Wednesday, June 13, 2012

Sinn should repent

Hans Werner Sinn (Germany Can’t Fix the Euro Crisis - NYTimes.com) provides us with yet further evidence that important voices in Germany simply don't get it, on multiple levels. First, he doesn't get it on the economic level, by espousing policies that have already failed and basing his reasoning on unbelievably crude notions of how debt works (the 'liability principle'). Second, by committing a political and historical howler that Karl Whelan rightly calls him on.

Let's take the 'liability principle' first. Sinn suggests that bailouts would violate that principle, which reads that

'it is the creditors’ responsibility to choose their debtors. If debtors cannot repay, creditors should bear the losses.'

Fair enough. But I thought Germany was the big creditor here? Never mind. The 'liability principle' needs to be respected because

'If we give up the liability principle, the European market economy will lose its most important allocative virtue: the careful selection of investment opportunities by creditors. We would then waste part of the capital generated by the arduous savings of earlier generations.'

Well, I think it's a bit late for that one, don't you? The capital has already been wasted. Hard-earned German savings were funneled through the Eurozone financial system into unsellable apartment blocks in Spain and unsustainable public employment in Greece. That money has been wasted, so the only reason to refuse bailouts is to make future generations aware they could lose their investment if they are not careful which bank they give their money to. In that case, why not drop deposit insurance too? Then people will finally realize they need to perform due diligence with every pfennig they put in a bank.

All of that is in my view idiotic, but at least bears some relation to a recognizable theory. But the history part is really shocking. Sinn forgets that before the Marshall Plan - for which he at least expresses grudging gratitude - the US spent four years, nearly half its GDP and nearly half a million American lives fighting Nazism in Europe. Instead of punishing Germans for the crimes of their leaders, the country was helped back onto its feet. Has Germany responded to this generosity by doing it all again? No. Moral hazard apparently only works in economics.

The saddest part of all this is that really this should not be about Germany vs Greece, or anyone else. It should be about the people, across Europe, who have been taken for a ride by their political leaders and their financial institutions. Germans who could lose their jobs and savings are in the same boat as Greeks who have lost their jobs and their credit. Nobody should be punished because of a flawed institutional design that required them to exercise impossible prescience and restraint. Instead, people should be helped on their feet and the right institutions created. Germany, of all nations, should remember that.