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
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
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
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
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.
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
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
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
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
H.-W. Sinn
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