Irish Bail-Out a Mistake, Says IER President

Prof. Hans-Werner Sinn Speaks to IESE Alumni

02/12/2010

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"My country (Germany) is very nervous about decisions taken over the rescue operation in Ireland," said Prof. Hans-Werner Sinn, President of the Ifo Institute for Economic Research and professor at the University of Munich, during an IESE Continuous Education Session this week in Barcelona. "In the EU as a whole, the rules for budget deficit and sanctions were not respected prior to the crisis and debt constraints were not taken seriously or respected accordingly," he said.

IESE Prof. Xavier Vives, who was moderating the session, introduced guest speaker Prof. Sinn to the audience of 120 IESE alumni as: "a man of conviction who says exactly what he thinks, and despite being one of the world´s brightest economists, he does it in a way that is understandable and accessible."

In his presentation, Prof. Sinn lived up to expectations by providing an in-depth and candid summary of the Euro crisis, the growth in EU countries over the last 10 years and where the euro stands today in the wake of recent "rescue operations" of Greece and Ireland.

Comparing the Irish economy to that of Germany, he claimed that the Irish bail-out had been a mistake for several reasons. "Firstly, it was not necessary - Ireland´s GDP per capita is 15 percent greater than Germany´s. [...] The message that this rescue operation sent out destabilized markets across Europe."

Prof. Sinn also highlighted that Ireland´s current account deficit is disappearing and that the tax bands in Ireland are disproportionately low compared to other EU countries. He explained that the tax bracket per GDP in Ireland is 11 percent smaller than Germany´s.

"200 billion euros could be raised simply by raising the tax band from 29 percent to 40 percent, a level similar to that of Germany, Spain or France," said Prof. Sinn.

He described how countries will now be more conservative in exercising EU bail-out funds which currently total €926bn. Of these, Germany contributes €215bn and France €165bn. "The new crisis mechanism will provide help, but not full coverage insurance, against insolvency," he said.

Between 1995 and 2009, GDP growth was 50 percent in Spain and 105 percent in Ireland whereas Germany was at the lower end of the scale with only 11 percent growth. Since the crisis first hit, this has dramatically changed: from 2008-2010 Sweden and Slovakia have seen the highest growth in the EU at 4 percent and Germany follows with 3,5 percent. Spain´s growth rate contracted to a meager 0.3 percent over this 2-year period.

"The preconception that Germany has always been the strongest EU economy is totally flawed. The former gazelles, Spain and Ireland, are becoming turtles and only now are the former turtles, Germany, becoming gazelles" he said. "There is a credit-driven investment boom in Germany at moment."

Prof. Sinn highlighted the over-evaluation of the euro as a key issue of concern, stating that repercussions of this could be "the beginning of a major speculative fall in Spain." However, his analysis of the Spanish economy within the EU context was not all doom and gloom, highlighting how national debt in Spain is almost half that of Ireland´s and the budget deficit sits at 9.3 percent compared to 72.3 percent in Ireland.

"Spain is not comparable to other countries as the national debt is much lower than many of the EU countries most affected by the crisis. There is every reason to be optimistic in Spain," he said.