March 14, 2010 / 3:22 AM / 10 years ago

Reuters interview with Ifo head Hans-Werner Sinn

MUNICH, Germany (Reuters) - The head of the Ifo economic research institute told Reuters in an interview a European Monetary Fund risked skewing the incentives of debt-ridden euro zone countries, thereby endangering the euro.

The following is the transcript of the interview with Ifo President Hans-Werner Sinn:


“I think very little of this concept. I fear that the fund would become a redistribution system, distributing the resources of the more prudent countries to the less prudent ones. That would then be the remuneration for lack of prudence in the past and would create new opportunistic incentives for the future.

“I can imagine that such a fund would be created after the crisis was overcome. Then European countries would need to re-negotiate the Maastricht Treaty and set clear financing rules for such a fund with contributions dependent on debt ratios. That would be a fair insurance—the sinners pay for themselves.

“What really irritates me is the way governments are hurriedly trying to bring this fund into being. That just goes to show that they are not trying to find a solution for the future but a solution for the current problems of Greece and other weak countries. Then it really will just become a redistribution system.

“The EMF can offer Greece money. The Greeks would of course want that. If they don’t have to get themselves into more debt, but are simply offered the money, then that is a solution for them. But it is a catastrophe for Europe, because Greece is not the victim of an external crisis, but it created its problems itself.”


“I think it is wishful thinking of politicians to expect the country to regain stability through budget consolidation. Even if Greece’s budget disappears completely, the country will still have a current account deficit of 9 to 10 percent that it has to finance. The problems are far too big for the country to be able to find a way out by simply saving.

“Greece cannot get around a depreciation. Greece must decide, whether it wants a depreciation in or outside the euro area. If it wanted to depreciate within the euro area, it would have to significantly reduce wages and prices. That is the recipe for a national uprising.

“It would be much easier to depreciate outside the euro area, if part of the country’s debt was simultaneously cancelled. That is the more socially acceptable way with smaller complications. I certainly see a potential endangering of the euro through a domino affect.

“But I see an even greater risk to the euro if Greece’s deficit is solved through transfers from other countries. Then there would be a European financial transfer with unforeseeable consequences for the financial conduct of member countries. That would damage the euro even more. The whole thing is a tragedy, because there is no possibility of solving Greece’s problems without causing collateral damage.”


“The IMF should help Greece. This is why all countries recently made a further 500 billion dollars available. You cannot expect then to pay a second time for Greece, when they have already paid. And the IMF can overcome the inevitable protests among the population a lot better than a European institution. The IMF sits a long way from Greece and can incur its wrath.”


“The bond auction showed that the markets expect the EMF to be founded with corresponding state transfers to support Greece. That is a realistic expectation, given that the German government, which would be the biggest paymaster, has already pronounced itself in favour of this. The markets clearly already knew this.”


“The euro is not endangered in the sense that it will collapse over this. You have to remember: the euro is a success story for Europe. It spared us exchange-rate volatility throughout this crisis, that would otherwise certainly have arisen.

“But the issue of Greece is definitely a threat to the euro. The best solution for the euro is to stipulate functioning, strict debt limits on countries. The Stability and Growth Pact was not meant seriously from the very beginning because it did not set up automatic sanctions for those countries which breached it. Instead it set up a system whereby the sinners get to help decide, whether they should punish one another.

“Judging by the range of purchasing power parities, based on the U.S., OECD and German basket of goods, the euro is still extremely strong. It is in the top margin of purchasing power parities and is therefore overvalued from a long term perspective. But it has to stay overvalued for many years, so that the U.S. can reduce its current account deficit.”


“Credit Default Swaps strongly destabilised the markets. On normal insurance markets, it is evident that you can only purchase an insurance on an insurable asset...This should also be the case for CDS: you should only be able to buy CDS when you have an insurable asset.

“It is also necessary to regulate hedge funds and private equity firms. They do business in a similar way to banks, for the most part also with CDS. These are risky bets, for which banks don’t need to back with equity capital.

“The main problem in the banking system is that too much business is being done without equity capital backing. That means that the risk is being transferred onto the backs of others, the creditors of financial institutions or even the taxpayer, who have to rush to the rescue when things go wrong.” (Reporting by Sarah Marsh and Irene Preisinger)

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