Eurozone’s ‘serious design flaw’ is hurting Germany says top economist

By on

The president of IFO Institute has expressed his frustration at a serious design flaw in the eurozone’s structure which makes putting excess capital in Germany’s Bundesbank to work, virtually impossible.

Speaking on Wednesday at a panel discussion at the annual meeting of German economists, also attended by EFSF chief Klaus Regling, IFO president, Hans-Werner Sinn said that with the establishment of a ceiling for the Swiss franc, the Swiss National Bank now finds itself in a similar situation as the German Bundesbank.

Just as foreign exchange is flowing into the SNB because investors are seeking a safe haven, euro money stocks are continuously flowing into the Bundesbank that have been created in other euro countries, primarily the GIPS countries.

But far from benefitting Germany, Sinn argues, this influx of safe haven capital is displacing internal monetary creation via central bank loans.

Highlighting a major difference between the two banks he argued that while the SNB is able to use the incoming foreign exchange for the purchase of gold and securities with good interest rates abroad, the Bundesbank, in contrast finds itself hamstrung.

‘The Bundesbank receives in compensation for the elimination of its own credit creation only claims against the ECB system that it cannot exchange in marketable assets and that currently carry an interest rate below the inflation rate.’

He says up to May 2011, under the name of ‘Target claims’, (Trans-European Automated Real-time Gross Settlement Express Transfer System) the Bundesbank had accumulated €326 billion of such claims against the ECB.

However, he argues if the eurozone had adopted the US compensation system (known as inter-district settlement accounts), the Bundesbank today, like the Swiss National Bank, would have the right to exchange its claims to the amount of €326 billion euros vis-à-vis the ECB for gold certificates or for marketable assets with normal yields.

‘This shows once again that the euro zone is suffering from a serious design flaw, which in the crisis is increasingly acting to the detriment of the Federal Republic of Germany.’