Eurozone crisis ready for comeback, here for a decade - German Economic Ministry adviser

The European Union and its euro currency were created by those who dreamt of a truly united Europe - one without borders, both physical and economic. However, wave after wave of crises are now shaking the foundations of that dream. Voices of discontent and disagreement are heard inside the EU: some nations are disappointed with the seemingly inefficient economic policy of Brussels be saved? We ask the president of the Institute for Economic Research, adviser, other are angry with the decisions taken on refugees. Is the EU showing signs of falling apart? Is there a way out of the financial crisis? Can the euro be saved? We ask the President of IFO Institute for Economic Research, advisor to the German Economic Ministry - Hans-Werner Sinn is on Sophie&Co today.

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Sophie Shevardnadze:President of IFO Institute for Economic Research, advisor to the German Economic Ministry, professor Hans-Werner Sinn, welcome to the show, it's really great to have you with us today. So, professor Sinn, you have said that the euro crisis is coming back and that the Eurozone can expect it to last for at least a decade. Is a single currency in its current state set to fade away?

Hans-Werner Sinn: No, I don't think so and I don't hope so, but the crisis is certainly coming back. Greece has received funds for 3 years - I suspect that after 2,5 years the same sort of discussion which we have had this year, will return.

SS:Now, you propose adopting a "breathable Euro", where struggling nations can temporarily leave the single currency and then re-enter. How would that work? I mean, would they return to their own currencies for the time being?

HWS: Yes, indeed. The problem is, Europe has not created the "common state", like the United States of America or Switzerland. We still do have a common currency, this does not fit very well together, because some countries may have borrowed too much, and you can not prevent them from doing that, because we don't have enough central power. So, then these countries become too expensive - by borrowing, they increase their wages, they lose their competitiveness, and then they need help - and this help, in the Eurozone, is expensive, if you have a transfer system. The alternative, the better alternative is to temporarily exit the the EU and then later, when the new exchange rate has found its equilibrium, you can return.

SS:But how that technically happens, though? I mean, once you exit the Euro, how difficult would it be to come back to it?

HWS: The Euro in terms of bank notes can stay in circulation, you know. These banknotes create a debt of the state with regard to the Euro system, and they can serve temporarily for cash payments. But most people use nowadays credit cards and make transfers from one bank account to another account, so that can be done overnight, very easily. Then, gradually, with the passage of time, say, after a few months, new banknotes will be printed, and then they can be used, but in the meantime, the old Euro banknotes can be continued to be used.

SS:Now, you've said that Greece should have exited the Euro back in 2010, temporarily. Is that still an option today?

HWS: In the moment, no, because Greece has received its third rescue program and that will be enough money for the next 2,5-3 years. So, there won't be Greek exit for that period, I guess. You know, we have the Maastricht treaty, the Maastricht treaty says there's no bailout. A country can go bankrupt, if it has overborrowed - but then we would also need a possibility for this country to regain competitiveness and this is the exit. Yanis Varoufakis, the finance minister of Greece, has prepared for such an exit, so it's not an absurd idea - in fact, it's the devaluation which has in the past always rescued economies that lost their competitiveness.

SS:Why fight so much for Greece to stay on board, when, obviously, helping out Greece and bailing out Greece is causing so much rifts within the EU members, the founding EU members? What's such a big deal about letting Greece go?

HWS: You mean, why they stay on board?

SS:Yeah, why fight so much to keep Greece on board?

HWS: Well, from the Greek perspective, the advantage is that they have access to the printing press, they can print Euros and that gives them a lot of flexibility, otherwise they would have to print drachmas which are not accepted outside Greece as a payment meas...

SS:Yeah, but I am asking from the European perspective.

HWS: Okay, from the European perspective, I would say most of the countries were against it: fifteen or fourteen countries were for the exit, as Finance Minister Schaeuble has said the other day. And only France and Greece and Cyprus, and perhaps Italy - here I'm not sure - were in favor of keeping Greece in. Why "in"? Well, the French have invested a lot of money in Greece, the exposure is huge, they own banks in Greece, and France is afraid that if one country goes out of the Euro, then the next country might do the same, if it works well, and they seem to have an idea that a new political entity should be created out of the Euro - which I'm not sure is the right thing to do for Europe, because it would also divide Europe in the middle. There are the Eastern European countries which, to a large extent, do not participate in the Euro.

SS:Yanis Varoufakis, whom you've just mentioned, also called Greece "an experiment for austerity" - how long can it continue? Are the 344 bn euro loans worth it?

HWS: Austerity experiment of austerity"? Well, I'm not sure what he means. I think he means that austerity was imposed on him, on Greece, by the other countries of the Eurozone - which is not true. Austerity was imposed by the markets. Greece overborrowed, lost its creditworthiness, and from 2008 onwards, they were unable to borrow. Then, the other European countries came and helped: first, they allowed Greece to use their own printing press, so they borrowed through the ECB system, and then, from 2010 onwards, there were the fiscal rescue credits. The overall amount of funds which Greece has received from international institutions like the IMF, like the EU, the other European countries, the ECB, was more than 350 billion euros - and this is 200% of its GDP, so it was everything but austerity. It was the biggest austerity-mitigating program ever in history.

SS:But I think what he meant is that 5 years on, the austerity measures haven't quite solved the debt crisis - and the country is in economic shambles, and people are very angry. The country isn't any better off than 5 years ago, so why insist on it? I think, that's what he meant - so why insist on it, professor?

HWS: Well, here we agree. The whole program has not worked, so one has given Greece lots of money, but money doesn't create competitiveness; to the contrary, the lack of competitiveness in Greece results from the fact that they overborrowed in the period when the euro brought them very low interest rates. The state borrowed to increase the wages faster than productivity. The private sector had to follow - the wage increase forced prices up and Greece lost its competitiveness; and if you give such a country the ongoing credit from other countries, the wrong prices and wages are maintained and the lack of competitiveness is preserved forever. So, that's not a solution. The only solution for Greece would be...there are following solutions: main solutions: first solution is, we pay permanent transfers from the northern countries to Greece, but then other will want that too, and that can be expensive. The second possibility is to cut their prices - they inflated too much, and now the prices have to come down again. That is more difficult than it seems, because you would drive debtors into bankruptcy and also tenants, who can't pay their rent anymore. So, the third possibility is we inflate Germany: the ECB might be trying to do that with its QE program. Greece has increased its price level, other southern countries too, Germany follows up - you know, they are trying that. If it works, we will see. I'm not sure. If it doesn't work, the last possibility is the exit, and this is the logical consequence which Yanis Varoufakis was willing to draw, and which I would also be drawing.

SS:Here’s to another country. The President of Portugal has refused to let the left, anti-austerity forces, who are in the majority in Parliament, to form a government, fearing a backlash from Brussels. So, following budget orders from EU creditors is more important than following democratic principles?

HWS: If Portugal wants to take it, they can take this money. If they don't want to take it, they don't take the money. So, what is undemocratic about it? They can't say "democracy requires to receive as much credit as we like from other countries" - there are, after all, the taxpayers of other countries in Europe which provide the credit.

SS:You advocate a united Europe, with a common government, parliament and armies. What does it mean - do you propose merging 27 countries into one? Walk us through it.

HWS: Yes, actually, I do. I think a construction like the United States of America would be useful for Europe, but I have no illusions that this will come in the foreseeable future, because some countries, like France, for example, do not like this idea of really having a political union - and here's the problem of Europe, you know. France asks for a lot of money, they want fiscal union, they want transfers, helping their clients in southern Europe. But they do not want to go the full step towards a political union - and that is a fundamental problem for Europe.

SS:So, why do you think the EU can't work the way it is today? Why does it need to be more integrated?

HWS: Well, it doesn’t work well... If we want to go to a fiscal union, I would say, what we need first, is a political union, because if you look at Switzerland, if you look at the U.S. - it all began as a political union, and the fiscal things came thereafter. You can't just have fiscal union with transfers and common printing press and so on when you don't have a political union.

SS:Why not?

HWS: Why not, because you misuse your rights.

SS:In what way?

C)If you have the local printing press, you print money which you need. The six crisis countries during the crisis have printed more than 1,000 bn euros in addition to what they normally need for internal circulation - money, which they formally had borrowed, which they would’ve liked to borrow in the market, but couldn't borrow at normal rates of interest and so they printed the money and their Central Banks lended it to the banks and they to the private economy. These things are not really very good - it shows a malfunctioning of the European system, in my opinion. Also, we have mutual reassurances through the rescue programs, you know - these things are insurance contracts, but when you have an insurance , you need a contract, you can't just pay out the money without having a binding, mutual insurance contract - and that's a nation.

SS:Okay. So, first, you propose a political integration - what do you propose? A single parliament, a one-vote system, and if yes, then won't it marginalize countries with smaller populations and dilute their voices?

HWS: There would be a second Chamber where each country has one representative, like in America, or like in Germany, where you have the Parliament and you have the Bundesrat where each land has one representative.

SS:Right. But the difference is, in America, people are born Americans - and then they are everything else, from wherever they descent. In Europe, people are either born French, or German, or Italian, or Portuguese and so on and so on - my question was, if you have that one single Parliament, one man-one vote system, wouldn't it actually dilute voices of smaller countries, and marginalize them?

HWS: Well, small countries are small countries, what can I do about it? Each person in Europe should have the same right - there can't be inhabitants of smaller countries which have more rights than inhabitants of bigger countries. This, I find rather self-evident; this is the principle of democracy.

SS:Okay and you think big country, like Germany, would voluntarily give up its independence in favor of a federal government?

HWS: Germans, in the end, yes. You know, we have this horrible history, and Germans feel by and large that the future can only be an integrated Europe, rather than having separate countries. But this feeling, admittedly, is not as strong in many other European countries.

SS:You also mentioned a common army as a necessary step for uniting Europe - so will that be independent from NATO?

HWS: Yeah, well, NATO is a defense treaty, it has the U.S., it has Canada, it has all these separate European countries... I don't see why this means that the European countries cannot unite. We're unable to really act... We are not able even to defend the borders. Frontex, which is a European activity to defend the borders, really, doesn't function. So, a state needs some minimum prerequisites; if we don't have that, let's stay where we are, you know, then let's have the EU with separate countries, as a free-trade area, and separate armies, yes, this is a possibility - but I see the difficulty with the current state of the Union: the euro does not really function. So, for the time being, therefore, I'm in favor... not in favor of really doing the whole step, because... I mean, I'm in favor in the long-term, but I don't see it as a near, realistic possibility. As a realistic possibility, I see more the flexibility of euro as a "breathing currency" union. Then, my argument is, if, however, we succeeded in creating the full Union, then we could have Euro like the dollar - without exit possibilities.

SS:Now, the EU, in the state that it is now, has signed an association agreement with Ukraine. Kiev insists its main goal is to totally integrate into the EU. Is that a goal shared by the block, in your opinion?

HWS: That, I don't know. This is highly political question, which I cannot answer reasonably. I know about the Russian interest in Ukraine, and I hope very much that this conflict can be overcome in a way which is mutually acceptable by Russia and by the EU.

SS:But, do you think, economically, it can accept Ukraine as its member? Do you think it is in a state to accept new members like Ukraine? Forget about the political conflict, do you feel like Ukraine, the way things are looking in Ukraine right now, can become a member of the block, and the block afford it economically?

HWS: For the time being, I think we have enough difficulties in keeping the old EU together, rather than expanding it further, and expanding it in a way which conflicts with Russian interests - I find problematic. So, let me say, I'm very much in favor of improving the relationship with Russia in economic terms, because I think Russia is a very natural partner for Western Europe. That I find important, so I do not want to speculate about the membership of Ukraine in the EU, for which I am really not competent.

SS:Exactly, but I know you've said, I've heard you saying that no reasonable party can be in favor of economic destabilization of Russia and a trade war - which is what we're seeing today. But with political stabilization in Ukraine, because things are getting okay now, is it time to put an end to the sanctions between Russia and the EU?

HWS: The sanctions were based on conditions. If these conditions are satisfied - yes, no sanctions anymore. Again, you're driving me into territory where I'm not an expert, I can only say that the trade relationships between Russia and Europe are important, and therefore, it is important to quickly find a political agreement between Russia and the West, and Ukraine, so that a new, stable, situation can be found - because this sort of trade restrictions and tensions and so on are ultimately negative sum game. Everyone is losing this way. We have to come back to normal terms and settle this Ukraine question one way or another. Here, I very much hope that the politicians will do a good job.

SS:The Euro crisis and the standoff with Russia isn't actually on the top of Europe's challenges today. Refugee crisis, really worsening, steadily. Germany is attracting most refugees from the Middle East, with a large number of them claiming political asylum, but: are they really the economic migrants? How are so many slipping through the German immigration authorities, hence this.. I mean, how come?

HWS: Germany has no borders, no physical borders anymore, and people just come and then they register somewhere inside Germany. They go to the cities and register there. Many do not register at all, we speak about 300,000 people who may not have registered but are inside the country. The whole process of immigration has come out of control.

SS:But Germany actually offers massive economic benefits to migrants. A lot of European members aren't happy with that. Look at, for instance, Hungary. Some propose slashing that to help manage the flow of migrants. What do you think? Would that help, or does that go against the spirit of the EU?

HWS: That goes against the spirit of humanity. Germany Supreme Court has declared that the subsistence minimum should be given to anyone who legally resides in Germany - and this includes asylum-seekers.

SS:Professor Sinn, thank you very much for this wonderful interview. We wish you all the lack. We were talking to Professor Hans-Werner Sinn, leading German economist, President of IFO Institute for Economic Research, advisor to the German Economic Ministry. We were discussing the continuing Eurozone crisis and if it stands in the way of political integration of the EU. That's it for this edition of Sophie&Co, I will see you next time.