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Home > Blogs > Anthony Harrington > Stealth bail-outs – an economist’s furore with a twist. Part 1

Stealth bail-outs – an economist’s furore with a twist. Part 1

Greece bail-out | Stealth bail-outs – an economist’s furore with a twist. Part 1 Anthony Harrington

An extraordinary row is going on over whether the EU settlement mechanism, Target2, which has until now been regarded simply as the plumbing of the EU’s inter-state financial mechanism, is actually the conduit for a stealth bail-out of peripheral states like Greece and Ireland (said stealth bail-out allegedly being on a scale that dwarfs the official bail-out).

The stealth bail-out case is being made by Hans Werner Sinn, Professor of Economics and Public Finance at the University of Munich, President of ifo, the Institute for Economic Research, and one of the most respected German economists. Sinn’s point was taken up by the FT’s illustrious economic columnist Martin Wolf, and by the renown Reuters financial blogger Felix Salmon (who has since admitted that he might have been led astray in his venture into the labyrinth of central bank financial plumbing – unsurprising really, since you have to be a hardened “wonk” to find your way in that murky space).

The counter-argument

Those “debunking” the Sinn case for stealth bail-outs include Karl Whelan, Professor of Economics at University College Dublin, Citibank chief economist Willem Buiter and a number of people with a decade or more of experience as central bankers. There is also a lengthy and excellent account from Olaf Storbeck, the International  Economics Correspondent with Handelsblatt, the German business daily. The short summary version of their case against Sinn is that he is reading the accounting measures required by a transnational settlement mechanism as if these measures were an undercover, euros-in-a-brown-envelope gigantic handout to the peripheral states which will eventually sink the euro and the eurozone.

This is the point at which this debate moves beyond being an entertaining economist’s wrangle and transmogrifies into something that could blow the feet off over-excitable politicians – particularly that set of German politicians who might be disposed to pay heed to Hans Werner Sinn and who have never been comfortable with paying German taxpayer money to profligate Greeks to fund a socialist system that the Greeks themselves could never have afforded, no matter how many rocks angry public sector workers and the unemployed throw in Athens. (As an aside we should note that you can’t riot yourself into funds that you don’t have, no matter how hard you try or how much chaos you cause. As John Mauldin points out in his Viewpoint in QFinance, the further the Greeks go down this road the more pain they are storing up for themselves in the years ahead. This doesn’t mean that acquiescing meekly in the austerity measures demanded by the EU and the IMF won’t be almost as painful. As Mauldin says, the Greeks are out of good choices and their only remaining options are intensely painful ones – which is why avoiding “becoming Greece” should be every country’s top priority).

The solution?

Sinn is calling for measures to artificially limit the imbalances recorded by Target2, based on his case that there is a parallel between dealings across the Eurozone and dealings between US states, where imbalances caused by one state “exporting” more to another state than it “imports” also occur and have to be dealt with. Buiter and others basically argue that Sinn’s case is bogus and that his proposals, if adopted, would be both unworkable and hugely dangerous for the EU.  With Greek politics in a state of near chaos and with opposition to further increases in austerity gathering pace it is possible that the issue of the Greek bailout at least will be moot in short order, but this does not negate the issues raised. We return to look at the issues in more detail in Part Two.

Further reading on austerity and fiscal policy:


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