Tuesday, November 19, 2013

The Economist Hans-Werner Sinn

Krugman in last Friday's op-ed wrote about the euro crisis and the German reaction to the ECB rate cut. He mentioned the reaction of economists to the decision. One of them was Hans-Werner Sinn:
The influential German economist Hans-Werner Sinn declared that Mr. Draghi was just trying to give Italy access to low-interest loans.

Now, I am not going to defend this statement; and yes Sinn has said something along those lines, but one has to know that what he says in interviews  - for some reason - has nothing to do with his own economic analysis. I have called that "Bei├čreflex" ("biting reflex"). I think his negative feelings towards Draghi make him say things that are completely incompatible with his view on the crisis. A few days ago, Sinn gave an excellent, but sadly German talk on the euro crisis and offered a possible solution:

  • Some countries cannot stay in the euro. There should be debt relief talks to reduce the debt to a manageable level, and then Portugal, Cyprus, and Greece would have to leave the eurozone.
  • The  austerity policy in southern countries primarily leads to mass unemployment; and the deflationary adjustment is too slow.
  • Therefore, Germany should accept much higher inflation. He mentioned 5.5 percent for ten years; but he says that Germans will have a hard time tolerating such a high inflation.
He also criticised the German trade surplus. He said that it only makes sense to have high exports now, when one can expect to import more in the future.He showed that the "return on investment" on German savings is because of the rescues already very low.

Personally, I disagree with countries leaving the eurozone. Either they leave or they accept austerity; it is absolutely crazy to first take a hit through austerity and then accept another one by leaving the euro. If that should happen, then there is not only a significant risk that the currency breaks up, but this might also cause a revolution in the countries, so such a step is politically unacceptable, now.

He is against euro bonds and a banking union, which is designed to solve today's solvency problem, but agrees that there should be such an European institution to solve future banking crises. In fact, his idea of reducing the debt to a sustainable level in talks would be in my opinion more democratic (sadly in the current European "Union" democratic=infeasible) than through hiding the unsustainable part in eurobonds. Still, the euro had only one goal: to begin the creation of an United States of Europe; and that is the only way how to make the single currency work in the end, so either eurobonds come or the euro has to go in my opinion.

Also, Hans-Werner Sinn strongly opposes the ECB's OMT program, which Krugman called heroic. Sinn's criticism is based around a democracy problem, which is at the core of OMT: either the rescues are fiscal issues, then it is the job of the ESM and therefore in the end the parliaments' task to help, or assessing the risk and therefore acceptable spreads over German bonds are a monetary problem, then it would be the ECB's job. Again, since the eurozone is far from a perfect union I think that those lines between fiscal and monetary policy are very much blurred. 

Hans-Werner Sinn was one of the economists who came up with Germany's beggar thy neighbour policy of the last decade, but today thinks said policy went too far and the resulting trade surplus is not helpful, since a large chunk of the savings associated with it are at risk for example through target2:

While I do not agree with him on many particular issues, I do think that the solutions he presents are a good basis to find a workable solution to the crisis. That is not typical for a German economist. The "normal" German economist can be substituted with a parrot and nobody would realize that something has changed, since to them all solutions to any problem are "structural reforms" designed to slash the welfare state everywhere.

The political person Hans-Werner Sinn is strangely a completely different beast than the economist. He seems to be able to take on any position completely independent from his own research, which leads to a the weird situation that he sometimes contradicts himself within months.. several times. I have written something on that phenomenon.:

We are talking about a man who wants to go forward almost exactly like the [euro-sceptical party] AfD does, but warns that others might help the party. He believes that Germany has little say in austerity decisions, but at the same time can force through any decision. He thinks Germany should accept higher inflation, but he is against wage increases and stimulus programs  that would make that possible in a time where monetary policy has "lost its impact".

I really don't understand why that happens, but since it does: what is wrong with German journalists that they let him get away with it?

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