June 13, 2012
Hans-Werner Sinn, the president of the Ifo Institute and the director of the Center for Economic Studies at the University of Munich, compellingly argued that the euro cannot survive in an oped in the NYT this morning. That probably was not his intention. But as one of the respected economic voices in Germany, he showed how completely oblivious that country’s economic policy makers are to the steps that would actually be needed to address the euro crisis.
Mr. Sinn lays out how much money Germany has committed to the bailout of Greece, telling readers that Germans have taken on an enormous burden already to keep Greece afloat. He effectively is asking readers how much more can Germany be expected to give?
Of course that is not the relevant question. Germany will have to allow the European Central Bank to guarantee the debts of the debt-burdened countries. This will allow them to pay much lower interest rates on their debt, which will make the burdens sustainable.
The other step that Germany must take is to allow a higher inflation rate, propelled by more rapid wage growth, in order to allow peripheral countries to regain competitiveness. If there is not a change in relative prices between Germany and the peripheral countries then it will be impossible for them to reduce their trade imbalance, which is the central cause of their problem.
The appropriate analogy here is with putting water into a leaky bucket. Mr. Sinn is telling us how much water Germany has put into the leaky bucket of Greece. However it refuses to go along with measures that would patch the holes in the bucket. In fact, it doesn’t appear as though patching the holes is even on the agenda.
If Sinn’s views reflect the attitudes of German policymakers then the euro is doomed. Putting more water in the leaky bucket will not do the trick.
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