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Exit strategy

June 18, 2012

Hans-Werner Sinn, president of the Ifo research institute, expects countries on the periphery to exit the euro. In this DW interview he advises Chancellor Merkel not to be the paymaster.

Headless statue and Acropolis in Athens
Image: picture-alliance/dpa

DW: What are Europeans going to wake up to this Monday?

Hans-Werner Sinn: There will be a new Greek government which will have to negotiate with the EU. Then, some agreement will be reached. Probably, the EU will give in to the Greeks again. It is always that way. But, they won't be giving in as much to make the Greeks really happy. It is going to become more and more painful for all the participants.

At some point the Greeks will say: we cannot continue with the euro and instead we will reintroduce the drachma. The drachma will then be devalued and Greece can become competitive again.

Prof. Hans-Werner Sinn, Leiter vom ifo Institut. Copyright: ifo Institut via Danhong Zhang, DW Wirtschaft
Economist Hans-Werner Sinn of the Ifo InstituteImage: ifo Institut

There are several effects. First, the tourists will return. The, the Greeks will stop importing more agricultural products from France than they export. That will give a boost to the domestic economy. Third, the capital that was pulled out of the country will return.

At the moment, the rich Greeks are sitting in Switzerland with their money and don't dare return to Greece because they know that all the [financial] rescue activities are keeping real estate prices and other asset values at an artificial level that is not stable. They expect prices to fall as soon as the rescuers have no more money, or refuse to pay anymore. That is why they are not coming. However, once Greece has left the eurozone and the drachma has been devalued, they will come back immediately because there will be great buys and they won't have to fear further asset losses.

Do you think Spain will soon be the next candidate for a rescue?

Spain quite obviously has difficulties. The Spanish government is already being rescued. We have the decision to give Spain loans worth 100 billion euros ($125 billion), which, specifically, are to be passed on its banks. But, this is already a loan to the Spanish state.

When all the political leaders are emphasizing that Italy does not need help; then, that is almost a sure sign that the opposite is true. Has the end of the flagpole been reached when the eurozone's third largest economy needs a bailout?

Under no circumstances whatsoever could the eurozone members span a protective umbrella over Europe's big countries, like it has for the small ones. Altogether, Greece has received 460 billion euros so far. That cannot be repeated proportionately for the big countries. We are fast approaching a tight spot where things are getting very difficult.

What can be done? The southern countries want Eurobonds. These would essentially mean that old debt – some of it accrued before the euro – would be socialized. Then, there would be new debt, new bonds at low interest, to replace the old ones. After a while, the old debt has just been passed on to everybody else. These countries will continue piling up debt in the future because they think they can pass it on to others. This is a very dangerous development.

What does your road map look like?

Realistically, we have to accept that some countries on the periphery will leave the eurozone. Those countries, which have become way too expensive due to the credit-financed bubble that the euro itself is responsible for, should leave the eurozone and devalue in their own interest so that they can become competitive again.

Then, the rest of the euro area can be kept and these countries could re-join, once they are finished with their reforms. The possibility of returning is a big incentive to implement the necessary reforms.

We need to stop characterizing a eurozone exit as a catastrophe if we don't want it to become a catastrophe. Instead, we should be making an exit easier with financial aid and stop dramatizing the whole thing.

Of course, we still have the problem with the banks, but the bank debt is so huge that we cannot collectively cover it. There is only one way to deal with it: WE have to ask creditors of the banks to write off a portion of their outstanding claims in exchange for shares in the banks. In other words, we save the banks without saving the shareholders of the banks. This is the proper strategy. These are such immensely vast sums that a solution using collective collateralization is essentially out of the question. And Germany would certainly be poorly advised to accept such a solution.

How much time do you give the eurozone? Large investors, like George Soros, say that the currency union has less than three months to save the euro?

I hold George Soros in high esteem. He is a very smart man. But I'm not sure whether he is just pressuring governments so that they open their wallets. At the moment, Chancellor Merkel finds herself being chased in a fox hunt by Wall Street, the City of London and even the US president. Everybody wants that German money in order to cover the asset losses in their own portfolio. But I think it would be a mistake for Germany to succumb to this pressure because Germany is already paying gigantic sums to the other eurozone countries. When only the current line of credit is exhausted and the crisis countries don't pay it back, Germany stands to lose 700 billion euros.

Interview: Zhang Danhong / gb
Editor: Matt Zuvela

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