H.-W. Sinn

H.-W. Sinn

The European Balance-of-Payments Crisis

Hans-Werner Sinn May 2012

H.-W. Sinn

4. The cost of the rescue operations

1. The bubble

2. The balance-of-payments crisis

5. Two options for Europe

3. The loss of competitiveness

H.-W. Sinn

1. The bubble

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1985 1990 1995 2000 2005 2010

%

Italy

Greece

Ireland Spain

Portugal

France Germany

Introduction of virtual euro

Introduction of euro cash

Irrevocably fixed conversion rates

Belgium

Source: Thomson Reuters Datastream.

0

5

10

15

20

25

30

40

35

EU Summit in Madrid

Net yields for 10-year government bonds

H.-W. Sinn

1985 1990 1995 2000 2005 2010

%

Italy

Greece

Ireland Spain

Portugal

France Germany

Introduction of virtual euro

Introduction of euro cash

Irrevocably fixed conversion rates

Belgium

Source: Thomson Reuters Datastream.

0

5

10

15

20

25

30

40

35

Conference of EU governments

in Madrid

Net yields for 10-year government bonds

H.-W. Sinn

2. The loss of

competitiveness

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0 20 40 60 80 100

108 Slovenia 82 Slovakia

67 Greece 56 Spain

53 Ireland 51 Cyprus

47 Portugal 44 Luxembourg

40 Italy 37 Netherlands

26 Eurozone 25 Belgium 25 France

22 Finland 17 Austria

9 Germany

Price development 1995-2008 %

Source: Eurostat, calculations by the Ifo Institute. March 2012

Trade-weighted appreciation

vis-à-vis other euro countries:

GIIPS: + 30%

Germany: - 22%

H.-W. Sinn

Necessary real write-down in the Eurozone (Goldman Sachs)

Portugal 35%

Greece 30%

Spain 20%

France 20%

Italy 10% to 15%

Ireland 0% to 5%

Source: Goldman Sachs.

H.-W. Sinn

Index Q3 - 2008=100

France

Source: European Commission.

Greece

Ireland

Portugal

Spain

Italy

88

92

96

100

104

108

2005 2006 2007 2008 2009 2010 2011

Real exchange rate (GDP deflator relative to rest of Eurozone)

H.-W. Sinn

H.-W. Sinn

3. The balance-of-payments

crisis

(Sinn & Wollmershäuser, CESifo WP 3500, NBER WP 17626, 2011)

H.-W. Sinn

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bundesbank (left-hand scale)

GIPS (right-hand scale)

-700

-500

-400

-300

-200

-100

0

100

-600

-100

0

100

200

300

400

500

700

600

April 2012 644 bn

Target balances: German claim and GIPS debt

Billion euros Billion euros

Feb. 2012 -671 bn

Netherlands (left-hand scale)

March 2012 157 bn

H.-W. Sinn

547

146 100

45 0 0

- 4 - 10 - 10 - 35 - 51 - 63 - 85 - 96 - 106 - 194 - 211

-300

0

300

600 (End of February 2012)

Billion euros

Target balances in the Eurozone

Source: IMF, IFS; Deutsche Bundesbank; De Nederlandsche Bank; Banco de España; Banca d‘Italia.

GIIPS: -671

H.-W. Sinn

Credit and goods

Balance-of-payments imbalances

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Credit flow stops

Balance-of-payments imbalances

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Capital flight Balance-of-payments imbalances

H.-W. Sinn

Balance-of-payments imbalances Capital flight

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Balance-of-payments imbalances Capital flight

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Reprinting the money Balance-of-payments imbalances

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What happened to the money flowing into the core?

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Why was it so easy to reprint the money?

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ECB collateral requirements

Date Standard Until 24 October 2008 A-

From 25 Oktober 2008 BBB-

3 May 2010 – 7 July 2011 Rating requirement waved for government bonds of Greece, Irleland and Portugal

ELA credit Non-traded ABS created by commercial banks Company credit, national liability

H.-W. Sinn

Germany and the Netherlands received for their current account

surpluses in 2008-2012 only Target claims.

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Accumulated current account surplus

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Target claim and current account surplus % of GDP

-10

-5

0

5

10

15

20

25

30

35

Target claims

Germany

H.-W. Sinn

Accumulated current account surplus

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Target claim and current account surplus % of GDP

-10

-5

0

5

10

15

20

25

30

35

Target claims

Germany Netherlands

H.-W. Sinn

4. The cost of the rescue

operations

H.-W. Sinn

Target liabilities** (GIPS and Italy)

ECB purchases of government bonds*

1. rescue plan Greece (EU) 1. rescue plan Greece (IMF)

Portugal (IMF, EFSM, EFSF) Ireland (IMF, EFSM, EFSF)

1269

Until now awarded

Potential with preliminary ESM

* Data update: 17.5.2012 ** Data End of February 2012

The European bail-out funds (billion euros)

German exposure****

386 (without ECB)

883 671

212

77 63

120 78 30

18 2. rescue plan Greece (EU)

2. rescue plan Greece (IMF)

IMF

EFSM

ESM guarantees

2153

1270 (without ECB)

883 671

212 53***

620

188

250

49

Capital contribution

promised by EFSF

80 30

656

286

57 15***

10 80 15

168

2 22

*** Credits disbursed by the end of 2011, unused resources to be released by the EFSF.

**** if GIPS countries and Italy default

H.-W. Sinn

* Data update: 17.5.2012 ** Data End of February 2012

The European bail-out funds (billion euros)

*** Credits disbursed by the end of 2011, unused resources to be released by the EFSF.

**** if GIPS countries and Italy default

German exposure****

656

286

57 15***

10 80 15

168

2 22

Netherland´s exposure****

141

60

12 3***

2 17 5

35 1 5

in % of GDP (2011) 26 23

H.-W. Sinn

• Fiscal rescue operation circumventing parliaments (Europe is no nation)

• High risks for the core central banks

• Eurobonds follow with necessity

• Uniform interest despite differences in credit risk imply interest subsidies

• Allocation of capital through a central planning agency rather than the capital market

Why is the Target credit a problem?

H.-W. Sinn

Really rescue? 1. Wrong asset prices are supported artificially, capital stays away.

3. Wrong goods prices and wages are supported artificially: Current account deficits are maintained.

2. ECB chases away the interbank credit.

H.-W. Sinn

5. Two options for

Europe

H.-W. Sinn

Two options for Europe 1. Eurobonds and Target credit like today, political debt constraints

H.-W. Sinn

Two options for Europe 1. Eurobonds and Target credit like today, political debt constraints 2. Liability, interest spreads, and settlement of Target balances with marketable assets

H.-W. Sinn

0

2

4

6

8

10

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

USA 0.1%

April 2012 21 bn dollars

% of GDP (of the previous year)

Target and ISA balances

H.-W. Sinn

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Eurozone

April 2012 947 bn euros

USA 0.1%

April 2012 21 bn dollars

0

2

4

6

8

10

12

10.1%

% of GDP (of the previous year)

Target and ISA balances

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A crisis procedure: insurance with deductibles

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I

II

III

Liquidity crisis • Tempory help (two years)

Impending insolvency • Piecemeal approach maturity by maturity • Other maturities cannot be called due (CAC) • Haircut up to 50% • Replacement bonds, secured up to 80% • Upper bound for guarantees and liquidity help: 30% of GDP

Full insolvency Exit from the Eurozone (my proposal)

H.-W. Sinn

6. Conclusions

• US model is better, because it has harder budget constraints.

• ECB causes capital flight and maintains current-account imbalances.

• Balance-of-payment crisis caused by loss of competitiveness

• The eurozone needs an internal realignment.

• Target: 947 billion euro bailout program not sanctioned by any parliaments

• EEAG bankruptcy procedure for help and orderly default

H.-W. Sinn