in order to restore foundations so that broadened productivity and wealth accumulation occur.

      I think too much burden is being put on Germany to commandeer and this leads to the high probability of conflicts of interest.  Better to have an outsider oversee and offer guidance.  We all know that the international community needs to reassess responsibilities due to a number of misleading blunders on the part of the United States.

    5. CommentedGerald Silverberg

      Sinn betrays a very defective knowledge of American debt history (the purported moral hazard created by Alexander Hamilton is nonsense) and thus too glibly rejects debt mutualization (Eurobonds) as part of a solution to the Euro's problems. See my blog

      Paul de Grauwe has just restated the case for a European Hamilton Moment in these (web)pages:

    6. CommentedBala Subramanian

      I believe the present solar-clock based monetary system has outlived its usefulness to the 21st century global economy. Pricing/valuations of monetary assets based on this solar-time will only distort the economic-management of global-societal-relationships.

      The better way forward is to create multidimensional currencies that will capture productivity-gains and restore the purchasing-power to the global citizenry.

      Neither Sors nor Sinn approaches advocate any solution to the built-in unfairness of the present-day money-mechanisms that ignore the biological and the non-biological realms that have remained disconnected since their conception.

      The future of money and monetary assets are irrelevant for individual and societal-well-being unless they are linked differently from the present-day economic theories.

    7. Commentedfrancesco totino

      very interesting !!! and according to what i wrote you about G 20 Worldwide Growth Strategy and global finance rules
      If we want to have a long term balanced social developmente we need take the following actions

      GROWTH Strategy for G20

      2 steps

      a) The EU economic policy must move simultaneously to worldwide (G8 and more ) political and financial reforms .

      No one economic policy strategy (on tax , on workers, on trade, on growth ) will have any effects on sigle countries without a common and accepted worldwide ( no one country excluded) agreement on beating speculation, corruption and finance abuse.

      Financial Derivatives still worth 14 times worldwide stocks exchange markets ...the situation became worse even after the 2008 crisis advice ... what are we waiting to fix rules and make them be observed ??? as every common citiziens have been asking since 5 years ???

      To overcame single countries and worldwide crisis we need to move all together sinergically .

      "Fiscal compact" agreement in Europe has been a good first step .... now we need

      1 ) a Global " Fiscal Compact,

      2) a global Balanced Budged in any other world countries constitution

      3) to abolish all worldwide Tax Heavens and make agrrement among governements to stop corruption in private and public business.

      B) Fixed this worldwide FINANCIAL /ECONOMIC target any single countries should simultaneusly start to reform deeply his domestic not only FINANCIAL but also POLITICAL AND PUBLIC Structure, a structure that has gained in the last years more and more importance in the success of all the economic policy actions. In particular a factor that affects economic development and that is common to both Politics and Pubblic sector is the corruption linked to political patronage, this factor has blocked the efficiency of the social system at any level in some EU countries like Italy, Spain , Portugal, Greece .

      From these point of view EU should fix immediately some social standard measures index to be applied by the singles EU country members that are particularly affected from inefficiency in political and public sector system.

      Eurobond could be a financial instrument useful to solve financial crisis in those countries that can demonstrate to cooperate both in financial and political and public structure reforms . Most of the time Financial results in single countries come out only if some political and pubblic reforms have been done .

    8. CommentedGregory Sims

      Concerning causes of the financial crisis in the Eurozone, I have to say I'm surprised that neither contributor to this (necessarily) long exchange mentions fraud, corruption, nepotism, hugely overblown public sectors (especially Greece, but also Italy), lack of democratic processes and - last but far from least - systematic tax evasion as factors (tax evasion being a massive problem here in Germany as well) - and those just for starters. Even though he treads ultra-softly on the issue ("walking on eggs"?), Professor Sinn nevertheless makes it clear enough in his contributions that there is a massive amount of political resentment in Germany concerning the bailout of the hugely indebted Euro member states. Those who don't regularly read German newspapers online (and I mean the respectable broadsheets, not the Bild-Zeitung) cannot grasp the depth and breadth of the animosity that is expressed by countless readers who vent their spleen against the "Euro-Rettung" and the almost complete lack of democracy involved in it. The main reasons behind the resentment and anger precisely have to do with the problems I enumerated (fraud, corruption, tax evasion, undemocratic processes, etc.), rather than frustration at uncompetitive economies. In this respect, the debate between Mr. Soros and Professor Sinn takes place in a very, very curious political vacuum. I would advise Mr. Soros to learn German, spend some serious time reading German newspapers and then (and only then) get back to us.

    9. CommentedPaul Peters

      A very unspoken angst concerns internal issues of Germany. Germany is a confederation of 16 states, each of which have their own financial policy. These local arrangements are not added to the public debt. If their arrangements (social security, healthcare and pension) are taken with the wrong set of pills (such as unsupportive due to an aging population) and regarded as toxic, then Germany can add nearly 4 trillion euro debt to add to their existing debt. So, Germany is investing on working their way into the future... which is ok and admirable, and in order to maintain the pyschological momentum it seems that 'austerity' is the thing that does it for Germans.. especially since they've only recently finalized the payments for WWI there is a renewed sense of freedom and self-governance. But that also means that Germany is not as rich as other EU members, so the public view of Germany as "the" engine of Europe is simply not true. But this idea of self-governance is reflected and projected onto other members of the EU. That is not bad, per se. It is in fact nobel. Unfortunatelly other countries are not as responsible and also joined the EU with a different notion of "union". The thread faced by the EU is larger than this though, but there is no history book on the future and the effects on productivity due to ongoing automation, digitalization and now the emergence of modular robotics and artificial intelligence, make mass unemployment an unfortunate reality if any of the EU members continue to grasp to a medieval economical model.. Shame on all.

    10. CommentedDan Adams

      That went back and forth and in the end we agreed Germany will not accept Eurobonds or leave the euro so its all pretty hypothetical. Interesting nonetheless.

    11. CommentedPatrick Lietz

      For Germany to support the other countries and softening the pace of further austerity measures, it would have to let go a defining aspect of its post WWII self-perception: the German Constitution and its revered guardian, the German Supreme Court.

      That is more than many are willing to pay, particularly as there is no guarantee that Southern Europe would put its renewed access to cheap credit to good use. In addition, none of these countries seem to be willing to put their own sovereignty at disposal either, but they demand it of Germany.

      The one thing that Sinn underestimates in my opinion are the exit costs for Germany. We have no idea how that would affect the banks and what kind of Derivatives domino could be triggered. I also think that a country that is as export oriented as Germany would suffer economically much more than he is willing to admit.

      My issue is that I do not see a constructive way forward. The coming months and years are going to be challenging.

        CommentedPaul Peters

        Coming down hard on banks in the wrong way is counterproductive. The brains they employ are in trade but their societal role is with retail banking and providing loans to small businesses. Most lack the competence to gauge any such loan.. and in time when that didn't matter and it was just a case of bellybrain logic things worked fine. Making them adhere to all kinds of rules and risk management about things there is no basic understanding of is having bank upon bank retract from this segment of the market.. and in that way they are murdering innovation or any natural eb and flow in the normal economy. Of course, even random trading and following the main stock market indexes will provide plenty of income for most banks and as long as we're in this long globalization shift from an economy of scarcity to economies of information, when trading information itself it is pretty much a win-win situation for the banking sector. Now, governments can try to suddenly act as if they have an ethical hickup and enforce all kinds of halfwitted policies, but indirectly they are responsible for the entire malaise in Europe. Instead of ending up imprisoned in a downward spiral of overregulation it should be common sense that ambiguity is a reality and giving someone the benefit of the doubt is the best policy. Upto now, more than half my years as a wannabe entrepreneur my doings are obstructed by 'guilty until proven innocent' policies which by any measure are borderline insane. If the state isn't sucking my wallet dry, then the banks guarantee that nothing lands in it. For all these good people that yearn to do something of value.. that is by far the majority. So why do most policies focus on the 2-4% wrongdoers? Outgroup homogeneity bias does of course play a role, but only as much as it is used to amplify nationalist tendencies.. and there we also have something.. nations are the wrong scale, the wrong solution to address such problems. Second rate politicians who didn't make it in Brussels have come to dominate what is a dying institution struggling hard to survive, and they can't make it happen, not matter how savvy their marketing advisors are.

    12. CommentedRalph Musgrave

      Soros is too pessimistic: periphery countries ARE SLOWLY regaining competitiveness. What the periphery SHOULD DO is impose a wage, social security and profits freeze: or even a 5%pa wage and profit cut. That would equal devaluation and would solve the problem in two years.

      Of course that would cause a few riots. But the peasants like having a good riot once a month regardless.

        CommentedMiguel Guedes

        Mr. Musgrave, I live in portugal, and I can assure you that wage and profit cuts in this country over the last 2 years are well above 15%, forget the 5%...and the public deficit worsened dramatically despite the trade deficit shows signs of correction. However this trade deficit correction came through rising exports to ex-colonies (not dependent on low wages), especially construction contracts, and , surprise, dramatic import reduction following sharp domestic consumption and investment contractions. But as soon as investment goes up (and there is no other way to get to positive growth), so will imports, and... The point I am making, is that periphery countries problems will not go away by simply lowering wages or if you want to use another word ... devalue. It is the "structure" of production in these coutries that should change, meaning produce less textiles and produce more of something else which is not as exposed to cheap asiatic or other competitors. Competitiveness, is not merely a function of wages, it depends crucially on the sectors a country specializes. To achieve this structural reform a country needs time, and good honest governments. There is also a myth that mediterranean coutries are not hard working. That is not true: in portugal we work 40 hours/week, with 22 days off per year this to get 485eur (min. wage) in our pockets everymonth (although you need to add this 414eur twice every year)... and you can only retire at 66 to enjoy the max pension. So we do not lack hard work, we lack intelligence!

    13. CommentedJohan Luthor

      Sinn says that "Germany will not accept Eurobonds" since it would be against the rules (German Constitution and EU Treaty) and since the current political leadership in Germany is against the idea. In addition, the German people would not accept eurobonds if asked in a referendum.

      This is the standard line from respondents on the German right, at least although it is entirely hollow and illustrates Germany's continued obsession with "rules" (at least as long as they are to Germany's benefit) as opposed to adapting to an evolving situation in order to improve things and in order to avoid disaster.

      Nobody ever assumed that the Maastricht Treaty could not be amended. On the contrary, is has been amended several times since the early 1990s and could be amended again, as required and according to the usual procedures. This also applies to the German Constitution, of course. The current status is that Germany is member of a currency area involving 17 states but Sinn's line of argumentation is that the other 16 should entirely fold and adapt to whatever internal, national, German rules and politics may dictate at any given point in time. Running the world's second currency in this way with the cart before the horse leads to the guaranteed disaster that we are witnessing and that Sinn appears oblivious to.

      If Sinn truly believes that Germany never will accept amending the rules as necessary in order to avoid disaster, he should say that the whole project has been a terrible idea and that the euro should be dissolved.

      Sinn, also faithful to German tradition, only focuses on the lack of competitiveness in Southern Europe as the only reason for the current disaster. If only the non-Germans were more like Germans. Sinn's long text however lacks any indication as to how the current crisis should be resolved. Is he suggesting that Southern Europe should continue down the path of internal devaluations to the point that the economic and social fabric in those countries have been completely disfigured? This seems in my view to be profoundly dishonest since such a recommendation implicitly consists of gradually pushing Southern Europe to the point where they catastrophically leave the euro zone, probably under chaotic circumstances. The EU should be about avoiding "divide and rule" although Germany is doing just that, using the existence of "rules" as a very weak intellectual alibi.

      Sinn's, and so many other Germans', mechanical obsession with "the rules", and the corresponding absence of open-mindedness, vision and leadership is truly depressing. What will it take before they understand that they are perceived by everybody else as the bureaucratic guardians of the Greater D-Mark?

      Soon a euro zone break-up will feel more like a promise than a threat.

    14. CommentedWalter Gingery

      Seriously, though. . . . It seems the two sides are talking past each other. George makes some good points, but even he has to admit the Euro Bonds would be only a stop-gap measure, until the peripheral states could get their acts together and restructure their labor markets so as to become "competitive." And how much confidence can one really have in the Italians? Perhaps a German Eurexit is the only sane course, after all.

    15. CommentedWalter Gingery

      Welcome back to the Further Adventures of Tintin. Today's episode features George of the Sorrows vs. Professor Un-Sinn. Stay tuned. . .