HWS: Adjustment within the Euro Area

This FT article covers a lot of ground – here.

11 replies on “HWS: Adjustment within the Euro Area”

Sinn states that ‘ If the ECB stuck to a more conventional definition of monetary policy it would give markets a better chance of correcting Europe’s imbalances’ and is an attack on the Bank’s use of non-conventional policies rather than the recent rate cut. He argues that the ECB’s efforts to support the debtor economies (or the South in his terms) is slowing the necessary economic adjustments required in those economies to restore some competitiveness. But surely that change in relative prices (assuming it is possible within the single currency area) may require massive deflation in the periphery or moderate deflation depending on the monetary stance of the ECB, which at the moment appears to be too tight given the relative strength of the euro and the dismal performance of the economy.

Professor Sinn persists on demonstrating his complete ignorance of monetary economics. (He used to be a mediocre public finance economist).

We now learn that “all central bank money issued in Germany effectively comes from abroad.” Hmmm.

Has he considered that this is because the bad assets that (he now claims) underpin the money supply must have (ultimately) been bought from Germans? How else would the money have gotten into Germany (except in exchange for assets now held at the ECB)? Would he rather that the bad assets were allowed to default (and not supported, temporarily, by the ECB)? Irish taxpayers certainly would.

Whatever about his lack of understanding of the basics, Professor Sinn makes his agenda very clear. He objects that, because the ECB has an OMT programme, it “is escorting private German savings again to southern Europe, where they are reluctant to go voluntarily.” In other words, he wants German savings to come home and does not want the ECB to act as a lender of last resort.

Even though he does not understand the basic mechanism, Professor Sinn wants monetary union to persist only for as long as it completes the bail out of German savers. He might well get his way.

A feature of Sinn’s analysis which he said in Dublin, from memory, is that the Euro should be more like a club that it was less of a big deal to join and leave. He thought some of the adjustments required in various countries were so extreme that they’d be better off leaving.

HWS gave a more complete exposition of his analysis in the FT in July:


He does indeed believe that countries should be able to leave and rejoin the Euro system. Also that Germany should accept higher inflation. The part that Irish readers may not like is that he rejects banking union or common liabilities such as Eurobonds. However his views are not as unreasonable as his detractors often portray them.

If the learned professor wants to solve the problem of dodgy collateral being posted by banks in the EA periphery to gain financing through ELA i.e. from its own central bank in the first instance, he should surely be in favour of solving the problem giving rise to it through the creation of a properly functioning banking union.

The idea of a currency union as a kind of Lanigan’s Ball is hardly credible.

Sinn wants Spain, Greece and Portugal to deflate by a further 30%.
Greece this year will -4%, only another 26% to go.
“all central bank money issued in Germany effectively comes from abroad”.

The peripheral people being deflated will surely make the connection some time soon.

I’m pretty sik of Sinn at this stage – but the zenophobic prof has his followers in both the academic [where being totally wrong seems to matter as little for economists as bankers] and political german communities …..

Exit Clause: Merkel’s Partners Want Broke Countries Out of Euro
By Peter Müller

Chancellor Angela Merkel wants the next government to be unified on its EU policy, but her sister party is resorting to populism. Bavaria’s Christian Social Union wants tougher provisions against deficit offenders and the ability to drive them out of the euro zone.

What they didn’t reveal is the fact that the 12-page paper they negotiated in a working group covering European issues also includes a short note that has been appended to the minutes. In the text, which has been seen by SPIEGEL ONLINE, the CSU, the Bavarian sister party to Merkel’s CDU, calls for repeat deficit offenders to exit the euro zone.

“The CSU wants member states who will not be in a position in the foreseeable future to fulfill the stability criteria of the Maastricht Treaty to be given the possibility of temporarily leaving the euro zone,” the text states. The CDU and the SPD take a different view from the CSU and no compromise is in sight.


Hopefully some unexpected hurricane force_9 will ‘force’ radical change – in its absence it is extradinarily difficult to be optimistic from a citizen_serf perspective.

@David O’Donnell

re: “sik of Sinn”

Off thread but, knowingly or unknowingly’ , you have phonetically captured some words of the well Wilfred Owen poem, ‘Dulce et Decorum Est’.
“If in some smothering dreams, you too could pace
Behind the wagon that we flung him in,
And watch the white eyes writhing in his face,
His hanging face, like a devil’s sick of sin,
If you could hear, at every jolt, the blood
Come gargling from the froth-corrupted lungs
Bitter as the cud of vile, incurable sores on innocent tongues,
My friend, you would not tell with such high zest
To children ardent for some desperate glory,
The old Lie: Dulce et decorum est
Pro patria mori.”

Worth linking in full:

Prof Unsinn does make sense sometimes and he has highlighted “the dire state of the household-relevant services sector” while the majority of investment was going abroad.

There is an interesting statistic comparing German and US real average hourly wages in the period 2010 using US and German data.

German wages rose a real 30% compared with 6% in the US. That’s not denying low pay issues in both countries.

 Energies are concentrated on the capital and knowledge-intensive export sectors, including the final stages of production, but the price is an excessively rapid destruction of labour-intensive domestic sectors, which causes losses in employment and growth. The fact that the excessively rapid growth of the export sector, an unavoidable by-product of Germany’s over-specialisation, is perceived as a sign of success by the public contributes to the difficulty of realising that there is a problem at all.

Germany became the second-largest capital exporter after China since the euro announcement in the mid-1990s. The lion’s share of its savings flowed to other countries, instead of being invested at home. On average, from 1995 to 2008 no less than 76% of aggregate German savings (private, governmental and corporate) were invested abroad, while only 24% found their way into the domestic economy. Germany exhibited the lowest net investment rate of all OECD countries, together with the second-lowest growth rate among all European countries. The performance of a euro-winner ought to actually look a bit different than this.


@Joseph Ryan

Unknowingly; but I am familiar with the poem and its classic ‘old lie’. Ta for the link.

Spose Diarmuid Martin’s hungry kids might recite:

Dulce et decorum est

Pro patria fame enecare.

[me Latin ‘s a bit rusty so I’m open to correction]

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