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Analysis
Germany discovers new source of euro polarisation

Germany discovers new source of euro polarisation

Europe lurches between solidarity and chaos

Pressure for ECB to intervene will grow

by David Marsh

Mon 21 May 2012

As Europe lurches between solidarity and chaos, Germany has discovered a new source of euro polarisation. An ex-Bundesbanker with the medieval name of Thilo Sarrazin who resigned from the German central bank 20 months ago has launched a new anti-euro book that is already setting nerves jangling in Europe’s largest, strongest economy.

In a prime slot on Germany’s main public service TV channel last night, Sarrazin voiced some incontestable truths. Economic and monetary union (EMU) is fostering animosity instead of brotherhood among European states. And the support rendered by EMU for German prosperity is falling as costs of euro rescue plans pile up and German exporters move trade towards countries outside the euro bloc.

Sarrazin was debating with a somewhat ineffectual former German finance minister, Peer Steinbrück, who responded that EMU was supporting efforts to promote peace in Europe and make up for the damage wrought by Nazi aggression and the Holocaust.

In an interview with the conservative daily Frankfurter Allgemeine Zeitung today, Sarrazin attacks Wolfgang Schäuble, saying the current German finance minister is devaluing German savings by accepting inflation of 3% but selling bonds with a coupon of only 1.5%. Mutualised Eurobonds high on President François Hollande’s post-election agenda would depress German savers’ returns still further.

Meanwhile Germany and Greece, at different ends of the spectrum, are locked in intriguing asymmetry. The Greeks say they wish to stay in the euro, yet are voting for political parties advocating policies inimical to that aim. Alexis Tsipras, head of the left-wing Syriza party that led the Greek polls on 6 May on a fiercely anti-austerity line, is visiting Paris and Berlin this week to plead for lower debts and more time.

The Germans, the supreme creditors, are doing the opposite. Opinion polls say they are fed up with the euro, yet they overwhelmingly favour German political parties which want to maintain the status quo. They may buy Sarrazin’s book by the sack load, but they would never vote for him.

In the middle of these extremes sits the European Central Bank. For some, the deus ex machina, ready to burst into action with a last desperate throw of the monetary dice – buying government debt, propping up banks, advocating Eurobonds. For others, the ECB is a technical animal, reduced now in status to doing nothing more than fulfil its supreme mandate of price stability.

The ECB itself is leaning strongly in the direction of the second variant. Despite the mood of gathering gloom, it’s not in the mood to do anything adventurous. A combination of moral hazard fears, genuine conservatism and belief that Germany should not be pushed too far explains why ECB president Mario Draghi came close to imitating Pontius Pilate last week.

At a speech opening a symposium in Frankfurt for José Manuel González-Páramo, departing member of the ECB executive board, Draghi put on a capable imitation of someone washing their hands of a tiresome interloper. Addressing ‘the difficult situation in Greece’, Draghi said: ‘Since the Treaty does not foresee anything on exit, this is not a matter for the ECB to decide. While the ECB will continue to comply with the mandate of keeping price stability over the medium term in line with Treaty provisions and preserving the integrity of our balance sheet, I want to state that our strong preference is that Greece will continue to stay in the euro area.’

Note that ‘preserving the integrity’ of the ECB’s balance sheet has now attained equivalent status with price stability. Hardly a ringing endorsement for the euro area to remain in one piece. And a point made also by Jens Weidmann, the Bundesbank president, in an interview yesterday.

Amid persuasive talk of ‘contingency plans’ by the ECB and national central banks to cover a Greek exit, the lukewarm tone of Draghi’s statement was echoed by the highly unenthusiastic message of support for Greece’s euro membership from the weekend G8 summit at Camp David. ‘We affirm our interest in Greece remaining in the eurozone’, as the G8 leaders announced, is hardly the same as saying it will.

ECB representatives these days exhibit contrition for not having paid attention earlier to the gathering storm, especially euro area payment imbalances, which one day (as we now know) had to be financed at ever more punitive interest rates. Erkki Liikanen, governor of the Bank of Finland, told the Frankfurt symposium, ‘The age of innocence has come to an end.’

The ECB rejects any idea that it was itself to blame. It was someone else’s fault. Jacques Delors, European Commission president in the 1980s, has waded into the fray. ‘The ECB’s only goal was, and that was demanded by the Germans, to maintain price stability. But everybody knows that in today’s world a central bank must also deal with financial stability, public debt as well as private debt,’ Delors says. ‘At what moment did the governor of the Bank of Ireland, the governor of the Bank of Spain or other governors tell the ECB governing council that something was wrong? They did not say anything, nobody said a word. Therefore, they too are responsible for this situation. So, this is no time for them to lecture others.’

As President Hollande has made clear, the socialists wish to take a far more activist approach on the ECB. How he does so in a manner consistent with the European treaties and German wishes remains to be seen. But, as the crisis on Greece’s membership reaches a denouement, pressure on the ECB to intervene will certainly increase in coming weeks.

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