Grexit the only way out of ‘valley of tears,’ says Hans-Werner Sinn

Head of the Institute for Economic Research argues eurozone should allow Greece orderly temporary departure By Xenia Kounalaki

German economist Hans-Werner Sinn has consistently argued in favor of Greece’s exit from the eurozone. The head of the Munich-based Institute for Economic Research (Ifo) considers it his personal mission to explain and interpret in simple terms the European credit crisis, both for his own compatriots and Europeans in general, often drawing accusations of oversimplification and populism.

In an e-email interview with Kathimerini, Sinn explains why he considers the best solution for the Greek conundrum to be a debt writedown and a temporary exit from the common currency as a means of improving the cash-strapped country’s competitiveness.

You believe the solution lies in a Greek eurozone exit followed by a haircut. Have you considered the consequences for Greece and how, for example, it would be able to import basic requirements, like fuel, given its low production base?

I have proposed that in this case Greece could receive funding from the international community to pay for vital imports like medicine and fuel. A return to the drachma and the devaluation of the currency would, even without this assistance, have the advantage that Greece would stop buying foreign agricultural products. The majority of consumers would turn to domestic producers, who would in turn see a boost in production and be able to generate jobs. Greece could develop its agricultural sector with the same level of success already achieved by Israel, which exports products all over Europe. Furthermore, there would be a repatriation of deposits by wealthy Greeks who have transferred at least 100 billion euros abroad in order to safeguard it. Once everything becomes cheaper they will want to invest in their country again. This would lead to a fast recovery in the construction sector, which could also create new jobs quickly, within a year or two. Finally, in the medium term it would make it possible to rebuild the industries that Greece once had; only this time around they would be modern and adapted to the needs of a new era.

Almost every credit crisis in the world is dealt with through haircuts and national currency devaluations, and I do not see why Greece should be an exception. The Greek people, who are suffering from mass unemployment at the moment, would be the biggest winners of such a devaluation. The present course benefits only big investors in Greece and abroad, while placing additional burdens on the Greek people.

Do you believe that the eurozone could deal with the effects of a Greek exit? A number of your colleagues have recently reconsidered the consequences of such a turn of events, estimating that it would cost the bloc tens of billions of euros.

With a haircut European states would simply be writing off future claims, which they won’t be able to collect in any case. This is a separate issue to the question of a Greek exit from the eurozone. The sooner that creditors face the truth, the better. Only a Grexit can make Greece competitive once more and allow the country the possibility of getting back on its feet and recovering without generating new debt.

Do you think that the German government will be able to come to some sort of compromise with a left-wing government in Greece in the event that SYRIZA wins the January 25 elections?

Yes, of course. There is always room to explore a compromise.

Do you support Chancellor Angela Merkel’s current policy in regard to Europe or do you support a change in strategy? Pressure for change is coming from Italy, Greece and Spain. Do you believe Merkel should give in to it?

Chancellor Merkel agreed to the mutuality of the investment risk through the bailout packages and the actions of the European Central Bank. This protected investors all over the world, and especially French banks, as well as German banks and insurance companies. The result, however, was a drop in interest rate spreads. This creates the temptation to generate new debt, which means the problem is aggravated rather than alleviated. Europe is at risk from a huge mountain of debt that threatens to crush it as the limitations on debt have proved ineffective. There is only one principle that leads to debt discipline: the mutualization of the debt by creditors. This is precisely why I believe there needs to be a European summit on the debt aimed at offering relief to countries, to private banks and central banks, as well as an overhaul of the eurozone.

Do you believe that Greece’s membership of the eurozone was a mistake?

Greece did itself a lot of harm by joining the eurozone because the introduction of the euro caused an inflationary credit bubble that stripped the country of its competitiveness. Unemployment rates of around 50 percent among young people and 25 percent of the general population are the terrifying consequences. And the people responsible for that are the politicians both in Greece and Germany.

Do you believe that the Europhobic Alternative for Germany has any influence on government decisions?

I personally have no ties to this particular party nor to any other. Nevertheless, I do believe that this new party will influence the decisions of the German government, which is trying to hold onto votes.

How do you imagine the eurozone in five years’ time? In your last book, “The Euro Trap,” you predicted several decades of crisis ahead. What can we do to prevent that?

I think it wise to preserve the eurozone. But we need the abovementioned summit. Above all else, however, we need the euro to become more flexible. A monetary union that foresees only entries and no exits is a prison. I would like to see reforms that would allow a country to exit the euro in an orderly fashion and devaluate its currency. After a period of a few years, during which it could stabilize or change course, create new economic structures and implement reforms, the same country should have the option of rejoining the eurozone. In fact, if it was up to me, I would ensure that this country could have a limited participation in the board of the ECB. The prospect of reinclusion in the eurozone would enhance the country’s reform drive. Trying to boost competitiveness from within the eurozone, through a long period of stagnation and reductions in salaries and prices, would be a long walk through a valley of tears that would destroy Greek society.

Would a small euro area composed only of the core countries be more effective than what we have today?

Monetary union makes sense by definition but it needs to be based on strict discipline on the issue of debt, which can only be achieved through its mutualization by creditors. Think of the US. There, neither the federal government nor the Federal Reserve would offer economic assistance to troubled states like Illinois or California. That is why American federalism works. I have repeatedly warned of the danger of breaking up or shrinking the eurozone. Such a radical solution would be as bad as making it impossible for a country to leave the bloc. Ideological extremism cannot save the eurozone; it needs flexible solutions that can be applied on a case-by-case basis.