_ Hans-Werner Sinn, Dr. Sc., president, ifo Institute for Economic Research (1999-2016), member, advisory council, Federal Ministry for Economic Affairs and Energy (Germany); professor emeritus, Ludwig-Maximilian-University. Translation into English by Yuri Kofner. Munich, 22 August 2020.*
Professor Sinn, if the heads of state and government of the European Union have their way, the EU should collectively take on 750 billion euros in debt. Some describe the Recovery fund as a milestone, others fear an EU going astray. Who do you think is right?
It is necessary to support the countries badly affected by the crisis and to keep them in the euro, otherwise, an anti-European mood will arise. In this respect, I agree with generous help in principle. One can, of course, argue about the fund. There are a lot of issues. I do not agree with the fact that we have to take on debt at the EU level. That is a taboo break. Why don’t the countries give the money through the EU to the countries that are affected? Or why don’t they donate the money unilaterally? When one does a humanitarian action, one does not have to coordinate with others, one can do that all by oneself. Germany could have done that much earlier. A collectivized debt at the EU level will be a hidden German national debt. Because Germany will have to pay for it, and I do not like that aspect at all. Implicitly, it will be us, who will be liable for the joint debt. Because if in the future a country decides to not repay its part of the joint debt because it has no more money, then the other countries will have to step in and take over. This is called Eurobonds.
Where does all the money come from?
It is not a loan taken on the capital market, but the ECB provides the money. It will acquire these papers as part of its purchasing program. That means: Ultimately, we print fresh money and pass it on via the Recovery fund to Italy, Spain, Greece, Bulgaria, and elsewhere. That is not sustainable, because we cannot just print money and thereby satisfy any needs. The money needs something in return. It should be earned instead of coming from the printing press. Here I see potentially considerable dangers for monetary stability on the horizon.
The ECB has not just started buying up bonds today, and yet the EU has so far been spared from excessive inflation. Why should this change in the future?
In times of crisis, additional money is stowed away and is not spent. This is the liquidity trap that Keynes already described and that Europe is stuck in because of its euro crisis. At some point, however, the crisis will be over. The world economy will be picking up again, wages will be rising and so are oil prices, and confidence in the stability of prices will be waning. Then the ECB will have a hard time collecting all the money again. At the end of this year, we will probably have a money supply of over five trillion euros for a European economy that got by with 900 billion twelve years ago. That is more than five times increase. Four out of five trillion are superfluous. I don’t think the ECB will be able to take them off the market again. It is right to help troubled countries. It is also right to go into debt to spread the burden over time. But it is certainly not right to use the ECB’s printing press to finance the fund.
The risk of inflation is one thing. Critics also repeatedly warn against a permanent transfer union. What exactly is meant by that? There is already a permanent redistribution mechanism through the EU structural funds.
But only at a low level. So far the EU only had a budget of one percent of its GDP. That’s virtually nothing. But the problem is that because the EU has so little money of its own, it has now gained access to the printing press. It can get into debt with the European Central Bank after a little detour via the capital market. This taboo break is a real problem. It removes the budget barriers. A system without budget constraints cannot work. We do not live in the land of milk and honey, in which there is any number of products. Therefore the Bzreal economic scarcity has to be reflected in the monetary system. This basic principle is now being broken. It won’t work out. Moreover, even a normal transfer union that is financed directly from the individual member states would not advance Europe either.
Others claim that Germany, as an export nation, will benefit from a transfer union. The credo: If our neighbors are doing well, we are also doing well.
The argument is simple and pleasant, but unfortunately wrong on this basis. How does Germany benefit from giving other countries money so that they can buy German cars? In substance, we are giving away these cars. There is no benefit for us. Only those who drive the free cars benefit. Besides, a permanent transfer union naturally creates dependencies. The cash transfers support wage levels that are too high for the industry. In southern Europe, we have the problem that in the first ten euro years an economic bubble developed in which wages rose much faster than productivity so that goods prices rose faster than elsewhere in the euro area. This has permanently damaged the competitiveness of their industry. Even before Corona in Italy, industrial production had declined by around 20 percent compared to the level before the Lehman crisis. And now it slumped another 10 percentage points lower. Recently, Italy’s industrial production was a third below the level shortly before the outbreak of the financial crisis in 2009. This is a catastrophe. With permanent transfers, one supports a wage level at which the Southern industry no longer has a chance. Transfers are a recipe for permanent infirmity, but not for a dynamic Europe that would one day be able to stand up to tough countries like the USA or China.
How can these structural problems be solved?
Through national reforms on the labor market that create flexibility. Also through reforms that give companies more freedom so that they can be innovative and also through the creation of a capital market that injects capital into startups.
The Commission will review countries’ spending and only when it gives the green light will countries get the money paid. Will this control mechanism not work?
No, that has never worked before. It won’t work in the future either. One will find purposes that correspond to the categories of the EU Commission and use the funds that would otherwise have been spent for other purposes.
Is the EU on the way to a debt union?
It has a foot in the door to a debt union. One swears a thousand vows that the new Recovery fund is a one-time action and will only occur once in a generation, but the reality will be very different. This Recovery fund opens a new regime. In the future, the EU will then continue to borrow for new purposes.
*Translated and republished without prior written consent. For educational purposes only.