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Germany is threatened by a debt
tsunami, a leading German economist will say in a lecture on Monday evening. The
same economist said in a Sunday newspaper interview that Greece should quit the
euro. Meanwhile, Morgan Kelly, a professor of economics at University College
Dublin, has won a lot of attention for his latest bleak analysis of Ireland's
economic outlook but his drastic prescriptions are without consideration of
downsides. There are no volunteers among his colleagues never mind elsewhere,
for huge pay cuts.
Prof. Hans-Werner Sinn, president of
the Ifo Institute for Economic Research at the University of Munich, on Monday
night at the Humboldt University, Berlin, will examine the build-up and risks of
the current euro crisis and show how the threatening tsunami can be averted.
Sinn has said Germany is still enjoying the economic upswing, but all around
the euro a gigantic debt tsunami is building up. The GIPS states of Greece,
Ireland, Portugal and also, in part, Spain cannot only not refinance their own
government bonds, also their foreign trade debts are now being assumed and
deferred by the European Central Bank (so-called Target2 claims).
Over the years the southern European countries have lived beyond their means
and now they are being subsidised with additional billions. The time bomb of the
swelling amount of liabilities of now €1.5trn is ticking. Of this Germany
will have to cover €400bn, with a growing trend.
Sinn said the German Bundestag has long recognised the explosiveness of the
European Stability Mechanism (ESM) and is insisting on its own budgetary powers.
More and more members of parliament are declaring their unwillingness to carry
the additional liability risks. Legislation on the introduction of the ESM will
be brought before the Bundestag this summer.
At the week-end, Prof. Sinn said Greece will be unable to solve its debt
crisis if it keeps the euro currency. The German public, too, is upset over the
billions being spent to keep Greece afloat.
"If Greece were to exit the euro, it would be able to devalue its currency
and thus become competitive once again," Sinn said in the Sunday edition of
the Frankfurter Allgemeine newspaper.
He said Greece was heading for a banking crisis whether it kept the euro or not.
If the country remained with the euro, the economist said that there would be no way to
rescue the economy in the long run.
"If Greece decides to attempt a so-called internal devaluation - - that is by
cutting salaries and prices within the country - - it would risk setting off civil
war," Sinn said. "Greece is heading for economic crisis in either
scenario. But if it stays in the Eurozone, Athens will kill off the companies
that make up its economy."
Private Eurozone meeting
Prime Minister George Papandreou of Greece
on Saturday attacked “rumour and
speculation” after Germany's Der Spiegel magazine reported
that Athens was threatening to leave the Eurozone in order to bargain for easier
terms on its huge debt obligations.
“Markets continue to have doubts and we have scheduled our next steps for
2012,” said Greek finance minister George Papaconstantinou
who commented in
reference to his discussions in Luxembourg on Friday night with the finance
ministers of Germany, France, Italy, and Spain. ECB President Jean-Claude
Trichet, European commissioner for Economic Affairs Olli Rehn and Eurogroup
president Jean-Claude Juncker also attended.
“We will either go out to markets or use the recent decision by the EU
Council that allows the European fund to buy Greek bonds. That was what the
discussion was about,” Papaconstantinou said.
With the prospect of a second Greek bailout rising, George Osborne Britain’s
chancellor of the exchequer, told the BBC that participation in the Irish
bailout was a “special case.” Britain did not wish to take part in any
“second bailout” of Greece, he added.
Meanwhile, a survey published on Sunday showed that the German people were
still opposed the bailout of Greece a year ago.
German daily Welt am Sonntag showed that only one in five Germans believed the
bailout was acceptable. Forty-seven percent of those asked said the move was
"false," and 33% were undecided.
in an article in The Irish Times, Prof. Morgan Kelly said: "At a stroke,
the Irish Government can halve its debt to a survivable €110bn. The ECB can do
nothing to the Irish banks in retaliation without triggering a catastrophic
panic in Spain and across the rest of Europe. The only way Europe can respond is
by cutting off funding to the Irish Government.
So the second strand of national survival is to bring the Government budget
immediately into balance. The reason for governments to run deficits in
recessions is to smooth out temporary dips in economic activity. However, our
current slump is not temporary: Ireland bet everything that house prices would
rise forever, and lost. To borrow so that senior civil servants like me can
continue to enjoy salaries twice as much as our European counterparts makes no
sense, macroeconomic or otherwise."
It is likely that Ireland would have to negotiate a restructuring of debt in
2013 when the current EU-IMF bailout deal ends.
The country has no shortage of hurlers on the ditch who make radical
proposals but do not have to detail their prescriptions and the downsides.
To cut the budget deficit of €18bn at stroke would be a drastic step but by
having collapsed banks the whole SME sector would be a risk.
On RTÉ radio’s This Week on
Minister for Communications Pat Rabbitte said he agreed with
Kelly’s analysis of how Ireland
got into its current difficulties.
“The piece is a powerful
horror polemic,” he said.
“I don’t dispute most of the analysis but I do dispute the prescription.” He
said people had a “ghoulish fascination” with Prof Kelly’s analysis but they
needed to look at the “prescription”.
The “implications of Morgan Kelly’s prescription which is that we bring the
public finances into kilter as quickly as possible” would mean cutting €17bn or €18bn in one budget.
This would result in “serious cuts in pay, in pensions, increases in taxes, cuts
in the public capital programme.”
There were already critics in the Dáil he said who “throw around default like
confetti.” Some “think we can land oil on Dalkey head and that will solve all
Prof. Patrick Honohan,
governor of the Central Bank, said sustainability of Ireland’s debt depended on
its economic growth prospects.
“If things don’t go well in terms of economic growth it will be much more
difficult . . . in that case there will be a problem and in order to cope with
that situation we need to think of better financial arrangements with Europe,”
he said. “We need to think of risk-sharing arrangements that would ensure
that the growth will come right.”
While defending the EU-IMF deal, he said that Ireland has a number of cards to
“We have a number of cards . . . there is a right time
to play your most important card.”
None of Kelly's admirers could
address how the prescriptions could work in almost 400 posts on the Irish
Irish Economy Blog: Morgan Kelly
I challenged academics to make
specific proposals on cutting the budget deficit; there were none.
Emotion is not a strategy and we had
a Civil War, because for some emotion trumped facts.