German economists slug it out over euro future

13/7/2012

By Quentin Peel

The gloves are finally coming off among Germany’s normally sober and scrupulously polite community of economists in a bitter battle over the future of the euro.

Serious lecturers in the higher flights of public finance and monetary economics have been trading accusations of stirring up nationalist fears in a “bar-room debate”, according to one faction, and deliberately falsifying the facts, according to their opponents.

At the heart of the confrontation is a distinguished and media-savvy professor, head of one of Germany’s most renowned economic institutes. His emotive language and stark warnings of vast European debts guaranteed by Germany have provoked angry counter-charges of populism from his fellow academics.

Hans-Werner Sinn, professor at Munich university and head of the Ifo economics research institute, was a leading signatory on a doom-laden open letter, published by the conservative Frankfurter Allgemeine newspaper last week, denouncing the government’s moves towards a “banking union” in the eurozone.

“The taxpayers, pensioners and savers of those European countries that are still [financially] sound” should not be expected to guarantee the bank debts of the rest, they declared. The scheme would not save the euro or the European idea, they insisted, but simply benefit the finance houses of Wall Street and London, plus a few rash German investors.

More than 200 academics have now signed the letter, its authors say. But it has infuriated Wolfgang Schäuble, finance minister, who denounced the writers as “irresponsible”. Privately he refers to Prof Sinn – whose name means “sense” – as Prof Unsinn, or “Nonsense”.

It has also stirred up the universities. Some 220 academics have signed a counterblast declaring that a banking union is an essential step in managing the eurozone crisis that “in no way endorses” the collectivisation of bank liabilities.

A third missive, published in Handelsblatt, the business newspaper, from such luminaries as Bert Rürup, long-serving former chairman of the government’s “five wise men” – its panel of economic advisers – condemns the “questionable arguments” and “national clichés” of the original letter. They accuse its authors of “stirring up fears and emotions” without providing facts to prove their case.

“They are like doctors in the emergency ward who say ‘switch off the oxygen’ without having any other solution to offer”, says Peter Bofinger, economics professor at Göttingen university and one the “five wise men”. He challenges Prof Sinn to say precisely where he wants to go.

“If they believe Germany would be better off with the Deutschmark again, that is fair enough. But they set off all these fears and anger without providing any other suggestions.”

Prof Sinn, whose neatly-trimmed sailor’s beard and hooded eyelids make him look like a mystic sea-captain in his frequent public appearances, is unrepentant.

“It is first a matter of justice, but for me as an economist it is much more a matter of fundamental principles,” he told the FT. “An investor must face the consequences of his investment.

“The sums are simply too large to even begin thinking about bailouts. We have €9.2trn in bank liabilities and €3.3trn in government debt. It’s way over €12tn. The taxpayer alone cannot guarantee that.”

Prof Sinn has also made a big issue about the question of “Target 2” liabilities being accumulated on the books of the German Bundesbank and other northern central banks in the eurozone, as private capital has drained from the south. He is writing a book on the subject of the “Target Trap”.

His figures and interpretations are vigorously disputed by rivals.

“He is a very good speaker, and gets attention, but on some things he has just been wrong,” says Michael Burda, economics professor at Berlin’s Humboldt university and head of the German economics association.

“The letter is written in a very polemical way, like a politician would speak to his voters, and that angered a lot of us.”

Dennis Snower, president of the Kiel Institute for the World Economy, who signed Prof Burda’s letter, fears that economists are getting too emotional.

“The academic community is as susceptible to emotions as anyone else,” he says. “The problem is that academics sometimes lead people to believe that their expertise is driving their emotions. It isn’t helpful.”

The level of debate now leaves much to be desired, Mr Snower says.

“Little attempt is made to enlighten the public. Everyone jumps on the bandwagon when there are newspapers to be sold, regardless of the facts.”

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