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H.-W. Sinn
Austerity in Europe
Hans-Werner Sinn
January 2014
H.-W. Sinn
Summary of the
argument
H.-W. Sinn
Austerity of a currency union
as a whole
versus
Austerity of a sub-region
within a currency union
H.-W. Sinn
• The Eurozone needs austerity
in the south to realign
relative prices
• Austerity comes from
markets; policy softens
the budget constraints
• Exits may be better than
austerity
H.-W. Sinn
Hans-Werner Sinn
CESifo Munich
The Euro Trap
On Bursting Bubbles,
Budgets and Beliefs
H.-W. Sinn,
„Austerity, Growth and
Inflation: Remarks
on the Eurozone’s Unresolved
Competitiveness Problem,“
The World Economy 36, 2013
2014
Oxford University Press
H.-W. Sinn
The bubble
H.-W. Sinn
Net yields for 10-year government bonds
40
%
Irrevocably fixed
conversion rates
35
Summit of
EU governments
in Madrid
30
25
20
15
10
5
Germany
0
1985
1990
Source: Thomson Reuters Datastream.
1995
2000
2005
2010
Greece
Portugal
Spain
Italy
Ireland
Belgium
France
2013
December 2013 H.-W. Sinn
Net yields for 10-year government bonds
40
%
Irrevocably fixed
conversion rates
35
Summit of
EU governments
in Madrid
30
25
20
15
10
5
Germany
0
1985
1990
Source: Thomson Reuters Datastream.
1995
2000
2005
2010
Greece
Portugal
Spain
Italy
Ireland
Belgium
France
2013
December 2013 H.-W. Sinn
Unemployment rates in Europe
%
30
Greece
Spain
23
Portugal
Cyprus
16
Ireland
Italy
9
2
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Eurostat; December 2013.
H.-W. Sinn
Youth unemployment
70
%
(< 25 years)
60
Spain
Greece
50
Italy
Portugal
40
30
Ireland
20
Cyprus
10
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Eurostat, December 2013.
H.-W. Sinn
Industrial production
130
2008Q1=100
Emerging and
developing
economies
120
110
Ireland
100
Advanced
economies
90
Portugal
80
Italy
Spain
Greece
70
60
00
01
02
03
04
05
06
07
08
09
10
11
12
Source: Eurostat; OECD; CPB Netherlands Bureau for Economic Policy Analysis, World Trade Monitor.
13
H.-W. Sinn
The realignment problem
H.-W. Sinn
Real exchange rates
(GDP deflator relative to rest of euro area)
& necessary realignment according to Goldman Sachs
Q3/2008=100
140
120
Germany
Lehman
France
100
Portugal
Greece
Ireland
Spain
80
Italy
Italy
60
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Long run
target
H.-W. Sinn
Four dismal options
1. Transfer union
H.-W. Sinn
Four dismal options
1. Transfer union
2. Deflation in the periphery (austerity)
H.-W. Sinn
Four dismal options
1. Transfer union
2. Deflation in the periphery (austerity)
3. Inflation in the core
H.-W. Sinn
Four dismal options
1. Transfer union
2. Deflation in the periphery (austerity)
3. Inflation in the core
4. Exits
H.-W. Sinn
Austerity
or
soft budget constraints?
H.-W. Sinn
Bail out with the printing
press:
Non-investment grade
collateral for ECB refinancing
credit
H.-W. Sinn
Inside money and outside money
Monetary base
Eurozone
%
100
90
80
Inside money
non-GIPSIC
Monetary base
non-GIPSIC
81%
70
Base money
originating in
GIPSIC
60
50
Outside money
( GIPSIC Target balance)
55%
40
30
26%
Monetary base
GIPSIC
20
10
0
2007
2008
2009
2010
2011
2012
2013
H.-W. Sinn
Lending funds to euro countries
(Billion euros)
Paid-out to date
Cyprus (ESM)
Spain (ESM)
Portugal (EFSM, EFSF, IMF)
Ireland (EFSM, EFSF, IMF)
5
41
72
61
Greece (euro countries, EFSF, IMF)
213
Purchases of GIPSIC government
bonds by the central banks
of the other euro countries*
116
Target liabilities*
(GIPSIC)
639
Claims related to the
under-proportionate
issuance of banknotes
)
392
698
(36%) Parliaments
(64%) ECB
56
1090
* Updated 13 December 2013
H.-W. Sinn
Soft budget constraints
= abolishment of risk premia
ex ante
= credit bubbles and
overheating
= lack of reforms and
realignment efforts
ex post
H.-W. Sinn
Soft budget
constraints are
dangerous
Harold James, Princeton:
The Hamiltonian scheme of
federal finance did not
guarantee a peaceful
commonwealth. “In fact the
fiscal union proved to be
explosive rather than cement.”
H.-W. Sinn
Unsustainable debt
H.-W. Sinn
Debt sustainability requires
real devaluations, but real
devaluations increase the
debt-to-GDP ratios.
H.-W. Sinn
Actual and hypothetical public debt-to-GDP ratios
( 2012, % )
Official
Official public
public debt at
debt
competitive GDP prices
157
197
211
294
Ireland
118
114
Portugal
Spain
124
84
173
118
Italy
127
141
Greece
NB: without haircut
H.-W. Sinn
The way out
H.-W. Sinn
Three basic measures to
rescue the EU and the euro
1. Debt conference to forgive part of
the public debt, the bank debt
and the Target debt
2. Temporary exits of severely
uncompetitive countries
3. Harder local budget constraints for
central banks (settlement of
new Target balances, internal
gold standard like US until
1975)
H.-W. Sinn
A “breathing currency union”
placed between
Bretton Woods and the dollar
until the
United States of Europe
is founded
H.-W. Sinn
H.-W. Sinn