Saturday 4 September 2010

EU Austerity Policies Risk Civil War in Greece, Warns Top German Economist Dr Sinn

THE TELEGRAPH: Greece’s austerity measures cannot prevent default and will lead to a breakdown of the political order if continued for long, a leading German economist has warned.

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Hans-Werner Sinn, head of Germany's prestigious IFO Institute, said it was impossible to cut wages and prices by 30pc without major riots. Photo: The Telegraph

“This tragedy does not have a solution,” said Hans-Werner Sinn, head of the prestigious IFO Institute in Munich.

“The policy of forced 'internal devaluation', deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30pc without major riots,” he said, speaking at the elite European House Ambrosetti forum at Lake Como.

“Greece would have been bankrupt without the rescue measures. All the alternatives are terrible but the least terrible is for the country to get out of the eurozone, even if this kills the Greek banks,” he said.

Dr Sinn said Greece is an entirely different case from Spain and Portugal, which still have manageable public debts and can bring their public finances back into line with higher taxes.

“Greece would have defaulted in the period between April 28 and May 7, had the money not been promised by the European Union,” he said, describing the failure of the EU’s bail-out strategy to include a haircut for the banks as an invitation to moral hazard.

“There should be a quasi-insolvency procedure for countries. Creditors have to accept a haircut before any money flows for rescue plans, otherwise we’ll never have debt discipline in the eurozone,” he said.

Greek society has so far held together well, despite a wave of strikes and street violence in the early months of the crisis. However, unemployment is rising fast and political fatigue with such austerity policies typically sets in the second year. >>> Ambrose Evans-Pritchard in Cernobbio, Italy | Friday, September 03, 2010