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Analysis
As Federal Reserve’s QE2 hits dollar, President Obama starts to appear as the new Richard Nixon

As Federal Reserve’s QE2 hits dollar, President Obama starts to appear as the new Richard Nixon

Germany and others show renewed distaste at American monetary adventurism

by David Marsh

Mon 8 Nov 2010

‘We are not amused.’ The frosty words forever on the pursed lips of Queen Victoria 150 years ago seem to match the mood of Chancellor Angela ‘Ironsides’ Merkel as she contemplates renewed US monetary adventurism after last week’s much-heralded QE2 announcement.

The last time that the Federal Reserve waded into the market with massive purchases of Treasury bonds, Mrs Merkel made harshly clear where she stood. In a much-noted speech in Berlin in June 2009, she took the Fed, the Bank of England and the European Central Bank to task, saying she looked at the new bond-purchasing powers of the Fed ‘with great scepticism’, adding primly that the ECB was coming under ‘international pressure to bend [its principles].’ She urged: ‘We must go back again to an independent central banking policy and return to the path of reason.’

The latest reaction from Berlin to the renewed opening of the monetary floodgates looks like being equally critical. And the German government’s view is very likely to be shared by Bundesbank President Axel Weber, who in recent weeks has made no secret of his disdain for the ECB policy started in May (although more or less suspended in recent months) to purchase the bonds of weaker euro members led by Greece, Portugal and Ireland.

Germany has not gone as far as the Chinese who have spoken about setting up a ‘protective wall’ to counter further dollar decline. But with each new monetary policy softening across the Atlantic, the relationship between Europeans and Americans becomes a little tougher. Sooner or later, we will be back to the same kind of climate that prevailed in 1971, the year President Richard Nixon closed the gold window and effectively brought down the curtain on the Bretton Woods system – an occasion that will spark all kinds of 40th anniversary commemorations next year.

In contrast to competitors from weaker euro members, large parts of the German export industry can live with a Euro significantly above $1.40. A further depreciation of the dollar will however bring the euro area as a whole into still greater difficulties - increasing the pressure on the Germans to bail out their more fragile partners.

For decades the ever-present American willingness to pursue cheap money at times of trouble has been a bone of contention between the US and Europe. For the Europeans the desire to shield themselves from what they see as irresponsible US monetary and fiscal policies was one of the many catalysts behind the creation of monetary union. With the introduction of the single currency, Germany has indeed received significant protection against the perils of too sharp a rise in the D-Mark.

But the euro defence mechanism is still limited. Despite the edifice of the euro, the Europeans remain in thrall to monetary policy wrangling on the other side of the pond. Europe's vulnerability is increased by the unflagging efforts of the Japanese and Chinese to curb an over-appreciation of their own currencies – something that rankles particularly with President Nicolas Sarkozy.

As we prepare to commemorate the forty year anniversary of the Nixon gold move, the immortal words of his Treasury Secretary John Connally – ‘The dollar is our currency but your problem’ - will be ringing in Europeans’ ears. Not many people thought two years ago that Barack Obama might be the spiritual successor to Richard M. Nixon. But as Angela Merkel and others on the Old Continent fret over the Americans’ penchant to hurl large sums of dollars at their own and the world economy, it could just be that the two presidents will be seen increasingly in a common light.

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