Ideologies Redux

Have you heard of Hans-Werner Sinn? If you have not (like I had not until very recently) then as a quick search in Wikipedia could have indicated, he is an economist and the President of the Ifo Institute for Economic Research. So far so good. According to an article in today's Spiegel he is also promoting the idea that Portugal and Greece should temporarily exit the monetary Union until their competitiveness is restored and then return to it.

(Sigh) Some people never see the real world... First of all, let us assume that it is indeed better for Portugal and Greece to exit the monetary Union. Then they exit, and supposedly nothing bad happens during that transition period. Then let us assume that, after some unspecified period of time, their competitiveness is finally restored. Then why on earth would theses two countries ever want to return to the monetary Union? Their competitiveness is high, they still do not pay tariffs for goods to and from the EU because they are still members and they possess an ability to devalue their currency every time their public debt reaches high levels.

Then, if relatively small countries like Portugal and Greece should exit then why not Spain or Italy? What would stop them from returning back to the peseta and the lira? The plan Sinn is proposing is not one of strengthening the Union but one of demolishing it. People do not realize that if one country exits the Eurozone then many will follow. And many, (amongst them myself) have stated it in the past: we need more solidarity not more division.

We have also assumed that nothing bad happens to Portugal and Greece if they exit the monetary Union. But if you would remember, I had posted the following chart about inflation rates after the Euro induction in the Eurozone countries:

On average, inflation in the Eurozone countries was higher by 0.95% in the times after the initiation of the Euro than before. (for a detailed analysis I would refer you to this) You may imagine the chaos that would be presented if they suddenly returned to their own currency. Another round of high inflation would render the nations completely uncompetitive for the at least the next 5-10 years.

According to Sinn, "Euro-zone member states have made available €1,400 billion ($1,780 billion) in bailout loans, €700 billion of which has been contributed by the Bundesbank through its TARGET loans. On top of this, there is the ESM with €700 billion, which is to be leveraged to €2,000 billion with the help of private investors. This stabilizes the capital markets, but it also destabilizes the remaining stable European states and wipes out the savings of retirees and taxpayers." 

What he seems to be forgetting is that the way out of the crisis is by the devaluation of the currency and not by letting it remain at high levels. Yet, he seems to remain stuck to the idea of a strong currency. I fail to see how the bail-outs would have caused any harm had the Germans allowed the ECB to just print money. Yes, I can understand that this is something against German ideology of strong and stable currency, but how could this have hurt German taxpayers and retirees? Had Germany not wanted to play the part of the lender of all nations then none of this would have made sense.

By allowing the ECB to print money in order to finance the ailing nations, then the Euro would have just been devalued and no harm would be possible for the German taxpayer or retiree. On the contrary it would have boosted German as well as EU exports.

I am not blaming the Germans for this situation. Just some of their politicians and policymakers. But having an economist state that an exit and a return of a country in the Union is the best alternative to this situation is just the case I presented here where economists do not consider a real world with implications for every action. In addition the German taxpayer should not be worried if his/her government allowed the ECB to function the way a real central bank does. Only if...