Professor Sinn Misses the Target

I’ve written a post at the IIEA blog commenting on Hans Werner Sinn’s recent columns on the operation of the Eurosystem. Sinn has made some seriously incorrect claims and followed them up with dangerous policy recommendations. These columns have been cited approvingly by Martin Wolf, Paul Krugman and Felix Salmon over the past week.

Felix, however, has now read this post by Olaf Storbeck of Handelsblatt and doesn’t seem sure who is correct on these issues: He’s looking for “a central-banking wonk out there who fancies adjudicating this dispute”.

Well, with 11 years experience working in central banks, I suspect I meet the job requirements. I wrote my post before seeing Storbeck’s but hopefully my arguments back his up to help counter Professor Sinn’s somewhat wilder claims.

54 replies on “Professor Sinn Misses the Target”

I wonder why Sinn is writing such articles. I expect he knows Ireland is the main cause of the TARGET imbalances, but has a current a/c surplus. This is common knowledge.

So what is his motivation?

We must have run out of ‘local celebrity economists’ (-;



@ DoD

Indeed. Perhaps the blog could start earning us some export income by trashing other countries’ sleb economists.

As for your winking smiley face, get with the programme!

It’s not (-; it’s ; and then – and then )

and you get this 😉

Or if its really funny it’s : and then lol and :

And you get 😆


“Perhaps the blog could start earning us some export income by trashing other countries’ sleb economists.”

via paywall presumably, so it costs them to have a look to see if they are important enough, or currently making enough noise to be bitched about.

When the respected German Ifo Institute allows its Head to produce and spread garbage it makes one wonder about the stuff that is spewed out daily by some of our so called respected academic economists and economic commentators here.

Thanks KW

I am not that central bank wonk who will arbitrate this dispute. But it is obvious to me that Sinn is doing politics, not economics. He is campaining to push Greece out of the Euro Area and to stop the bailouts. Anyway, I am intuitively convinced that the result of his proposals would be the immediate and complete break-up of the Euro Area. Even a common currency between say only Finland and Germany would not function.

@Karl Whelan.

That was an excellent and well needed rebuttal.

I had read the Prof Sinn article, completely by chance. His explanations were difficult. His conclusions re settling the balance would straight away entail a reversion to individual currencies.

I was not aware, until reading your rebuttal, of how skewed his explanation of the Target system was or of how inappropriate his comparison to the US regional system was.

He has his audience in mind.

oh… Inspired by some recent associations to Lord of the Rings, Bini Smaghi etc., I think Karl now earns the title of the very like able character of Treebeard who did not hesitate once he saw the reality of Saruman’s plots to attack him in the ‘Ivory tower’.

Hmmm…. which brings me to Prof. Sinn, and I am really tempted to offer him the title of Saruman, not only for the descriptive features of this character, with white hair and beard, but perhaps also his qualities by just using his voice to influence entire nations.


Full Marks Karl!

@ All

I would agree with the view expressed by Incognito. The analysis of Sinn is obvious twaddle but that makes rebutting it rather easy and this may disguise a deeper truth. The basic question is WHY have the banks in the periphery become dependent on ECB unlimited liquidity support?

The answer, and one does not need to be an economist to know it, is that the capacity of the sovereign states to guarantee the solvency of their banks is in question. Until Ireland solves this problem – and the solution lies in Ireland and nowhere else because no other state is willing to solve it – we will continue to be grouped with the two other countries “to which the euro crisis has been confined”, to quote Rehn before the European Parliament yesterday.

cf. video. The Q & A with Juncker/Rehn begins at 8 p.m.

I would add the following. If these TARGET 2 imbalances would really be an issue (which I do not believe), there would be a very simple solution to solve the problem: scrap the national central banks! They are absolutely not necessary to conduct monetary policy.


The basic question is WHY have the banks in the periphery become dependent on ECB unlimited liquidity support?…….The answer, and one does not need to be an economist to know it, is that the capacity of the sovereign states to guarantee the solvency of their banks is in question.

I could not disagree more with you re this.

1. It should not worry Ireland in the least that the ECB is owed €150 billion. They choose after all to label themselves a central bank, but neglected to make it known to mere mortals, that when it came to LOLR, they were packing a water pistol.

2. The Euro bank bond/interbank lending is gone for many many years as far as peripheral country banks are concerned. Peripheral bank funding, other than through national deposits that have a revised and protected status is finished for the medium term.

3. Even bank funding for the stronger banks in “virtuous” countries is built on sand. The 2009 post Lehman’s collapse experience was enough evidence of that. In fact the ECB is only too well aware of how unsafe the quicksand that the eurobanking system is built on. That is one of its reasons for its continuing stance.

Until the ECB or EU put a proper central banking structure in place that allows banks to fail and allows banks to fund themselves through a central and fully insured facility, Ireland should have no sleepless nights about the money owed to the ECB.

In any case an exit from the EZ could hardly be worse that the present road to ruin.

@DOCM the Conflationist Spinner

‘… that the capacity of the sovereign states to guarantee the solvency of their banks is in question.’

It is NOT the function of the state to guarantee the solvency of any of its banks.

It IS the function of the state, and of the suprastate, to regulate its banking systems.

If the Irish Central Bank were to go bust (on its lendings to Irish banks) is the Irish state liable for those amounts?

Morgan Kelly was right when he named Namawinelake as the best source of information on the Irish economy. All we get here is the same arguments rehashed over and over by the same people – just under a different thread name – with never any new information. I found this site back in September of 2010 and dip in from time to time but, as soon as I see the names appearing, I know what’s going to be said.

It’s frustrating because the Irish public was probably never more engaged in public affairs and economic issues in particular over the past few years. Almost every Irish person has an opinion on the IMF, austerity, negative equity, the bank guarantee, property taxes, trends in house prices, risk of sovereign default, burning the bondholders, etc. and this website should be the first port of call for information on these issues. Features such as the essential day-by-day Greek Watch on Namawinelake should have had their natural home on this website. That blog is far better written, is more relevant, provides new and interesting facts and treatment of issues almost every day, and contributes greatly to public knowledge by, for example, analysing the bondholding of the Participating Institutions.

I cannot remember every finding anything here that changed my opinion or corrected a view I held – unlike Namawinelake where, in addition, contributions tend to be from those with some information not in the public domain which contributes to the debate. Be honest contributors – this site is tired and needs a total revamp in order to make it relevant.

Go on ahead Karl Whelan.

Who needs a green shirt when you have facts and cajhones!


(Thanks for that too)



@ Bunbury

whinge much? Given that NWL is a regular commenter on here, you somehow hurt you’re own argument by complaining so much…Perhaps you should, you know, not visit here if you don’t like it?

@ All

I think that I should make clear that I am not in any way suggesting that there is not value in debunking the views of Sinn, especially if in the process there is a wider international blog debate – for which Karl Whelan can take justifiable credit – as indicated by the link above. Indeed, certain eminent economic commentators may be viewing what they have written with a certain embarassment as a result (a point I made in relation to Martin Wolf some time ago).

My contention is that this cannot be allowed to distract from the fundamental problem resulting from the creation of a single currency with a Central Bank with limited functions while leaving regulatory authority with the member countries (which, whether David O’Donnell likes it or not, leaves them responsible de facto for their solvency, a reality blithely ignored by successive Irish governments – and economists – to the extent of not alone not having legislation in place to deal with such an eventuality but not even being aware of the need for it).

I would heartily recommed an hour and a half spent with Juncker and Rehn having regard to the manner in which they have dealt with a series of fundamental questions from MEPs yesterday cf. link above.

One could boil down the present political situation in Europe to a growing realisation that the euro is the currency of 17 countries and an equally strong feeling of exasperation with the one country that thinks that it is their old currency but in a different guise. Sinn is the very embodiment of this sentiment.

In short, if we want to get out of the quarantine ward, we will have to do it on our own. Indeed, given that Germany is likely to lose the argument on all issues other than that in relation to moral hazard, this reality is likely to be hammered home in the months ahead. To quote Schaeuble:

“For this reason, I am convinced that we cannot do away with the threat of higher interest rates for spendthrift states. If we did, it would shut down the premise by which the Stability and Growth Pact operates. Besides, I firmly believe that it would be a disastrous signal to send to the financial markets. They would immediately interpret it as meaning the Euro would now cease to be a stable currency. For this reason, I am convinced that we cannot do away with the threat of higher interest rates for profligate states”.

P.S. The following extract from the speech is a gross and blatant misrepresentation of what other countries are seeking from Germany. Nonbody is asking Germany to spancel the country’s “competitiveness”. What Germany is being asked to do its to cease administrative measures that promote the export sector to the detriment of other areas of her economy. Asking the peripheral countries to carry out a painful internal devaluation when Germany has needlessly done the same over the past ten years is also an economic folly.

“Besides, one does not resolve one’s own problems of competitiveness by asking others to become less competitive and one cannot permanently close the gap between expenditure and income by asking others for more money”.


Very little research done by Sinn and the other punter, then again why let the facts get in the way of a good yarn. Maybe Liam Delaney can post something about confirmation bias of certain dud academics and even worse bloggers.

– Note by Peter Garber of Deutsche Bank titled
“The Mechanics of IntraEuro Area Capital Flight”, 10 December 2010
Nice takedown here too

-Felix Salmon didnt look too hard, then again he’s got form for not being able to do bond maths, read BIS data…


@ Bunbury

Thanks for the tip! I was an infrequent visitor to NWL but today’s edition will make me change that, especially as it fits in with a conclusion to which I had arrived independently.

I think, in fact, that the two blogs should be viewed as complementary. This is the free-wheeling, stream of consciousness, Joycean version.

Tis a pity auld Bunbury doesn’t like our blog. We’ll all have to pick up the shattered pieces of our lives and carry on. 😥

Still, he’s got a point about how brilliant Namawinelake is. Who does it (or how many people are involved) remains a mystery but a pleasant one. Let’s just hope he or they keep up the good work.


How much do you want to bet? I can give you very good odds!


Just to repeat something elsewhere, deserves the nation’s gratitude for providing a forum to explain what’s happening and then allowing debate. Economists and academics here put their name to the site and moderate hundreds of comments per week, any one of which is a potential defamation landmine. If they ever hand out medals – and I think they should, did I read today from JtO that LBS received medals! – then they need to start with the folks who operate Not least because they’ll know where to find them; but mostly for the labour of love that operating this huge site must be.


I have come a bit late to reading your IIEA post. It is a model piece of economics writing on a very challenging subject. Well done! It is also vitally important to kill this particular fallacy, and, given their influence, I hope Martin Wolf and Paul Krugman follow Felix Salmon and admit they got it wrong.

For our domestic audience, however, I hope your highlighting of the true potential cost to other eurozone countries is not lost — the possibility of losses on ECB loans to Irish banks that would have to be made up by governments in a recapitalisation of the ECB.

It just goes to show again that intelligent people and experts in their field, can be blinded by existing strong positions, into saying stupid things.

In the US, Pew has reported that among Republicans, the most trenchant climate change deniers are the ones with an education.

Just to cheer up some of the folk here, entrepreneur Luke Johnson says in his FT column today: “I fail to see the point of professional economists. They purport to know about trade and finance, about markets and credit, but I struggle to identify the actual benefits of all their expensive advice and esoteric debates.

For example, they really should be able to provide the answers we need about job creation, but where are they? How are new jobs created, by whom and under what conditions? Countries such as Spain are crippled with 40 per cent youth unemployment: what pragmatic solutions do the economists offer to this disaster?”

It’s clear that the Bundesbank does not have direct exposure to the liabilities of countries like Ireland in Target 2. But that’s not the end of the story.
First, it’s clear that in periphery countries the liquidity of the banks has depended crucially on their ability to repo bonds through their local central bank. Thus the Irish farmer buys a tractor by borrowing money from AIB which gets the money from the central bank by repoing bonds.
This reflects the fact that the basic balance of the private sector of Ireland is heavily negative because of the outflow of funds. The current account is not the relevant issue here.
IF ( and it’s a very big if) things go wrong in Ireland and the bonds default with much lower recovery rates than implied by the haircut imposed by the Central Bank of Ireland and if the Irish government can’t make up the difference (which would seem likely in that case) there will be a big loss. That is a loss which has to be met by the ECB.
Now it is true that the obvious recapitalisation formula would be to use the existing ECB capital structure where Buba would put up around 27%. But the situation is a bit like the EFSF. If a country defaults, where does it get the money to pay the subscription? Just as with EFSF, a country in default can’t bail out anyone else. The cost has to fall back on those countries which do not default.
The guarantee that the ECB will remain solvent does not prevent it from making big losses in the event of major sovereign defaults by the countries in trouble. I believe that the ECB strategy, which basically aimed at concealing insolvencies in the banking system, has been irresponsible.
I wasn’t quite sure where to respond to your posts, here ot at the other site. But can I just make an obvious point about your other post? You say there that forcing Ireland to clear its Target 2 account would involve everyone handing over a full year’s income at once. Doesn’t that prove that Ireland HAS been borrowing, not direct from Buba but with the ECB as intermediary?

@ Bunbury

‘I cannot remember every finding anything here that changed my opinion or corrected a view I held – unlike Namawinelake where, in addition, contributions tend to be from those with some information not in the public domain which contributes to the debate. Be honest contributors – this site is tired and needs a total revamp in order to make it relevant’

NML is a great resource, but some of the threads here are extraodinarily enlightening. As DOCM says, it’s the Joycean version, with excursions into neighbouring sciences now and again, and cycle lanes for those who want to pedal gently through the technical stuff.

There is always a contradiction between efficiency and democracy in any enterprise. And then there’s the old saying about not looking a gift horse in the mouth. Its’ all collaboration, and sometimes a few days off helps us to get a bit of perspective. 🙂

@John McHale,

Completely agree. And three cheers for Karl. I read the Martin Wolf piece and instinctively felt on the issue Karl addresses that he was talking out of an orifice other than the oral, but I don’t have a grasp of the minutiae that Karl has presented to such devastating effect.

I sometimes wonder at these ‘learned’ commentators and the amount of baggage they bring when looking at economies and institutions other than those they are familiar with. (I have frequently found when working overseas with US (and even Canadian) ‘experts’ that they look at other economies and institutional set-ups through the prism of their own national experience. And I have frequently been compelled to sit them down, generally with a knowledgeable official in the country in which we’re working, to explain the ‘facts of life’.)

U.S. commentators – even lauded Nobel Laureates – fail to grasp the functionality of the EU and its institutions because, in a number of respects, it falls short of their union. But it remains a work in progress and we should celebrate the extent of its functionality and seek to remedy its shortcomings.

The EU is struggling because it relied on national governments and their bank supervisors and financial regulators to operate decentralised fiscal policy, bank supervision and financial regulation as if they were centralised. It would always have struggled to work in the absence of an EU-wide popular and democratic legitimacy, but the principal source of the current problem is that some national governments, quite a few national bank supervisors and financial regulators and many of the major players in the financial system were infected by (and allowed themselves to be infected by) the malign forces of financial capitalism that were released by the bonfire of financial regulation in the US in the late 90s, which spread to the UK and then to continental Europe.

So, in this respect, I think US (and UK) commentators on the EU and its problems should be more humble and restrained. (And I do wonder about UK commentators, irrespective of their erudition, and this instictive, atavistic distaste for anything to do with modern EU institutions that seems to permeate their utterances and writings.) As to Herr Dr. Sinn, I suspect, either deliberately or unwittingly, a political agenda is being pursued.

As a result I’m pleased that you highlight “the possibility of losses on ECB loans to Irish banks that would have to be made up by governments in a recapitalisation of the ECB.”

This is the key impasse and, despite all the sound and fury, we will always be forced back to this point. The ECB has been forced beyond its remit to provide indefinite funding support to the Irish banking system to replace the funding by the bondholders that so many would love to have seen burned and by the depositors who have taken fright. Unwinding this is the key challenge and it is largely out of our hands. So that’s perhaps why so much of the commentary seems to go around in circles.

@Michael H,

You’re being provocative – and to an extent I would agree. There are a whole range of issues beyond the banking fiasco and the fiscal deficit where economists should have something useful to say. But they seem reluctant or their models are broken and they don’t wish to reveal this or a bit of both.

Methinks Herr Sinn has taken the “gold-standard” element of the euro a little too far. Presumably he would prefer all the cash in europe to heap up in big piles in Germany, until there is such a shortage of cash outside that nobody buys any German stuff any more?

Mealsothinks that Herr Sinn should be more concerned at the manner in which large central bank credits are suppressing inflation indiciators. The CB rates (whether repo or ELA) don’t vary. They constitute a large sum of the most risky debt. Risk does not equal inflation expectations, but default has in the past led to inflation. Suppressing market indicators is a risky business…

By the way, it could also be that German banks are missing their high-yield taxpayer guaranteed debt now it is being repaid and not reissued. Is there a shortage of opportunities for stupid money?

@ Bond. Eoin Bond

That’s really very interesting and should be read in conjunction with the article by Schäuble linked by DOCM a couple of threads back.

Speaking of whom.


I feel I was unnecessarily snappy, to my own detriment, the other day and I apologise. It was a long day. I should learn a Paul Huntesque capacity to maintain an positive tone, whilst allowing for disagreement.

@ Bond. Eoin Bond.

The really interesting sentence in the letter is the final one: “I would be grateful for your support of these cornerstones in our coming discussions”. For cornerstones, read red lines: but whose? I think that Schaeuble is pushing the boat out too far and, as he has been involved in a tug-of-war with Merkel for influence in the CDU since the crisis began, I suspect that the issue will be booted upstairs by his finance ministers colleagues to the European Council where Merkel may well include the issue of dealing with the immediate problem of Greece in the final global package. Indeed, I do not see how this can be avoided in any case.

High wire politics with the risk of a major fall and considerable collateral damage (as Obama did not fail to point out in his press conference with Merkel, an event which may also be seen in retrospect as having played a role).

What never ceases to amaze me is the complete shallowness of the economic debate. This time it is Sinn, a Professor, who has so obviously spouted nonsense that another Professor can easily demolished him and in terms understandable by complete lay people like myself.

The equivalent in mathematics would be if some professor pointed out that the proof of Fermat’s Last Theorem was potentially unsound at line 400. Lay people would be completely unable to judge and it certainly would not have blog appeal.

It explains why we have sleb economists who specialise in making wild contrarian assertions. It explains why almost every journo and politician can risk a stab at some economic soundbyte knowing s/he would probably have as many Profs to back it as to denounce it.

Economics seems to me like football, that’s what makes it fun for the rest of us. We can watch professional exponents make some fantastic moves which we can fully appreciate but we can also recognises the same professional making a complete howler in the next five minutes. 😆


there may be a bit of an information asymmetry on this bet – but id still bet it all that you are either Morgan Kelly and/ or Mr T


Mealsothinks that Herr Sinn should be more concerned at the manner in which large central bank credits are suppressing inflation indiciators. The CB rates (whether repo or ELA) don’t vary. They constitute a large sum of the most risky debt. Risk does not equal inflation expectations, but default has in the past led to inflation. Suppressing market indicators is a risky business…

Can you elaborate a little. I don’t get the detail here.

Reading the full text of the speech by Schaeuble it appears a rational and carefully thought out method of dealing with certain “crisis” countries in contrast to the piecemeal rubbish emanating from the EU/ECB.
The letter merely seeks to give effect to the German plan and it will be interesting to observe the reaction from the rating agencies. If Scheauble can get away with the seven year extension on existing debt without bringing the whole house tumbling down, then he will have achieved a remarkable victory.
It is highly unlikely that the finance minister is engaged on a solo run…Angela is in the loop.

But, Hogan, suppressing market indicators – and markets, more generally – is what the EU is all about. Like all curate’s eggs there are good and parts to this. A possible good part is its attempt to pare back this layer of financialisation that adds little that is economically or socially useful and generates hidden systemic risk. But it is potentially harmful when it seeks to clamp markets because its institutional and procedural arrangements have been exposed as flawed, they need reform, the pace of reform, requiring political agreement, is glacially slow and markets respond almost instantaneously to the smallest change (or rumour of change) while the reform process is being worked through. It is equally damaging when barriers are removed and ‘national champions’ in the bigger economies chew up everything in sight and emerge as pan-European – even global – behemoths. And the benefits of the economies of scope and scale rarely flow to consumers.

@Joseph Ryan
“Can you elaborate a little. I don’t get the detail here.”
Let’s start with some suppositions.

Central Banks follow long-term interest rates and try and influence short-term ones. Short of exceptional interventions, their influence is normally quite small which allows them to follow markets rather than lead them.

New issues of sovereign and bank bonds are key parts of long-term rate averages. Currently, the riskier element is not being issued, so we are seeing a skewed average – only the stable and low-risk are being issued. So the medium and long-term indicators are broken.

Likewise on the short end, interbank borrowing costs are aggregated to produce euribor. The risky banks are not borrowing interbank. Therefore again the short-term indicator is broken.

Which leaves the ECB looking at current conditions to try and forecast inflation. Bond and borrowing yields are artificially suppressed. Current conditions lag inflation expectations.

You can argue that it is risk and not inflation that is screwing bond yields (both high and low), but you don’t know for sure…

@Paddy the American
Thanks for the link.

I suppose one way of looking at it:
If the ICB had to supply euros to the Bundesbank, it would be bust, as it would not have the euro reserves to supply.

But that is not the way the ESCB is designed. It is designed to have these surpluses.

What the number gives us, though, is the level of malinvestment that occurred. 300 bn flowed from Germany into the periphery where it presumably showed up as a surplus at the ICB. It was then frittered away on bling and tat and Bulgarian apartments (or whatever the Spanish, Portugese and Greeks frittered their money away on – submarines, fighter jets etc.).

Checking out the followup to Karl Whelan’s criticism is a good introduction to the joys of Google Translate. Here’s one commentator who is not convinced:

That through the actions of the ECB refinancing the countries concerned will be given effectively by the BuBa credit is, in my reading for meaning is not disputed by critics. They stress a more formalistic argument that the ECB is the counterparty of GIPS, as well as the Buba, and not the national central banks, but hey, what relevance would the institutional suspension for the economic-functional content of the procedure?

Okay, maybe we should let Martin Wolf handle it.

Amazing complexity – the MMT handbook in the States is a simple network in comparison to the Byzantine CB relationships withen the Euro area.

Even the very best must struggle to comprehend this many player, multidimensional chess set.
Imagine this game played on three different levels !!!

“Three-player chess (and other games) variants are the hardest to design fairly, because the imbalance that is created when two gang up on one is usually too great for the player to withstand. Some versions avoid this problem by deciding victory such that the third player loses as well as the checkmated player, leaving the player who delivers checkmate first to be the victor”

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