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Wednesday, January 23, 2013

Hans-Werner Sinn on the Greek crisis

H-W Sinn, chair, Public Economics at Munich Univ. and Chairman of IFO Institute. had this to say in Ifo Viewpoint No. 125: Greek Tragedy 27 Jul.2011 , (emphasis added)
Much worse, however, is the fact that Greece has lost its competitiveness. Its government took on massive debt under the euro, inflating Greek wages and prices. Greece’s current account deficit reached 10.5 percent of GDP in 2010. Aggregate consumption exceeded national income by 16.5 percent.
It is better for all concerned, in particular for Greece, if the country leaves the euro temporarily. It could then devalue, become competitive once more and later, at a suitable exchange rate, join again. Instead of slashing millions of prices and wages, it would be necessary to slash but one price, that of its currency. In addition, companies in the real economy would be out of the woods, since their debts with Greek banks would be devalued too. 
In his Ifo Viewpoint No. 141: A Second Chance for European Reform 16 Jan 2013
Eurozone politicians tend to believe that it is possible to regain competitiveness by carrying out reforms, undertaking infrastructure projects, and improving productivity, but without reducing domestic prices. That is a fallacy, because.......
... as long as these countries remain in the currency union: either they deflate, or their trading partners inflate faster. There is no easy or socially comfortable way to accomplish this.
In order to become cheaper, a country’s inflation rate must stay below that of its competitors, but that can be accomplished only through an economic slump. The more trade unions defend existing wage structures, and the lower productivity growth is, the longer the slump will be. 
Germany cut its prices relative to its eurozone trading partners by 22% from 1995, when the euro was definitively announced, to 2008, 
 with Greece needing to depreciate by 39% and Portugal by 32% just to reach the price level prevailing in Turkey (reference to OECD data)

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