A Crisis Made in Germany
09/12/2011 11:18 am EST
The exit of a German hawk from the European Central Bank underscores the failure of German policy, writes MoneyShow.com senior editor Igor Greenwald.
In the wee hours of Friday morning, Jürgen Stark, Germany’s man at the European Central Bank and the institution’s chief economist, was seen on Japanese TV assuring viewers that the ECB’s bond purchases are a temporary but open-ended measure, designed to “transmit” the benefit of low benchmark interest rates throughout the Eurozone.
Hours later, it emerged that Stark is resigning in protest over the very bond-buying program he had gamely tried to defend, until he couldn’t stand it any longer.
With Germany’s finance minister insisting that heavily bleeding Greece meet unrealistic budget-cutting goals, rumors were soon circulating that the Germans were at work on a “Plan B” designed to safeguard German banks when—not if—Greece defaults.
Stark’s resignation dealt a blow to the government of Chancellor Angela Merkel, already reeling from defeats in five consecutive provincial elections and growing internal opposition to Eurozone bailouts. Germany will send another representative to the ECB from its rookery of fiscal hawks, but the point has been made: the ECB’s policies are now at odds with the ideology of its richest and most powerful member state.
This ideology holds that debtors should be squeezed, though it’s not clear that there’s really a Plan B for when they refuse to pay, possibly blowing up the monetary union that has disproportionately benefited Germany.
Stark, for one, seems to believe that only cuts in government spending can stabilize slumping economies, despite evidence to the contrary from Greece and history.
“The massive risks to the sustainability of public-sector budgets are undermining financial stability,” he wrote in a newspaper column submitted alongside his resignation. “A fiscal stimulus would only allow the debt levels to rise further and thus further raise these risks.”
In other words, if Germans were the European party with which US Treasury Secretary Timothy Geithner held “frank discussions” Friday in his push to get Europe to stop the financial rot, he was probably wasting his breath.
Perhaps it was the French, the only European nation that has much influence over Germany, and one squarely in crisis mode as French bank stocks spiral ever closer to zero ahead of an expected credit downgrade.
But even Paris can only do so much so long, as Berlin rejects Geithner’s arguments that Europe needs a massive banking bailout, and that “fiscal policy everywhere has to be guided by imperatives of growth.”
The world’s largest economy and its healthiest one remain at loggerheads over the way out of this morass.
But it’s been two-plus years since the US resorted to bailouts and economic stimulus, whereas the effects of European austerity demanded by Germany are being felt every day.
Once Germany put Greece in an extra-itchy hair shirt, it was only natural for bondholders to ask what would happen in similar circumstances to Ireland and Portugal, and to heavily-indebted, growth-challenged Italy when its turn came. The ECB has been forced to buy Italian and Spanish bonds because German austerity demands have seriously undercut the growth potential of those economies, and therefore private bondholders’ confidence.
Germany’s own economic success has lent an extra measure of self-confidence and authority to its prescriptions for the rest of the Eurozone.
But now Germans are beginning to discover just how much of their economic “miracle” was based on unsustainable borrowing and uncompetitive wages in the rest of Europe. After reaching a record in May, German exports have now declined two months in a row. Exports to other Eurozone members are roughly 40% of the total, and Italy is a bigger customer than China.
If Italy, Spain, and France can’t grow, Germany is unlikely to keep chugging ahead. And if the Eurozone falls apart and former partners devalue their way out of the downturn, Germany would quickly get reacquainted with the double-digit unemployment that used to plague it.
It’s hard to fathom that things will get that far; with Frankfurt stocks in freefall, Berlin ought soon to figure out that there are worse problems than budget deficits.
Still, this is Germany we’re talking about. It may have to suffer terribly before changing its tune.