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This book offers a critical assessment of the history of the euro, its crisis, and the rescue measures taken by the European Central Bank and the community of states. The euro induced huge capital flows from the northern to the southern countries of the Eurozone that triggered an inflationary credit bubble in the latter, deprived them of their competitiveness, and made the This book offers a critical assessment of the history of the euro, its crisis, and the rescue measures taken by the European Central Bank and the community of states. The euro induced huge capital flows from the northern to the southern countries of the Eurozone that triggered an inflationary credit bubble in the latter, deprived them of their competitiveness, and made them vulnerable to the financial crisis that spilled over from the US in 2007 and 2008. As private capital shied away from the southern countries, the ECB helped out by providing credit from the local money-printing presses. The ECB became heavily exposed to investment risks in the process, and subsequently had to be bailed out by intergovernmental rescue operations that provided replacement credit for the ECB credit, which itself had replaced the dwindling private credit. The interventions stretched the legal structures stipulated by the Maastricht Treaty which, in the absence of a European federal state, had granted the ECB a very limited mandate. These interventions created a path dependency that effectively made parliaments vicarious agents of the ECB's Governing Council. This book describes what the author considers to be a dangerous political process that undermines both the market economy and democracy, without solving southern Europe's competitiveness problem. It argues that the Eurozone has to rethink its rules of conduct by limiting the role of the ECB, exiting the regime of soft budget constraints and writing off public and bank debt to help the crisis countries breathe again. At the same time, the Eurosystem should become more flexible by offering its members the option of exiting and re-entering the euro - something between the dollar and the Bretton Woods system - until it eventually turns into a federation with a strong political power centre and a uniform currency like the dollar.


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This book offers a critical assessment of the history of the euro, its crisis, and the rescue measures taken by the European Central Bank and the community of states. The euro induced huge capital flows from the northern to the southern countries of the Eurozone that triggered an inflationary credit bubble in the latter, deprived them of their competitiveness, and made the This book offers a critical assessment of the history of the euro, its crisis, and the rescue measures taken by the European Central Bank and the community of states. The euro induced huge capital flows from the northern to the southern countries of the Eurozone that triggered an inflationary credit bubble in the latter, deprived them of their competitiveness, and made them vulnerable to the financial crisis that spilled over from the US in 2007 and 2008. As private capital shied away from the southern countries, the ECB helped out by providing credit from the local money-printing presses. The ECB became heavily exposed to investment risks in the process, and subsequently had to be bailed out by intergovernmental rescue operations that provided replacement credit for the ECB credit, which itself had replaced the dwindling private credit. The interventions stretched the legal structures stipulated by the Maastricht Treaty which, in the absence of a European federal state, had granted the ECB a very limited mandate. These interventions created a path dependency that effectively made parliaments vicarious agents of the ECB's Governing Council. This book describes what the author considers to be a dangerous political process that undermines both the market economy and democracy, without solving southern Europe's competitiveness problem. It argues that the Eurozone has to rethink its rules of conduct by limiting the role of the ECB, exiting the regime of soft budget constraints and writing off public and bank debt to help the crisis countries breathe again. At the same time, the Eurosystem should become more flexible by offering its members the option of exiting and re-entering the euro - something between the dollar and the Bretton Woods system - until it eventually turns into a federation with a strong political power centre and a uniform currency like the dollar.

30 review for The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs

  1. 5 out of 5

    Leopold Benedict

    These days I am trying to wrap my head around the euro crisis. Andrew Moravcsik said that a lot of the criticism of Europe is unfair and unfounded, but with regard to the euro it is unfortunately true. The euro is constraining economic growth and thus eroding the political legitimacy of the Union as a whole. And there is no easy way out. I came to look for answers in this book. It has been analysed by a lot of commentators that the monetary union without the political union will not function. Th These days I am trying to wrap my head around the euro crisis. Andrew Moravcsik said that a lot of the criticism of Europe is unfair and unfounded, but with regard to the euro it is unfortunately true. The euro is constraining economic growth and thus eroding the political legitimacy of the Union as a whole. And there is no easy way out. I came to look for answers in this book. It has been analysed by a lot of commentators that the monetary union without the political union will not function. There are two different problem in the economies of the Southern European states, debt and competitiveness. To address the first problem there needs to be a restructuring of the debt. That would be a mixture of outright debt reduction, sale of public property by the debtor state and taxes on wealth. A debt restructuring could be organised in the frame of the Paris Club. The International Monetary Fund insisted in the recent bailout payments for Greece in June 2017 on a debt restructuring and will withhold any financial contribution until the debt is reduced to a manageable amount. But there will be no deal on debt restructuring before the federal elections in Germany in September 2017. It will be interesting to see whether a debt restructuring will be organised at the end of the year. The second is the lack of competitiveness. The products and services cannot be sold abroad because they are overpriced. In order to solve this problem countries usually resolve to devalue their currency in order to make their products cheaper. However, the structure of the euro prevents these countries from devaluing. Since the formal devaluation is not possible, they countries could pursue a strategy of internal devaluation. That means that wages and prices are cut in the country, which makes goods and services cheaper. The problem with this strategy is that the debtor countries need a devaluation of 20-30% in order to become competitive again. Internal devaluation in this magnitude will lead to unpredictable social unrest. The deflation policy of Chancellor Brüning during the Weimarer Republic lead to civil war like conditions and ultimately to the rise of fascism. Therefore, the only viable option is to create a breathing currency union where countries can opt out of the euro to make their economies competitive again and rejoin later in time. This strategy creates a row of technical problems, but also the political problem that the euro has been strongly linked to the project of European integration as a whole. Merkel's sentence, that if the euro fails then Europe fails, underlines the political investment into the euro project. A strategy of a breathing currency union would require a destigmatisation of an exit out of the common currency. The economic problems of the euro zone remain grave. Unfortunately, there are no easy solutions. The danger that Europe will muddle through ('durchwursteln') the next years are significant which will result in a lost generation for Europe.

  2. 5 out of 5

    Athan Tolis

    Hans-Werner Sinn is a paradox of Krugman-size proportions: just like the Nobel laureate NYT polemicist regularly does, he has written a book that is as tremendous as his articles are annoying. If you want to understand the reason Southern Europe should be considered “trapped” in the Euro, it’s all here: 1. Unjustified post-EUR-adoption increases in compensation for its workers in both the tradable and non-tradable sector are very tough to reverse within the EUR. This has led to unemployment in th Hans-Werner Sinn is a paradox of Krugman-size proportions: just like the Nobel laureate NYT polemicist regularly does, he has written a book that is as tremendous as his articles are annoying. If you want to understand the reason Southern Europe should be considered “trapped” in the Euro, it’s all here: 1. Unjustified post-EUR-adoption increases in compensation for its workers in both the tradable and non-tradable sector are very tough to reverse within the EUR. This has led to unemployment in the South. Rigidity in the labor market of the South, in turn, has turned this into a massive youth unemployment problem, with all that implies for the future of the region. 2. Should a Southern country exit the EUR, high accumulated private debts in hard currency will cause enormous re-distributions of wealth and private bankruptcies. 3. The barely serviceable public debts accumulated by many Southern countries are resolutely un-serviceable if you look at them in terms of what debt/GDP will be in terms of devalued, post-EUR-exit local GDP. 4. The powers-that-be of the North, chief among them the ECB, are doing “whatever it takes” to keep the Southern countries in the fold, mainly to protect the savings of the North that are denominated in liabilities of the South, and chiefly those of the French, German and Dutch banking systems. Hence, the title of the book! If you are looking for an explanation of how we sleepwalked into monetary financing, that’s also here: yes, the Maastricht criteria and the (oft-mentioned in the book) articles 123 and 125 were meant to prevent monetary financing, but the mess was pre-ordained when the EUR-denominated sovereign debt of Southern Europe was grandfathered zero risk weighting by Basle I and Basle II. The moment the investors, insurance companies and banks in the North were no longer exposed to currency risk when buying the sovereign debt of the South, what exactly did you think they would do? If you want a good explanation of the main reasons Germany does not benefit from the Euro as much as the press (and its own politicians) think it does, it’s all here too: 1. It’s a matter of starting point. If you set your clock ten years before the 1999 adoption of the EUR (also a very relevant period in this process), you will see that Germany had impossibly bad growth. It was, indeed, “the sick man of Europe,” because it imposed the reforms the South is currently, and very reluctantly, adopting. On a thirty year basis, Germany does not come out ahead. (He omits –I presume deliberately—to observe that Germany actually devalued its currency in 1999, by only letting Italy and Spain in at impossibly high exchange rates for their local currencies) 2. Investors across Europe, and Germany in particular, are blocked from earning a fair return on their investment, because of the financial repression exercised by the ECB. 3. Most of the business Germany gains versus the rest of the world that is attributable to having adopted the weak EUR as its currency carries on (even today) being automatically invested in claims on Southern Europe, which it will never be able to cash in. Which brings us very naturally to the main thrust of the book, and the major focus of every Sinn article you’ve ever read in the press: TARGET. Here’s how this breaks down: Suppose a Greek consumer buys book from Greek bookstore. If consumer and bookstore bank at the same bank, 1. The consumer’s commercial bank account is debited EUR 10 for the book purchase 2. The bookstore’s commercial bank account is credited EUR 10 for the book sale If consumer and bookstore bank at separate Greek banks that are prepared to lend to one another, 1. The consumer’s commercial bank account is debited EUR 10 for the book purchase 2. The consumer’s commercial bank borrows EUR 10 from the bookstore’s commercial bank 3. The bookstore’s commercial bank account is credited EUR 10 for the book sale If consumer and bookstore bank at separate Greek banks that are not prepared to lend to one another, 1. The consumer’s commercial bank account is debited EUR 10 for the book purchase 2. The consumer’s commercial bank borrows EUR 10 from the Greek National Central Bank (NCB) 3. The bookstore’s bank lends EUR 10 to the Greek NCB 4. The bookstore’s commercial bank account is credited EUR 10 for the book sale The Greek NCB obviously keeps an eye on all its banks and if over time a bank keeps adding to its borrowings, it will intervene. It will go ask it for some collateral, or it will go have a look and make sure the commercial bank is good for the money. Suppose a Greek consumer buys a book from amazon.de, on the other hand, we hit upon what is the major “elephant in the room” for the common European currency. Up until the day the EUR joined the monetary union, the manner in which the above transaction would have worked, was the following: 1. The consumer’s commercial bank account is debited GRD 1000 for the book purchase 2. The Greek NCB is credited with GRD 1000 3. The Greek NCB’s GRD account with TARGET is increased by GRD 1000 4. The Greek NCB’s EUR account with TARGET is decreased by EUR 10 5. The German NCB’s credit with TARGET in increased by EUR 10 6. The German NCB’s DEM account with TARGET is increased by DEM 15 7. The German NCB is debited with DEM 15 8. The bookstore’s commercial bank account is credited DEM 15 for the book sale Lines 3 through 6 correspond to a currency transaction, whereby the ECB converts the customer’s GDR into the DEM amazon.de is looking for. So if there was too much of this business going on, the GRD would fall in value versus the EUR, the DEM would go up in value versus the EUR and the world would continue. Swings in the FX rate would act as stabilizers in trade. When there was too much selling of GRD, the drachma would fall and Greek consumers would find themselves less able to buy books from Germany, but German tourists would find themselves more able to take a vacation in Greece. And the TARGET account would rebalance the other way, naturally. The EUR in the TARGET account are but an accounting unit, which keeps track of whether National Central Banks across Europe have been facilitating imports or exports. They fulfil the role gold used to fulfil until 1972 (They were actually called ECU, but that’s neither here nor there) But, in contrast with the price of gold that was not flexible (hence the end of Bretton Woods), the price of the FX was free to move and, over time, balance out intra-European trade. The moment Greece joins the union, however, it all gets simplified: 1. The consumer’s bank account is debited EUR 10 for the book purchase 2. The consumer’s bank borrows EUR 10 from the Greek NCB 3. The Greek NCB’s credit with TARGET2 is decreased by EUR 10 4. The German NCB’s credit with TARGET2 in increased by EUR 10 5. The bookstore’s bank lends EUR 10 to the German NCB 6. The bookstore’s bank account is credited EUR 10 for the book sale The two transactions in the middle look identical to the ones before Greece joined. There is an enormous difference: this is entirely automatic. It is not part of a market transaction in FX. Nobody can go tell the Greek central bank that it’s overdoing it on TARGET2. This is 100% in keeping with the idea that a Greek bank that gives me a loan to go buy a house is 100% entitled to create Euros. Its Greek banking license is just as good at a German banking license. If the Greek NCB is running a massive TARGET2 deficit it is not charged a higher rate for the privilege. If Germany is running a massive balance, it earns the normal rate. Market forces are suppressed. To some extent, from the angle of the designer of the system, that is as it should be. There is only one EUR. Not an account of Greek EUR and an account of German EUR. The moment you are sitting on a Greek banking license it ought to be 100% the same as sitting on a German banking license. Both of you ought to be able to lend 100% fungible EUR to your customers. Indeed, there really is no need for TARGET any more or for individual National Central Banks to keep accounts with it. However (IMPORTANT CAVEAT: THIS IS NOW ME TALKING, NOT THE AUTHOR), when the architects of the EUR put together the common currency, the last thing they needed was resistance from the Bundesbank, the Banque de France, the Banca d’Italia or the Bank of England (which they got regardless, of course, in spades). Rather than get rid of the NCB’s clearing systems (to say nothing about getting rid of the National Central Banks themselves), they allowed them each to carry on doing exactly what they were doing before and, importantly, keep their jobs. It would have been 100% acceptable under a single currency to have the following setup: 1. The consumer’s commercial bank account is debited EUR 10 2. The bookstore’s commercial bank account is credited EUR 10 3. The consumer’s commercial bank borrows EUR 10 from the ECB 4. The bookstore’s commercial bank lends EUR 10 to the ECB Instead, we kept the NCBs and we kept TARGET (though at some point it was re-baptized as TARGET2)! As a result, entirely through accident in my view, we have the gift of knowing the entire historical record of how printed money has helped the North sell stuff to the South without the South ever having sold equivalent goods and services to the North. NOW BACK TO HANS-WERNER SINN, RATHER THAN ME: The transaction does not need to involve a purchase of German books by a Greek consumer. A Greek consumer could be buying plastic toys from a Chinese manufacturer, who in turn buys machine tools from Germany. If it’s all done with EUR made inside the Greek banking system, we obtain: 1. The Greek consumer’s commercial bank account is debited EUR 1000 to buy plastic toys 2. The Greek consumer’s commercial bank borrows EUR 1000 from the Greek NCB 3. The Greek NCB’s EUR account with TARGET2 is decreased by EUR 1000 1. The German manufacturer’s commercial bank account is credited USD 1100 for machine tools 2. The German manufacturer’s commercial bank account is debited USD 1100 from an FX market transaction 3. The German manufacturer’s commercial bank account is credited EUR 1000 from an FX market transaction 4. The German manufacturer’s commercial bank lends EUR 1000 to the German NCB 5. The German NCB’s EUR account with TARGET2 is increased by EUR 1000 Note that by dint of (i) the Greek consumer buying Chinese products with money printed by the Greek NCB and (ii) the German manufacturer selling machine tools to the same Chinese company, we end up with an increase in the EUR TARGET2 balance of the German NCB and a decrease in the EUR TARGET2 balance of the Greek NCB TARGET2 balances are the new gold, basically, BUT IT’S AN ACCIDENT and it’s an accident rooted in the lack of the will to undo the previously existing system. Sinn expresses the wish that we will replace TARGET2 with actual, physical gold, which would of course be a silly anachronism. The reality about TARGET2 is something altogether more exciting and unique: Because, through accident of history, we can observe it, it’s real! End of story. A mechanism is in place, basically, to keep track of the money the North has mechanically sent to the South (sometimes via China!!!) through the mechanism called the Euro and Hans-Werner Sinn calls the printing press. If TARGET2 wasn’t there, we would not be able to measure it. But we are! Moreover, if a southern European state were to leave the currency union, it would be entirely legitimate for the North to require that it be compensated for the TARGET2 credit issued to the southern state. It is therefore entirely legitimate for Hans Werner Sinn to say that the cheap EUR, the result of Germany consorting with Italy, does not really benefit Germany, because all Germany collects from the resulting exports to China is a bunch of TARGET2 credits. Additionally it is a way to keep track of the dollar amount by which the South is subsidized. On the other hand, those who say the South does not owe that money and the only reason we can count it is because we did not go “all the way” when we set up the ECB and maintained the sundry NCBs, are also right: if the EUR is irreversible, then we should be at peace with these credits and debits tallying up to the sky. Go tell it to the 40% of the Italian youth and 50% of the Greek youth that’s unemployed, though. I would say they’d much rather their country had stayed competitive, rather than spend money it did not make. And go tell it to whoever tries to collect a dime from Greece or Italy when they eventually leave. Like all matters European, it’s complicated and it can legitimately be argued both ways. I disagree with a lot that Hans-Werner Sinn has to say, but I’m very grateful he wrote this book!

  3. 5 out of 5

    John

    The first third and last quarter are quite accessible but it does get quite technical in the middle section. As a former banker I could just about keep up but not with all of it. However, the bits I did understand were very interesting indeed, in particular: 1) ECB Target 2 balances: Most especially interesting was the expanation of how T2 balances have been abused by the national central banks of S.Europe and what this means for generations of young German, Dutch and Finnish tax-payers. In summa The first third and last quarter are quite accessible but it does get quite technical in the middle section. As a former banker I could just about keep up but not with all of it. However, the bits I did understand were very interesting indeed, in particular: 1) ECB Target 2 balances: Most especially interesting was the expanation of how T2 balances have been abused by the national central banks of S.Europe and what this means for generations of young German, Dutch and Finnish tax-payers. In summary, S. Europe owes Germany "somewhere between" (?!) 1 and 2 Trillion Euros. How this plays out will be fascinating. 2) Real wealth growth disparity: fascinating that contrary to most understanding the average S. European has been enriched at the expense of the Northern Europeans, in particular Germans. Germany, under Schroder, implemented many hard reforms and was punished for it at the polls but Germany got knocked into shape. However the statistics are also revealing as wealth disparity also increased, whereby poor got poorer, and rich got richer in Southern Europe. Germany is by no means exploting anyone and is in fact a very positive influence in the Euro-zone despite what the media suggest. 3) Interest rate abuse: after the intro of the Euro, it is also a tragedy how Italy, Spain and others abused the advantage of low interest rates from the Euro to pump credit into their economies, and mask inefficiencies, rather than reform and use the opportunity to prepare their economies for the challenge of 21st Century. 4) Future tax-payer burden: the ECB response to the crisis, which was also felt in UK, US and elsewhere was similar: create money, put today's burden on future generations. The sheer weight of burden from this AND the ageing population is a very big challenge for our time. Only growth and productivity can alleviate this challenge so reforms of social security systems in S. Europe are as urgent as ever. We must wait and see if pension, social security and other benefit reforms can be implemented soon enough to deal with this time bomb. This is a problem across all Western societies but in particular Southern Europe. Evidence so far, as of July 2017, indicates that too little is being done too slowly, so we shall see... In conclusion, the startling fact is that Italy, Spain, Greece and co workers are still, 10 years after the crisis of 2008, between 20 and 30% overvalued versus Germany, if this is a valid benchmark. They also remain more expensive places to do business than Central and Eastern Europe. Mr Sinn is very balanced and pro-EU, so it is a good book to understand the challenges ahead. Whether the EU can address North v South; East v West; and the challenge of ageing populations we can only wait and see. A very informative and highly compelling analysis of one of the biggest issues of our time from an academic seeking to propose solutions. Well worth persevering.

  4. 5 out of 5

    Petr Hanak

    It book describes the origins of Eurozone and its problems in great detail. There are hundreds of sources quoted for anyone who would like to get even more details. The book argues that the Eurozone problems are so deep that it may bring about the collapse of the union. However, what the author omits to mention is the reason why the southern countries have become so indebted and stuck in the crisis. It is the profligacy of the southern governments. Each of them has been spending about 3-15% more It book describes the origins of Eurozone and its problems in great detail. There are hundreds of sources quoted for anyone who would like to get even more details. The book argues that the Eurozone problems are so deep that it may bring about the collapse of the union. However, what the author omits to mention is the reason why the southern countries have become so indebted and stuck in the crisis. It is the profligacy of the southern governments. Each of them has been spending about 3-15% more each year than they collect on taxes and it has been going on at least since 2007. No wonder, many of them are on the brink on bankruptcy. And it has all happed in contradiction with the Maastricht Treaty. The logical conclusion then, is for the northern countries to establish their own currency, Euro2 and leave Eurozone. Nobody should try to construe purely technical solutions to a problem that is one of morality and integrity. Leadership of the indebted southern countries is full of liars and fraudsters - it is impossible to form a long-term relationship with such people.

  5. 5 out of 5

    Plamen P.

    Techically difficult to digest the book, expert knowledege needed to better understand this reading, very academic

  6. 5 out of 5

    Andy

    I couldn't finish this book, even though I dearly wanted to. As I am a novice, the economic theory was leaving me behind. However, during the half that I did read, the facts and history of events provide clear indication regarding the reality of the inception of the Euro and the manipulations and lucky circumstances which allowed so many (unsuitable?) countries to join. If i ever complete a economics course, I will definately come back to this book. I couldn't finish this book, even though I dearly wanted to. As I am a novice, the economic theory was leaving me behind. However, during the half that I did read, the facts and history of events provide clear indication regarding the reality of the inception of the Euro and the manipulations and lucky circumstances which allowed so many (unsuitable?) countries to join. If i ever complete a economics course, I will definately come back to this book.

  7. 4 out of 5

    Boris Pavelec

  8. 5 out of 5

    Christoph Walz

  9. 4 out of 5

    Berry

  10. 5 out of 5

    Nicolas

  11. 4 out of 5

    Bxslaint

  12. 5 out of 5

    Jakub Masek

  13. 4 out of 5

    Indradeep Ghosh

  14. 4 out of 5

    Luciano

  15. 4 out of 5

    Jing

  16. 5 out of 5

    Aimilia-Christina Kollia

  17. 4 out of 5

    Frank

  18. 4 out of 5

    John

  19. 4 out of 5

    Mary

  20. 5 out of 5

    Daniel1974nlgmail.com

  21. 4 out of 5

    Fabiana

  22. 4 out of 5

    Patrick

  23. 5 out of 5

    Henrik Kvadsheim

  24. 4 out of 5

    Arne Van

  25. 4 out of 5

    Klaas

  26. 4 out of 5

    Nina Mehmandoost

  27. 4 out of 5

    bookfan

  28. 4 out of 5

    Tomas Daubner

  29. 5 out of 5

    Victor Ropero

  30. 4 out of 5

    Jack

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