Analysis: German view of the euro suggests current calm may turn to fresh turmoil

Analysis: German view of the euro suggests current calm may turn to fresh turmoil

Anniversaries of recent events are falling thick and fast. Sunday marked a year on from the most dreadful of these: the twin earthquake and tsunami in Japan that produced a third disaster at the Fukushima nuclear reactor.

All else pales besides this. But last week also saw the third anniversary of the US stock market’s lowest point in the wake of the Lehman Brothers bankruptcy, and this week will mark five years since the start of the sub-prime credit crisis when US mortgage company New Century Financial filed for bankruptcy.

(The ‘credit crunch’ took a little longer to feed through to the UK with the collapse of Northern Rock in September 2007).

The fall out from that crisis remains with us, one manifestation being the ongoing debt deal between Greece and its creditors – described by the Financial Times as “the biggest sovereign default in history”.

The extent of the unresolved problems in the economy was laid out at German travel trade show ITB by Hans-Werner Sinn, president of Germany’s Ifo Institute for Economic Research.

Sinn did not mince his words: “I don’t know Europe can handle the debt problem,” he said.

One of Germany’s foremost economists, Sinn insisted he was “slightly optimistic” on the grounds that: “By and large we do not have to fear a repetition of the Lehman crisis.”

That appeared to be the sum total of his optimism despite the fact that the German economy is growing at present – and the country’s travel industry doing rather well. “Western Europe is in recession,” he said, “even though Germany is not.”

Sinn acknowledged the good news from the US, suggesting a recovery in the world’s biggest economy. “The US showed a strong recovery in February, but American consumers are more pessimistic than after the attack on the World Trade Centre,” he said.

“Whether the US growth is sustainable is the question. It is driven by the enormously expansionary monetary policy of the Federal Reserve.

“There has been no recovery in the US house price index which burst in 2009. January 2012 was worse than January 2009. The US recovery might be artificial.”

Then he turned to Europe and a sharp characterisation of the pre-crisis period: “There was an artificial boom in Greece [and other countries now suffering a debt crisis] created by cheap credit from Germany, often via France.

“There was a party where the credit went and stagnation in Germany where it came from, which had the lowest rates of growth in Europe. Prices in the crisis countries appreciated by 30%. Germany suffered a depreciation of 22% through price changes.”

Now, he said: “Prices in Greece need to come down by 30%, to the level of Turkey. So far Greece has received [or had pledged] €500 billion (£417 billion), almost three times its national income.

“An alternative is to leave the euro, return to the drachma and devalue. There would be a lot of turmoil, possibly a bank run, but once it was done tourists would return and the Greeks would no longer be buying Dutch tomatoes but growing their own.

“Another alternative is that Greece can stay in the euro and cut wages and prices by 30%. But this is impossible. It is what Germany did in 1929-33. So the only possibility is for Greece to exit the euro zone.

“Greece stays in now only so investors can redeem some of their investment. The Greek population has become the scapegoat for these investors. It could destroy the euro if this continues.”

Sinn estimated the total rescue funds so far set aside by the European Central Bank (ECB) and the European Financial Stability Facility (EFSF) at €2,069 billion (£1,724 billion).

He argued: “If things go wrong Germany will lose €676 billion [£563 billion] and France €476 billion [£397 billion].”

Referring to the German central bank, Sinn said: “More than half the Bundesbank’s wealth is a claim against the ECB transfer of public funds [in the bail out]. This will disappear if the euro zone disappears.” The risk was “enormous”, he said

Like the Federal Reserve and the Bank of England with its quantitative easing, “The European Central Bank is printing money,” said Sinn.

“For the time being it has calmed the crisis, but I doubt it is helpful. This is the fifth year since the crisis. It is a chronic problem that cannot be solved this way. It is not solving the problem but perpetuating it.

“Greece and Portugal might go so far, but there can be no solution [for them] in the euro. Spain and Italy might slump for 10-15 years.”

He insisted the crisis is “not just about attacks by speculators”. “The rescue programme is running out of ammunition. The socialisation of debt liability has caused a capital flight by the rich.

“It may go on for two years, maybe five years, but then the same problem will reappear.”

The Financial Times last Saturday offered a warning of its own. It noted a US revival appears under way and suggested: “Disaster has been averted and stocks kept afloat by government intervention to print money.”

The warning relates to a surging gold price, which reflects anxiety about how long this can continue. “Is the gold price correct in predicting that money printing will end in tears, with a collapse in confidence in governments’ credit and in currencies?”

Hans-Werner Sinn seems to think so. His view cast a cloud over ITB in Berlin that no amount of travel industry jollity quite managed to dispel.


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