We are honoured to announce that we have become a sponsor of the Czech edition of The Euro Trap (V pasti eura) by the German author Hans-Werner Sinn.
A short summary of the book by Pavel Matocha
Anyone who still believes the euro is in good shape – or who does not know why Václav Klaus was right again when he argued from the very beginning that the currency made no sense – should read this slim book by Hans-Werner Sinn, the most respected German economist of today.
Put simply, Sinn shows how disastrous the sharing of debts within the eurozone is. Irresponsible debtors become even more irresponsible, and so do creditors (that is, investors), because they know they will earn a higher interest rate in the riskier countries of the EU’s south and that, if problems arise, Germany and others will cover their losses.
Below I summarise Sinn’s main arguments from The Euro Trap, along with a critical warning about what Sinn proposes at the end as a long-term solution in Germany’s interest – he argues for a United States of Europe (modelled on the Swiss Confederation) led by Berlin. I have no objections, however, to the highly critical analysis to which Sinn subjects the eurozone and the euro. It is realistic and rational.
Seven stages of the euro crisis
- 1. Ignoring the Maastricht Treaty, which prohibited bailing out individual states facing bankruptcy (meaning that neither the eurozone nor other EU states are liable for states in crisis and that only their creditors bear the costs), which led to a credit bubble in the south of the eurozone.
- 2. Allowing states in crisis to keep printing the common currency independently and without limits.
- 3.–5. The SMP, EFSF, ESM and OMT rescue programmes, through which eurozone central banks could buy even unrated bonds of insolvent states and shift the risks and losses of their creditors onto taxpayers in the healthy eurozone countries (“By the end of 2013, the crisis-hit countries had received a total of EUR 1,058 billion in loans from public money. Parliaments approved EUR 393 billion; the remaining EUR 665 billion was decided or tolerated by the ECB Governing Council. In other words, almost two thirds of the rescue loans were decided by the ECB Governing Council and thus escaped democratic parliamentary control.”)
- 6. The banking union, in which still relatively healthy banks will finance, through the ESM, the rescue of banks in trouble or already insolvent.
- 7. Eurobonds – bonds guaranteed by the whole eurozone. They will be issued by the ECB, where the crisis-hit countries hold the majority and can democratically vote for the healthy minority to bear the costs.
I will summarise the six steps Sinn proposes to resolve the euro crisis next time. To conclude, just one remark on a long-term problem of democracy and two gems about ABS (asset-backed securities):
“Democracy allows the systematic exploitation of future generations by today’s voters. If this distortion were to be removed, we would at least have to make sure that parents receive votes for their underage children. Majorities would then be completely different, and politicians would not shift the burden onto future generations as unscrupulously as they do today.”
(Incidentally, when the Czech Christian Democrats proposed this years ago, everybody laughed at them.)
“The ECB Governing Council allowed banks to package various kinds of claims into so-called ABS. Basically nobody wanted to know what had been stuffed into these dubious sausages. In Portugal, one security was found with a maturity date of 31 December 9999!”
“In Spain, loans that football clubs had used to buy their overpriced stars were packaged into ABS. One of them was Cristiano Ronaldo, who cost Real Madrid EUR 94 million. Today many clubs are going bankrupt and Spanish banks are not far from it. If they do not repay the loans they took from the Spanish central bank, the central bank will have to write off the corresponding losses. And because losses are shared within the Eurosystem, 27 per cent of the total loss will fall on Germany. Do the fans of Bayern Munich, Borussia Dortmund or Schalke 04 know that they, too, are liable for the loans used to buy their Champions League rivals’ stars?”