Sinn (Ifo): German fears about ECB moves and what Italy did wrong

Hans-Werner Sinn (Reuters)

Hans-Werner Sinn, president of the Ifo Institute, can the German economy continue to decouple from the crisis afflicting southern European countries, as shown by economic data released by Ifo and other sources?Yes, it can. This is the same sort of decoupling that took place during the early years of the euro and right up until the crisis.

During this period Germany's economy stagnated, unemployment soared and prices remained stable, while southern Europe, with the exception of Italy, boomed and inflated. Why did this happen? Because the euro created a safety net for investors who no longer wanted to invest in Germany, but decided to place their capital in southern Europe instead, typically through the banking sector. The crisis has reversed this situation: capital is now finding its way back from southern Europe and is returning to its home port. This implies that Southern Europe is now experiencing the same kind of stagnation as Germany did after the introduction of the euro, while Germany is seeing the same kind boom as the Southern countries did at that time.

What do you think of the new political party "Alternative for Germany" led by Bernd Lucke and former BDI president Hans-Olaf Henkel? And is it possible to envisage Germany's exit from the euro?
Both men are critical about the development of the euro, but I am not sure if they want Germany to exit the currency. I have no association with this party and do not know much about it. The party is very new. It reflects the general fatigue of the German population with the rising number of bail-out operations, particularly those conducted via the ECB system. The ECB is effectively now guaranteeing the government bonds of European countries, and more specifically of indebted countries, at the expense of the taxpayer. The Germans fear that they are being placed in a risky position without having been asked.

So they are nervous about the ECB's bail-out policy?
Yes, they are extremely nervous about the ECB's policy. The ECB has provided extra refinancing credit of around 800 billion euros to the crisis countries, including Italy and Ireland, at extremely low rates of interest, while ECB credit to the Northern regions of Europe has shrunk accordingly. In addition, the ECB has purchased government bonds worth over 200 billion euros from the crisis countries, meaning that ¾ of total public credit amounting to1.3 trillion euros has been issued by the ECB and only 1/4 is controlled by the parliaments of Europe. The main concern is that lot of fiscal credit operations are taking place via the ECB system and without democratic control. .

Which was the biggest mistake made by Italy following the introduction of the euro?
Italy's biggest mistake was to allow inflation to take hold. Italy initially devalued. The euro began for me at the Madrid Summit in 1995 when the euro was irrevocably announced and it was made clear which countries would participate. Since then Italian price levels relative to their German counterparts have increased by exactly 50%. This was partly due to the initial revaluation of the lira, but mostly due to inflation in Italy. This inflation undermined the competitiveness of the basically strong Italian economy. Northern Italy used to have the most competitive economy in Europe, but inflation undermined its competitiveness. The Italian government did not save enough either. In the 5 years prior to 1995 Italy spent 12% of its GDP on interest payments on public debt. By 2000 that percentage had dropped to 6.5% and it is now a mere 4.5%. In other words, the euro represented a huge advantage that was bigger than all of the VAT revenues collected by the Italian state. If Italy had saved the interest advantage that the euro brought between 1995 and today, its debt/GDP ratio would be a mere 18 percent instead of the 125% at which it stands today.

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