Heated Ökonomenstreit in Germany about the Future of the Euro

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Summer is typically slow in terms of newsworthy events. In Germany however, a serious debate among academics has come to replace the usual “silly season”. Not since 1986 has an intellectual debate attracted that much media attention. Back then, leading historians used mass media to argue about the uniqueness of the Holocaust in the “Historians’ Dispute” (“Historikerstreit”). These days, an “Ökonomenstreit” sees economists exchange dueling open letters about the last EU summit’s plans to save the euro.

Heated Ökonomenstreit in Germany about the Future of the Euro

It all started when 172 economists published a manifesto in the daily Frankfurter Allgemeine Zeitung, warning that the summit’s results were leading towards a banking union. They critisized that German tax payers would be held liable for banking debt three times the size of euro-zone public debt. Among the signatories of the open letter is Hans-Werner Sinn, head of the influential think tank Ifo, and arguably Germany’s most prominent economist.

Chancellor Angela Merkel dismissed the letter’s concerns. “First of all, this is about better banking supervision, which one can only say is urgently necessary,” she said. “It is absolutely not about adding liability.” Government officials assured that the most a potential banking union would guarantee were private savers’ deposits of up to 100.000 euro; not more than each EU country already guarantees at a national level.

The letter not only unleashed a backlash from the government, it also provoked open letters by economists who opposed its arguments. A group of pro-euro economists heavily criticized it for playing up to the fears of the German public, and argued that even the collapse of one small bank in one of the troubled countries had the potential to destabilize that country’s financial system, which undoubtedly would pull Germany down with it too.

Finally, a third open letter argued in favor of a banking union with joint regulatory standards, which, according to its signatories’ interpretation of the EU summit results, would not amount to joint guarantees for debt. They argued that such a banking union would be a critical step in repairing “a fatal flaw in the design of the European monetary union” and in ending the euro zone crisis. “Only by breaking the link between the refinancing of banks and the solvency of national governments will it be possible to stabilize the supply of credit in crisis countries.”

Notwithstanding these arguments, in the German public opinion the initial letter has the upper hand.

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

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