"A Pop-Star Economist Leaves the Stage"

In a farewell interview, Germany’s best-known economist Hans-Werner Sinn talks about a missing army, his biggest mistake and the elephant in Europe’s room.
Hans-Werner Sinn

Handelsblatt Global Edition Magazine, 29.03.2016

He’s Germany’s most outspoken economist. But after 17 years as president of the Ifo Institute for Economic Research in Munich, Hans-Werner Sinn is retiring. At his office in the Bavarian capital, Mr. Sinn reflected on his legacy and Europe’s uncertain future.

Handelsblatt: It’s been a pretty good financial crisis for Germany.

Hans-Werner Sinn: It’s true, Germany is no longer the sick man of Europe that it was a decade ago. The economy and job market are strong. Surprisingly, part of the reason is the euro crisis. Since 2010, we’ve had a construction boom because investors seek a place where their money is safe. We speak of a flight into “concrete gold.”

Where else do you see good news in Europe?

Eastern Europe is in the middle of an ongoing boom. These are well-organized societies with hard-working people. Yet wages in Poland are about half of what they are in Greece. That explains everything about the problems we see in southern Europe today.

In the German media, you have a reputation for being controversial.

Economists have to be controversial in an ideological society like Germany’s. We are classical liberals. We start from the idea that a market economy can create an order, with Adam Smith’s invisible hand. German journalists are typically green and left-wing. Most of them have a deep mistrust of everything having to do with markets.

Maybe they are just concerned about capitalism increasing the gap in income and wealth.

I’m not so pessimistic. Globalization has enormously reduced income inequality in the world. The share of the world’s population living below the World Bank’s poverty line has dropped from 44 percent to 13 percent over the last three decades. There is little reason to complain about the market economy’s performance from a worldwide perspective.

One of the reasons so many Germans were thrilled about the arrival of refugees was that the country needs immigrants. But they didn’t look so closely at who was coming.

Germany needs immigration for demographic reasons. Beyond humanitarian cases, we need to be selective about who comes here. Germany has had a lot of success with immigrants from the former communist countries, from Eastern Europe all the way to Kazakhstan. You can say what you want about communism, but it didn’t die because of its bad schools. The Balkan war refugees we took in in the 1990s also had a good education. That’s not the case for the countries from where the refugees are now coming —  Iraq, Syria, Afghanistan. They have a low education level and the illiteracy rates are frighteningly high by European standards.

Changing immigration policy is one thing, but it won’t keep the refugees from coming.

We have people fleeing war, as well as people simply looking for a better life. To sort them out, we need common rules for asylum in Europe. And we need firm quotas. The current situation where people just come and enter E.U. territory cannot be tolerated.

The economist Paul Collier argues that Europe’s open-door policy is well-intentioned but inhumane.

I’ll give you two numbers: Spain, which sends migrants back to the African continent, only had 106 people who drowned trying to cross in 2015. But among those who tried to cross to Malta and Italy, neither of which sends people back, there were nearly 3,000 deaths. It shows that the policy of inviting people to just come to a safe haven has unintended consequences.

What happens if Britain leaves the E.U.?

It would tear down all of Europe if Britain exits. The E.U. would lose its counterweight to France, which is very much going in the direction of state planning. The government already takes 56 percent of GDP. The French don’t want capital markets to control investors’ decisions. They want the state to do that. To have a counterweight against France was the reason the Germans insisted in the 1960s on bringing Britain into the E.U., against the will of French President Charles de Gaulle.

You’ve said that France is the elephant in Europe’s room.

France has a similar real estate bubble to what we saw in Greece and Spain. The difference is that the bubble has not yet burst. The reason is that there has never been any mistrust in the markets over France’s ability to raise funds. Not because France has such a powerful economy, but because of France’s political power. Investors are convinced France can always organize a bailout with E.U. funds.

How does an economist get his voice heard?

Speaking directly to the politicians is often useless. They have to get votes, so they cannot simply do things that are right if people don’t understand why they are right. You have to convince the people, have a public debate. Out of this discourse comes the pressure on politicians to react. That’s the proper way in a democracy.

Politicians want to know why economists didn’t warn them about the financial crisis.

Politicians are coming to us more often now than before the crisis. It’s like with a doctor. He cannot make a good prediction about when your cancer will start. But when it has started, he can make a diagnosis and in some cases has a medicine. People often expect too much from economists. Forecasts are difficult. And by the way, it’s wrong to say we economists didn’t warn. A lot of us did. I myself wrote a book in 2003 where I warned about the erosion of regulatory standards in banking, and the excessive risk-taking the system created.

Are we in another bubble now?

Yes. Assets have been inflated – or prevented from defaulting – by the extremely low interest rates. That is the intent behind very low interest rates – drive up valuations in order to rescue banks, countries and investors. This rescue philosophy might be defensible in an immediate crisis, but it is very dangerous as a long-term policy.

So central bankers are being dishonest when they tell us they need to keep financing costs low because the economy is still weak?

They tell us only half the truth.

Looking back, are there any mistakes you made?

I was very positive about the euro when it was first created. I thought it would help Europe integrate further. In 2003, former chancellor Helmut Kohl spoke of an “armada” of economists who had warned – in Mr. Kohl’s opinion wrongly– that the euro was a mistake. I must confess I did not belong to that group.

But many in that armada were wrong when they predicted the euro’s breakup.

They were right insofar as the breakup pressures were enormous. The measures undertaken to rescue the euro are leading us straight into a transfer union. Countries borrow in the markets as long as they can, then the ECB bails out the countries and their investors, and finally the euro zone’s taxpayers bail out the ECB. The European taxpayer has replaced the capital markets as the guarantor of credit, and has to accept that he will pay when debts go bad as in the case of Greece. We are in a process of stretching that debt forever so that it gradually turns into a transfer. Meanwhile, the economies of southern Europe remain depressed because they became too expensive in the inflationary asset bubble brought about by the euro.

Some say it’s a good thing that richer countries share their wealth with poorer ones.

I’m not against redistribution but my precondition would be to create a strong European state. The major problem is France, which has objected to the creation of a true political union with common military forces.

Can we not begin with redistribution now?

Let’s assume Ms. Merkel loves Mr. Hollande, and Mr. Hollande loves Ms. Merkel’s money. Mr. Hollande proposes to share the bank account before they marry. Should Ms. Merkel accept? I’d say no. First, the marriage contract. If the money comes first, then the marriage will never happen.

What should the contract say?

If we create a United States of Europe, we should mimic Switzerland and the United States. Individual states have limited ability to borrow and there is a strict no-bailout clause like in America. Creditors who lend a state money should know there is a risk of not getting it back. We’d have a common European budget and some redistribution between states, as there is in these other countries.

How can we get there?

First and foremost, there must be a common European army. No more money until the French give up their objection to it. The wars in Ukraine and the Arab countries, the situation on our borders, show us that Europe has a security deficit and is unable to act. It is ridiculous to talk about a common unemployment insurance, deposit insurance and all sorts of redistribution without creating the essential power center in Europe.

You’re retiring at the end of this month. What economic problem are you leaving for your successor to solve?

The most important is how to break the deadlock and solve this catastrophic development in southern Europe. It does not prosper economically and the population is deeply dissatisfied, leading to all sorts of radical political decisions. Greece may only be the beginning.

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