Top Economists Debate: The ECB's Controversial Euro Crisis Strategy
In a joint interview, economists Marcel Fratzscher and Hans-Werner Sinn evaluate the ECB's policy of lowering interest rates and the euro-zone rescue strategy, and arrive at completely different conclusions. Fratzscher sees the ECB's strategy as the solution. Sinn sees it as part of the problem.
The opponents: Anyone looking to pass economic judgment on the euro crisis cannot ignore the heads of the two leading German think tanks. Sinn, 65, has led the Ifo Institute for Economic Research in Munich for almost 15 years. He appeared in front of Germany's Federal Constitutional Court to support the complaint against the European Stability Mechanism permanent bailout fund. Fellow economist Fratzscher, 42, worked at the ECB until 2012. He has been the president of the DIW economic research institute since the beginning of the year; a few weeks ago, he was part of an appeal for closer political union in Europe.
SPIEGEL: Mr. Fratzscher, Mr. Sinn, the European Central Bank (ECB) has reduced its base lending rate to 0.25 percent and money has never been cheaper in Europe. Should we be pleased about this?
Sinn: The problem is the extent of the ECB loans. The central bank has supplied the Southern European countries with over 700 billion ($950 billion) in low-cost special loans. It's maintaining a huge fiscal bailout machine. The bank has thus exceeded its authority.
Fratzscher: I see this completely differently. The ECB has to supply the economy with liquidity to allow consumers to make purchases and companies to make investments. This is currently not happening to a sufficient extent, though, because loans in many euro-zone countries are too expensive and too scarce. That's precisely what the ECB intends to change, so reducing interest rates was the right decision.
SPIEGEL: In Germany interest rates are so low these days that they no longer balance out rising prices. This causes savings accounts to lose their value. Is this a case of creeping expropriation?
Fratzscher: It's true that today's investors only receive minimal returns. But there are alternatives. With stocks and real estate, for example, it's currently possible to make very good money in Germany. And when the economy in Southern Europe recovers, German savers will also benefit because growth and income will be bolstered in Germany.
Sinn: Debtors are delighted with falling interest rates. But Germany is a net creditor to other countries. Between 2008 and 2012, the bailout initiatives cost Germany over 200 billion in interest losses.
Fratzscher: Excuse me? How did you arrive at that figure?
Sinn: Our export surpluses were primarily no longer placed in savings. Instead, three-quarters of this money was paid with euros that other countries had borrowed from their own central banks. This borders on expropriation. If we had been able to save our export surpluses at 2007 interest rates, we would be 200 billion richer today.
Fratzscher: Interest rates have not been artificially reduced due to the bailout policies, but rather because we were in a boom in 2007, and now all of Europe is in the grip of a serious crisis. The ECB has managed to pull the economy back from a cliff. It's thanks to the central bank that there is light at the end of the tunnel in Southern Europe.
Sinn: I don't see any light.
Fratzscher: Without falling interest rates, the economy would have suffered a far worse downturn. Let's run through the scenario: Higher interest rates mean fewer loans; fewer loans mean less growth; less growth leads to less employment, more bankruptcies and a deeper recession. This puts state finances under pressure and weakens the banks, which in turn grant even fewer loans. That's how you turn a liquidity crisis into a solvency crisis, a vicious circle that would also impact us in Germany. Indeed, your scenario, Mr. Sinn, would give us no benefits, but enormous costs.
Sinn: The euro in Southern Europe created an inflationary credit bubble, and when it burst, the ECB's policies prevented the affected countries from improving their competitiveness. Southern Europe is wasting away. Unemployment in Spain and Greece is approaching 30 percent, and as many as 60 percent of the region's young people are looking for work. Industry is crashing.
Fratzscher: Anyone who blames this crisis on the euro might just as well blame the police officer when there has been a burglary somewhere. But the opposite is true: Since 1999, the euro has made it possible for all member states to acquire loans under more favorable conditions, to invest more and thus to achieve greater prosperity. This opportunity was often missed, but that's not the euro's fault.
SPIEGEL: The euro crisis eased after ECB President Mario Draghi announced over one year ago that, if necessary, his bank would purchase unlimited quantities of sovereign bonds from European crisis-ridden countries. Was that a good thing?
Sinn: For capital investors yes, for taxpayers no. Bad investments wiped out huge amounts of savings capital in Southern Europe. That's why investors no longer want to go there. But the ECB would like to see capital continue to flow south, so it has moved the printing presses to Southern Europe. What's more, the bank gives buyers of southern sovereign bonds free insurance protection at taxpayers' expense. This is an investment intervention that no longer has much to do with a free market economy.
Fratzscher: The ECB does not direct the flow of capital. It was we Germans who first invested our money worldwide and lost some of it and then pulled out of Southern Europe. Now there is a huge liquidity gap, and the ECB is doing what it has pledged to do: It is supplying Southern European banks with money and preventing a liquidity crisis from becoming a solvency crisis.
Sinn: And the risk is borne by taxpayers as the owner of the ECB.
Fratzscher: The ECB has not heightened the risks in Europe. Actually, it has reduced them. It has averted the risk that Europe's economy could slide even deeper into recession. Consequently, the financial sector is no longer in such grave danger. There is now a reduced risk that assets worth trillions -- including those owned by German citizens -- could be destroyed in a euro crash. Indeed, capital is slowly returning to Europe. We can see that it is better to prevent an insolvency than to precipitate a collapse.
Sinn: Prolonging an insolvency is even worse.
Fratzscher: What insolvency are you referring to?
Sinn: I'm referring to the insolvency of individual countries and many banks in Southern Europe. The earlier you recognize an insolvency, the less the burden on taxpayers, and the earlier it is possible to get a fresh start.
Fratzscher: Fresh start? We would experience a scenario that is comparable with the Great Depression of the late 1920s and early 1930s. It's good that we have been able to prevent something like this from happening.
- Part 1: The ECB's Controversial Euro Crisis Strategy
- Part 2: 'Even the Greeks Want to Stay in the Euro Zone'
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