Economist Sinn Rattles Merkel Laboring to Save

Jeff Black und Simon Kennedy, Bloomberg Markets, September 6th, 2012.

Dressed in his customary gray three-piece suit at a conference in Frankfurt on June 15, Hans-Werner Sinn folds his hands and listens without expression as a series of speakers criticize his economic theories. Hans-Willem Buiter, chief economist at Citigroup Inc., goes so far as to decry them as “nonsense.”

Taking his turn at the microphone shortly afterward, the 64-year-old president of the Munich based Ifo Institute for Economic Research says he regrets it when investment bankers such as Buiter “lose their composure.” He then lays out once more his argument that Germany is paying more than it thinks for Greece’s fiscal recklessness and that the struggling southern European nation should long ago have left the euro zone, Bloomberg Markets magazine reports in its October special issue on the 50 Most Influential people in global finance.

Since the 17-member euro area’s debt crisis erupted in 2010, Sinn has been center stage in the public debate. In speeches, television interviews and testimony before parliament, he has argued for a stricter stance on handing out German taxpayers’ money. The European Union should have let Greece default when it first ran into trouble at the end of 2009, he says.

In July, Sinn testified before Germany’s Constitutional Court that Chancellor Angela Merkel’s efforts to rescue the euro through vehicles such as the $600 billion European Stability Mechanism fund make fixing the euro even harder.

‘Road to Catastrophe’

“Now that the budgets have been overstretched, one tries to find other pots of money to loosen the constraints,” Sinn says in an interview at the elegant villa that serves as the institute’s branch office in Dresden. “This is a road to catastrophe.”

Sinn, who teaches at the University of Munich and is easily identified by his luxurious Captain Ahab beard, has been a thorn in the side of German governments for decades.

“Sinn’s much more influential than any other private-sector economist in Germany,” says Fredrik Erixon, head of the European Centre for International Political Economy in Brussels.“ His views reflect those of traditional Germans, whose anxieties about the flawed structure of the euro have been exacerbated by the crisis. He gets listened to by the cognoscenti of German policy making.”

Flaming Rhetoric

Sinn’s critique of German government initiatives has been wide ranging. In the early 2000s, he slammed the country’s social safety net as producing only unemployment. He later warned that Germany’s dependence on exports was turning it into a “bazaar economy.” He most recently denounced the greenenergy policy that will result in the shutdown of nuclear power plants.

Sometimes Sinn lets his rhetoric get the better of him. In 2008, he apologized to leaders of Germany’s Jewish community after comparing what he called the demonization of financial executives to the scapegoating of Jews in a 1929 German financial crisis.

“He makes up his mind and then argues very strongly and in public,” says Clemens Fuest, a former student of Sinn’s who teaches at the University of Oxford and advises Germany’s Finance Ministry. “He’s not someone who comes up with arguments of the ‘on the one hand, on the other hand’ type.”

Jean Pisani-Ferry, director of research group Bruegel in Brussels, says Sinn’s rhetoric at times risks veering into jingoism.

“As an economist, in this tense situation, we have a responsibility to maintain a certain quality of debate and not to pander to populism,” he says.

Most Influential

An opinion poll by German business weekly Wirtschaftswoche in December 2011 named Sinn the country’s most influential economist. That means Merkel and her fellow policy makers are forced to pay heed to his remarks. In a July interview with the newspaper Welt am Sonntag, Finance Minister Wolfgang Schaeubleaccused Sinn of making irresponsible statements about the amount of money Germany has at stake if the euro falls apart.

Sinn revels in his role as government gadfly. “Ten years ago, I was an enemy of the left,” he says.“Now, others don’t like us. This is our destiny.”

Sinn’s latest campaign -- and the topic of his latest book, “The Target Trap” (Carl Hanser, 2012) -- is to condemn imbalances in the euro zone’s money management system, which, he says, leaves German taxpayers unfairly exposed to the woes of Greece and other cash-strapped euro members.

The subject of his ire is the Trans-European Automated Real-time Gross Settlement System, known as Target2. It’s an electronic payments system, designed by the European Central Bank, that stitches together the euro area’s patchwork of national banking systems.

Targeting Target2

Target2 funnels euros from one bank to another across borders -- such as when a Greek executive orders a Mercedes from Germany -- via each country’s central bank. In accounting terms, the flows of money show up on each central bank’s ledger as either a surplus or a deficit.

In the course of the credit crisis, the Target2 deficits of countries such as Greece and Spain have risen to unprecedented levels, boosted by hundreds of billions in emergency funds loaned to their banks by the ECB. Core countries have accrued surpluses, with the system netting out to zero.

Germany had a 730 billion-euro ($910 billion) surplus as of July 31.

In Sinn’s view, Target2’s balances describe actual loans from core euro countries like Germany to southern Europe, and they’re a bailout by stealth that has never been approved by any parliament.

Flawed Analysis?

“It is as if you go to the shop, and the shopkeeper has an account and just writes down the numbers,” Sinn says. “If the debts are redeemed, it is fine. If not, we have a problem.”

Officials at the ECB and Germany’s Bundesbank say that Sinn’s analysis is flawed and that Target2 is simply a system of double-entry bookkeeping. Germany and other surplus nations would be at risk only if the euro disappeared, they say, and even then, any losses would be settled or shared throughout the euro area.

“There is absolutely no relationship, logically or quantitatively, between Germany’s risk exposure and Target2,”Citigroup’s Buiter says. To use the accounting system in such a way, he adds, “is completely incorrect.”

Sinn’s assertion that Germany is being taken for a ride by its euro-area neighbors has political resonance, says Simon Tilford, chief economist at the Centre for European Reform in London. It’s one reason, he says, that Merkel has refused to endorse the issuance of bonds backed by all of the euro-area countries and continues to demand a euro-zone-wide fiscal pact to bind the hands of future governments.

Constrained Climate

“Economists like Hans-Werner Sinn have contributed to a climate in which the German government has felt constrained in what it can agree at a euro-zone level,” Tilford says.

The German economist’s controversial pronouncements have made their way across the Atlantic. Nobel economics laureate andNew York Times columnist Paul Krugman attacked Sinn and his backers -- he called them Sinners -- on his blog in July, saying they’re only accelerating the euro’s demise.

“The Sinners clearly have the upper hand in German public opinion,” Krugman wrote.

Unbowed, Sinn is opening up new fronts. In July, he co-authored a letter entitled “Economists’ Appeal to the Citizens,” in which more than 200 German-speaking researchers condemned Merkel’s willingness to back a more integrated regulatory system for European banks.

“I do get listened to,” Sinn says.

Klaus-Peter Willsch, a lawmaker from Merkel’s own Christian Democratic Union, says Sinn’s ideas influenced parliamentarians who voted against ratifying the ESM. His ideas on Target2 “can no longer be dismissed as the opinion of the lunatic from Munich,” Willsch says. “His position has become part of a serious discussion."

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