The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs by Hans-Werner Sinn

Author:Hans-Werner Sinn [Sinn, Hans-Werner]
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 0101-01-01T00:00:00+00:00

Crowding out Refinancing Credit in the North

The question now is how the enormous increase in money creation in the crisis-hit countries has affected the rest of Europe. In public discussion, the issue raised most often is inflation. Politicians and economists warn against this danger, 27 while the ECB reassures everyone that there are no signs of an inflationary trend.28

One thing is certain: a vast amount of liquidity has been created in the GIPSIC countries that has landed in the other countries of the Eurozone. The money that had flowed from the core to the GIPSIC countries before the crisis, in the form of private credit, now ceased to flow, while the money that the core countries’ banks had lent to the now-troubled countries fled back home because investors were afraid of the risks, and unwilling to compete with the local printing presses, which were offering credit regardless of these risks at conditions private lenders could never meet. Moreover, as documented at the beginning of this chapter, there was large-scale capital flight from Greek and Spanish banks to safer places abroad.

All of this translated into a surplus of liquidity and credit in the rest of the euro countries, which pushed interest rates to a historical low and triggered a construction boom in Germany (see Chapter 3). The upswing in Germany absorbed only a small portion of the liquidity, using it as additional transaction cash. The banks of the northern euro bloc found themselves flush with liquidity and had difficulty disposing of it.

While this could mean that there may have been forces stoking inflation in these countries, no sizeable inflation differentials between the GIPSIC countries and the rest of the Eurozone have yet materialized, as Figure 4.8 in Chapter 4 showed (bar Ireland). The harmonized inflation rate in the Eurozone, in turn, gives no reason for concern: while it was 2.1% on average in the five crisis years from 2008 to 2012, it averaged 2.2% in the previous five years.

The reason was probably that the monetary base in the Eurozone did not, in fact, expand extraordinarily in the aggregate during the crisis. The more than three-fold increase mentioned above in the stock of money balances created in the GIPSIC countries in the period 2007–2012 contrasts sharply with the increase in the stock of money balances in the aggregate of all euro countries, which amounted to ‘only’ 71%.

Figure 6.6 shows what happened. Obviously the explosion of the stock of money balances created in the GIPSIC countries by way of refinancing credit, caused or made possible by the ECB’s collateral and maturity policies, only moderately expanded the aggregate monetary base, because it reduced the inside money circulating in the rest of the Eurozone. This happened because the commercial banks of the other Eurozone countries took countervailing actions to get rid of at least some of the inflowing liquidity, since they did not need it, by repaying their own refinancing credit or lending the surplus cash to their NCBs by investing in fixed-term deposits.

Remarkably, the

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