The battle lines are hardening: In its monthly report, the Bundesbank (German Central Bank) attacks its omnipotent sister, the ECB (European Central Bank) for its recent decision to buy sovereign bonds of Italy and other eurozone countries that lived high on the hog for years but are now crumbling under the resulting pile of debt.
And yet, holier-than-thou Germany faces a conundrum. Its export-oriented economy is dependent on other countries, including Greece and Italy. In fact, Germany has been the primary beneficiary of its neighbors’ borrowing binge. The German industrial complex, until last year the world’s number one export powerhouse, raked in huge profits by exporting to these countries for over a decade. The idea that this debt-fueled trade could take a hit if real belt-tightening were to set in produces a lot of hand-wringing these days in German business conversations.
Now they’re on collision course: On one side, the Bundesbank that sees itself as guardian of monetary stability; on the other side, the industrial complex that sees itself as engine of the German economy; and in between, Chancellor Angela Merkel and her cabinet that ping-pong around in their uphill battle to get reelected.
Printing money to monetize Germany’s national debt is of course still anathema to all of them. That such a strategy demolished the German economy twice in the 20th century is still taught in history class. But printing money to bail out other countries so that they can continue to buy German goods is suddenly up for discussion. While German industrialists and financial institutions have been working furiously behind the scenes and through the media to get some kind of deal worked out, the Bundesbank has drawn its knife.
The ECB’s decision to buy sovereign bonds of eurozone countries will shift liability and risks from individual countries to the eurozone as a whole, or rather from its weak members to its strongest, namely Germany, says the Bundesbank in its 166-page monthly report. And it will allow individual countries to evade the fiscal discipline that capital markets impose. At the same time, the ECB has done nothing to increase its influence over financial and fiscal policies of these troubled countries.
Designed to protect over-indebted countries from default, it turns into a false incentive: Countries with unsustainable budgetary policies can count on aid, and countries with solid finances are conscripted to finance that aid. Particularly disturbing, the Bundesbank says, is that the new credit conditions diminish the incentives for these countries to undertake the painful reforms needed to reach dry ground.
So the Bundesbank poses a question: How can you prevent financial irresponsibility at the national level if countries that violate eurozone budget rules year after year are protected from the discipline of the capital markets and are bailed out under very advantageous conditions that allow them to finance their out-of-control debt at lower rates than the aiding countries?
But exactly this system of bailing out troubled countries under very advantageous conditions makes German industrialists drool; they see the enormous profits to be made if they could just persuade the public and politicians to go along. And note, I haven’t said a word about German banks who own a big chunk of this troubled debt, and whose survival may well hinge on this very bailout.