Greece’s ability to recover competitive economic standing will be severely constrained if it continues to use the euro, and other indebted euro zone countries will likely face similar struggles, the head of Germany’s prominent Ifo Institute for Economic Research said on Monday.
“I personally believe there’s no chance for Greece to become competitive (while) in the euro zone,” Hans-Werner Sinn, president of Ifo, said in a luncheon speech in New York.
“If Greece is kept in the euro zone, there will be ongoing mass unemployment. But if they exit, they will see a very sudden recovery,” he said, as lower prices boost competitiveness.
He also cited risks of other indebted euro zone countries facing severe spending cuts and tax hikes.
“Cutting wages and prices to the extent necessary in some southern European countries is impossible, whatever the politicians say,” Mr. Sinn said. “Policy is unable to overcome the laws of economics.”
Greece has received more than €100-billion in aid since its debt crisis began, and last month creditors agreed to trade their Greek bonds for lower-valued securities.
Sinn said it would have been better to use that money to help Greece manage its exit from the euro zone.
ECB complicating crisis
Complicating matters are the various European Central Bank lending operations that Mr. Sinn said amount to “unlimited credit” for troubled countries.
The ECB has extended more than €1-trillion in low-cost, low-collateral, three-year loans to euro zone banks. Some of that money has in turn been loaned to euro zone governments to help bring down rising borrowing costs.
Mr. Sinn said these operations circumvent parliaments and will eventually lead to a common European government bond that removes interest rate risk and allows countries to borrow at below-market rates rather than pay down their debt and reform their economies.
“Uniform interest rates will lead to another misallocation of capital in Europe,” Mr. Sinn said.
He said Ireland has been successful in cutting its prices and trimming debt, relative to other troubled euro zone countries, because its housing bubble began to deflate before the ECB and the European Union rolled out cheap loans and rescue programs.
“Ireland had to help itself,” he said.