The crucial clue came from the same man whose signature once adorned the deutsche mark: Helmut Schlesinger, former president of Germany's central bank, the Bundesbank. He was the one who pointed Hans-Werner Sinn, an economist in Munich, in the direction of a strange entry in the Bundesbank's statistics: In late 2010, records showed claims on other euro-zone central banks totaling over 300 billion ($400 billion). Curious, Sinn began to dig deeper. What he found exceeded his worst expectations.
"In the beginning, all I had was this number, and I didn't really know what it meant," says Sinn, who is president of the Munich-based Ifo Institute for Economic Research. "The Bundesbank told me those were irrelevant balances. But that didn't reassure me."
Sinn spoke with specialists at various central banks and with colleagues in his field. "Each person knew a little bit," Sinn explains, "and I had to fit the pieces of the puzzle together. It was real detective work."
After weeks of work, Sinn had assembled enough pieces to create a picture that would make any one shudder: Since the 2007 financial crisis, immense imbalances have formed within the otherwise harmless payment system that exists between the central banks of the 17 euro-zone member states. While Italy, Spain, Ireland, Portugal and Greece, all hit hard by the debt crisis, show deficits totaling over 600 billion, the claims owed the Bundesbank have climbed to 498 billion.
'Caught in a Trap'
As long as the monetary union continues to exist, this isn't a catastrophe. The money is virtual, created by central banks, and its existence doesn't mean that an equivalent amount is lacking elsewhere. But as soon as a country leaves the euro zone, or the currency union collapses entirely, things get critical.
"We're caught in a trap," Sinn says. "If the euro breaks apart, we're left with an outstanding balance of nearly 500 billion, owed by a system that no longer exists." That figure, 500 billion, is more than one and a half times Germany's annual federal budget.
This, though, is the worst-case scenario, and would only apply if the euro zone falls apart entirely. A far more realistic possibility is that one country, such as Greece, would leave the monetary union. In this case, all of the other euro-zone central banks would have to bear the Greek central bank's debt together. Germany's Bundesbank, in accordance with its share of the European Central Bank (ECB), would assume about 28 percent. With Greek debt at 108 billion, Germany's share would be approximately 30 billion.
The Bundesbank's claims are set off by massive debts in crisis-stricken euro-zone countries.
"This is dangerous," Sinn says, his eyes flashing. These outstanding balances owed by other central banks open Germany up to blackmail, he explains. "Now everyone knows we have to save the euro, at almost any cost."
His thesis sounds dramatic, yet so far Sinn hasn't managed to get the general public interested in the problem, which is only slowly spreading beyond economic circles. He has made it into the major newspapers, but the mass-circulation tabloid Bild won't be publishing Sinn's discovery on its front page any time soon.
Sinn certainly isn't shy about making himself heard. He's a welcome guest on talk shows because he makes his case clearly and sums it up in pithy sound bites. But that approach doesn't work with Sinn's current subject, which is too complex for a talk show. Then there's the name of the payment system between the central banks -- "TARGET2" -- which sounds about as exciting as the title of an accounting seminar.