The Germans want to turn euroland into a form of Germany, but by doing that they might very well turn it into a form of Greece.
Jürgen Stark's strangely schizophrenic parting shot at the ECB:
In Frankfurt, a European Central Bank study warned the entire euro currency project was now in peril.
The study, perhaps the most stern warning about the euro's future from a central banker, was a parting shot from ECB chief economist Juergen Stark, who resigned this month after opposing the bank's purchases of troubled countries' bonds.
"Greatly increased fiscal imbalances in the euro area as a whole and the dire situation in individual member countries risk undermining stability, growth and employment, as well as the sustainability of (Europe's Economic and Monetary Union) itself," said the research paper, which was published by the ECB but not endorsed by it. [Moneynews]
Let's recapitalize that for you:
- Until Jürgen Stark resigned recently, the top economist at the executive board of the ECB wrote a paper arguing the entire euro currency project was now in peril.
- The ECB did not endorse the paper
- He resigned over the ECB buying bonds shortly after.
Here is the curious thing. At the moment, the ECB buying bonds is just about the only thing that can still salvage 'the whole euro currency project'. What else is there?
- One could increase the size of the European rescue fund (EFSF), but the Germans are against that (and in any case-- even if they were not-- agreements to get it in place would take too long).
- One could introduce eurobonds, but the Germans are against that as well (but even if they were not, the necessary Treaty amendments would probably take years).
So Stark, like most of his fellow countrymen, is keenly aware of the imminent dangers, but he's against the only workable imminent solution-- the ECB buying bonds. In fact, so much against it that he resigned. He wasn't even the first German to do that. Axel Weber, the frontrunner for replacing Trichet, resigned earlier this year for exactly the same reason.
To be fair to the Germans, they do have a solution, sort of. Absolutely vicious austerity, no matter the consequences for economic growth. Does it work? Well, there isn't much room for optimism here.
In Greece, everybody can see that it's clearly counterproductive. Growth is so negatively impacted that even the prime objective-- stabilizing the public finances-- hasn't been achieved, and that goal seems to be slipping further away each time. Next year, expectations are that the Greek public debt / GDP ratio will approach 200%.
The only case where one can say that it did achieve a modicum of success is Ireland. Ireland is competitive enough to ride the little wave experienced in world economy, and for growth not to be cut too drastically with the cut in public spending and tax increases. But that window of opportunity looks to be closing fast. What's more, that will all the more be the case if all euro countries take Jürgen Stark's medicine. If there is another round of demand cuts in the world economy, 'doing an Ireland' won't be an option anymore.
In times where even venerable institutions like the IMF and The Economist are warning against overdoing it on the austerity front and the dangers that it will lead to another world recession, does Stark wants to turn the whole euro area into some sort of Greece?
No, of course not. What he does want is turn it into some sort of Germany. But that ain't going to happen-- not overnight and not this way. Just ask what would have happened if the ECB would not have bought Italian bonds?
Italian financing costs would have shot through the roof, setting Italian public finances on an unsustainable path and thereby scaring away ever more investors. They might very well have been shut out of the markets altogether already, but even if not, that would be the end result. This will bring an economic crisis of epic proportions.
The 'entire euro currency project' is indeed in danger, as Jürgen Stark claimed. He got that part right, but not a whole lot more.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.