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ECONOMIC ANALYSIS
HANS-WERNER SINN
“COUNTERBALANCE THE CRISIS WITH
LARGE-SCALE INFRASTRUCTURE PROJECTS”
PROFESSOR HANS-WERNER SINN IS PRESIDENT OF THE IFO INSTITUTE FOR ECONOMIC RESEARCH, DIRECTOR OF THE CENTRE FOR ECONOMIC STUDIES (CES), CEO OF CESIFO INC
AND PROFESSOR IN THE DEPARTMENT OF ECONOMICS AND PUBLIC FINANCES OF MUNICH
UNIVERSITY, GERMANY
Text and photos ABERTIS
I
n these times of economic uncertainty, the experience and knowledge of experts such as professor
Hans-Werner Sinn is of vital importance. As president of the Ifo Institute for Economic Research, which
publishes the Ifo World Economic Survey measuring the
economic climate and making quarterly predictions,
professor Sinn has firsthand access to the most recent
perceptions of the state of the economy.
Could the results of the latest climate indexes be
too pessimistic matching the previous period of
real estate euphoria?
I find the pessimism justified in light of various other
indicators such as the sharp increase in US unemployment way beyond its 2003 peak or the unbelievably
sharp decline in German order flows and in the domestic German ifo index.
PRESTIGIOUS RESEARCHER
A
glance through some of professor Hans-Werner Sinn’s publications bears
witness not only to his academic importance but also to the influence
he has over economic policy. Hans-Werner Sinn studied economics at
Munster University and received his doctorate of political science from
Mannheim University. He began his academic career as a lecturer at Munich
University in 1984 and, since then, has been combining this work with
cooperation and research at other high-level international universities
such as Stanford, Princeton and the London School of Economics.
He currently holds the post of president of Ifo, a centre that publishes
regular reports on the state of the German economy, as well as promoting
various areas of research on the European and global economy. He has
achieved great recognition as one of Europe’s most influential economists. N
What have been the outcomes of the G20 meeting
that took place in Washington last November?
The G20 meeting helped to save the banking system by
defining rescue packages worth 3.3 trillion euros.
How is the crisis affecting the non financial sector?
Big companies are now suffering from a credit crunch,
because banks did not hold enough equity capital. They
should use their power to force their governments to opt
for a better and tougher system of banking regulation.
What type of measures to regulate the financial
market should be taken in the subsequent G20
meetings?
However, it has not yet come up with solutions for the
long-run stability of the banking system. For that we
need harmonized rules that force the banks to operate
with more equity capital, because with the tiny bits of
equity capital they use today they are lacking a sufficient buffer for bad times and, what is worse, they
begin to gamble.
What mechanisms could the governments use so
that the bailouts of the financial markets reach
also the non-financial sectors?
Governments should not bail out the non-financial sectors, because then we would enter a socialist type planning system. They should rather pump fresh equity into
the banks to enable them to provide sufficient credit to
the economy.
What are the reasons for the highly volatile stock
market witnessed?
Market agents are nervous. As the downturn of the
economy has just begun and the US price earnings ratio
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According
to professor
Hans-Werner
Sinn, any measure
that generates
infrastructure
investment would
be a step in the
right direction
now, including
public-private
partnership.
is still at its long term average there is scope for further
dramatic reductions in share prices. On the other hand,
the decline has already been sharp, and some believe
share prices cannot fall further. I belong to the former
group.
What is the playing field of the Governments in
order to try to counterbalance this trend and
minimize the social damages of the crisis?
We now need Keynesian demand policies. The most
important elements of such policies are large scale infrastructure projects and tax cuts. Infrastructure expenditure is aggregate demand and tax cuts create aggregate demand.
Do you think that the public budgets will need to
use privatisation and/or other schemes of publicprivate collaboration (e.g. public concessions)?
Any measure that generates infrastructure investment
would currently be good, including public-private partnerships.
Do you think Governments should invest more
actively in infrastructures as an anti-cyclical
measure?
I find it most urgent to abolish administrative constraints to infrastructure projects. In my country the
energy sector wants to spend billions, but cannot due
to political and administrative hurdles to investment.
How can the Western world manage this context
of economic downturn and changing geopolitical
balance to the east?
The European and American economies cannot slow
down the tendency to convergence, and they should
not. Emerging economies must grow faster, for if not
they will never catch up. With this I do not mean that
we should wait for the others.
What should the European and American economies do?
The west should keep going, and the most urgent
measure for that purpose is to overhaul the Anglo-
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INTERVIEW
“I BELIEVE IT IS URGENT TO ABOLISH
ADMINISTRATIVE CONSTRAINS
ON INFRASTRUCTURE PROJECTS”
COMPARISON OF GROWTH IN THE EURO ZONE
VS THE IFO INDEX OF BUSINESS CONFIDENCE
Sources: Eurostat, Ifo Business Survey, Germany.
Saxon financial system which is very badly constructed
in various dimensions, seducing households to consume
too much and save too little. The fact that the US
economy has absorbed the largest chunks of world
wide capital for decades rather than exporting capital
to other countries has been the major obstacle to
growth. The Americans have to learn restraint and stop
living beyond their means.
What recommendations would you give to the
governments in order to improve the environment under the current market conditions?
Local environmental problems can only be dealt with
locally, and global issues only globally. Dust, waste,
water quality, noise etc. are local issues, but the CO2
output is a global one. It needs a global response
through a post-Kyoto agreement in Copenhagen this
year. Let us hope that the US will now sign the treaty
and that China and India will accept emission constraints. Without that, European measures to reduce
the output would be counterproductive, as these measures simply reduce world energy prices and subsidize
the sinners. O
Professor
Hans-Werner Sinn
alongside Toni
Brunet, corporate
director of Studies
and Communication.
IN-DEPTH VIEW OF THE CRISIS
A
the conference on Prospects for the European economy and economic policy
responses, on 12 November, held at the IESE Business School, and at the
second international executive leadership meeting of abertis company executives,
professor Hans-Werner Sinn conducted an analysis of the European and Spanish
economies in the current climate, highlighting the extraordinary Spanish growth
of 60.8% between 1995 and 2008, topped only by Finland (65%) and Ireland
(144%). The outlook is far from promising, however, and a general fall in GDP
is expected. In Spain this will be due not only to the decline in the property
sector but also to its lack of competitiveness, which has led it to have the second
largest deficit on current account in absolute terms, beaten only by the US.
Faced with this outlook, professor Sinn proposed various measures that
should improve financial market capitalisation, in addition to harmonising
and strengthening international regulation.
He ended the conference with a warning of the difficult start facing the new
US president, Barack Obama: a world in recession and a North American economy
that will have to hold its excesses in check. N
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