Greece’s austerity measures cannot prevent default and will lead to a breakdown of the political order if continued for long, a leading German economist has warned. “This tragedy does not have a solution,” said Hans-Werner Sinn, head of the prestigious IFO Institute in Munich.
“The policy of forced ‘internal devaluation’, deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30pc without major riots,” he said, speaking at the elite European House Ambrosetti forum at Lake Como.
“Greece would have been bankrupt without the rescue measures. All the alternatives are terrible but the least terrible is for the country to get out of the eurozone, even if this kills the Greek banks,” he said.
Dr Sinn said Greece is an entirely different case from Spain and Portugal, which still have manageable public debts and can bring their public finances back into line with higher taxes.
While Sinn may be speaking too generally (it’s worth looking at how the drastic ‘internal devaluations’ in the Baltic states have worked out, at least so far), it is indeed difficult to feel very cheery about the prospects for Greece. At the same time, Sinn is too sanguine about the prospects for Spain and Portugal. Yes, it is not unreasonable to believe that both countries might be able to bring some sort of balance to their public finances, but any relief will be temporary unless they are also able to restore their international competitiveness–and, so long as they are stuck with the current euro, that looks like a very long shot indeed.
The answer—at least for now—must be to split the split the euro into two, with a strong ‘euro’ for Germany and the eurozone countries surrounding it, and a weak euro for everybody else.
Meanwhile Estonia, usually a sensible place, proceeds with its far-from-sensible plans to adopt the euro in January. Fewer than half the population is in favor. I wonder why that might be.
Comments