New steps to save the euro are raising anxiety levels among Germany’s influential economic policy establishment, which sees them as an existential threat to the principles that helped raise the country from the ashes of World War Two.
Many saw Chancellor Angela Merkel’s decision last month to let the euro zone rescue fund buy the bonds of vulnerable member states on the open market as a step toward a “transfer union,” in which Germans are forced to pay for the sins of others. More worrying to veteran policymakers and academics has been the European Central Bank’s (ECB) recent purchases of Italian and Spanish debt — seen as the latest step in a dangerous erosion of the bank’s independence that risks irreparable damage to its inflation-fighting credibility.
“Germany agreed to join the currency union on the basis that the ECB would operate under the same principles as the Bundesbank,” said Manfred Neumann, emeritus economics professor at Bonn University. “This has now been massively damaged and we simply can’t accept it anymore,” said Neumann, who was doctoral adviser to Jens Weidmann, head of the Bundesbank, and remains close to him. Like Weidmann, who opposed the ECB’s decision at an emergency meeting on Sunday to renew its bond-buying program, many veterans of German monetary and economic policy have avoided speaking out publicly about their concerns. Former Bundesbank heads Axel Weber and Hans Tietmeyer, as well as ex-finance minister Theo Waigel, declined requests to be interviewed for this story. But Otmar Issing, a former chief economist at the ECB, expressed in an article in the Financial Times this week what many of the men who dominated German policy in the run-up to the euro are now thinking.
Under the headline “Slithering to the wrong kind of union,” Issing described the agreement sealed by Merkel and other euro zone leaders last month as a “dangerous step” that could divide Europe and warned that the euro could not survive unless central bank independence was fully respected. That independence principle has been sacrosanct in Germany for over 60 years — a reaction to the hyper-inflation of the 1920s which saw the Reichsbank print money at an alarming rate in a doomed attempt to boost the economy. The economic dislocation that resulted helped pave the way for the rise of the Nazis.
MERKEL BACKLASH:
Bert Ruerup, who headed the respected “wise men” panel of German government economic advisers, believes recent actions have sapped the ECB’s monetary policy credibility, turning it into a kind of “bad bank” for the euro zone.
But he reserves most of his criticism for European leaders, notably Merkel, who he says should have made clear following last month’s summit that Germany was accepting a limited form of transfer union, instead of playing down the results due to fears of a domestic backlash. “The summit was a big step in the direction of political union, but the communication was horrible,” Ruerup said. “Merkel is scared politically. That’s understandable — sentiment is bad. But her reluctance to spell out what these decisions really mean prevents them from having a real impact on the markets.”
After a brief rally in the aftermath of the July 21 summit, Spanish and Italian bonds came under assault, forcing the ECB to intervene. The euro zone’s rescue fund — the European Financial Stability Facility (EFSF) — will not have the power to buy bonds until national parliaments have approved the steps agreed by the leaders, probably in early October.
One side-effect of the recent policy decisions has been a rise in the costs of insuring against a German default, a sign of growing investor concern that even Europe’s economic powerhouse could be weighed down by the euro zone partners it has vowed to support.
Merkel, criticized elsewhere in Europe for dragging her feet over accepting bold steps to fight the debt crisis, is now seen by many in Germany as having gone too far to save countries on the so-called periphery. A poll on Wednesday showed that nearly two in three members of her own conservative bloc are unhappy with her policy. Some 52 per cent of the 578 conservatives surveyed in the Forsa poll for Stern magazine said they were against measures to save Germany’s partners in the euro zone, and just 42 per cent approved of bailout packages for Greece, Ireland and Portugal. In an unusually pointed critique, the president of the German banking association (BDB) Andreas Schmitz slammed her leadership on Wednesday in top-selling tabloid Bild.
“If the euro really runs into trouble, it won’t be because of its weakest member, Greece,” Schmitz said. “The currency union will fail if Germany, its strongest member, does not fulfill its leadership role and spell out the way forward.”
Neumann of Bonn University says Merkel has gone “much too far” already in sacrificing core German economic principles in defense of the euro.
He is one of 155 academics who published a paper in 1998, months before the single currency was created, entitled “The euro is coming too early.”
In it, they warned about the risks of political pressure on the new ECB and the lack of rock-solid mechanisms for ensuring fiscal discipline. “Germany would not have agreed to enter the euro if it knew what it knows now,” he told Reuters.
