Published on 12 Nov 2011

The 1tr mark note – symbol of Germany’s fears

Outside the European Central Bank, Frankfurt

Forget Athens or Rome for now. The solution, if there is one to this crisis, now lies in Frankfurt.

It is seen as the silver bullet for the euro crisis. It’s unsurprising that Portugal’s president today suggested massive central bank purchases of Euro government debt as the solution to this crisis. Extraordinarily, this week David Cameron too specifically named the European Central Bank as the institution that needs to do more to solve this crisis.

Basically, this means printing money, whether in combination with the EFSF, IMF, or just straight-up purchases on a massive scale that are then maintained or “unsterilised” in the jargon – i.e. Bank of England-style quantitative easing, known here as geld drucken, or printing money.

And if you want to know why Germany hesitates over signing the cheque, launching the big bazooka to solve the euro crisis, then come here. Specifically, go to the Bundesbank, Germany’s central bank, which has an incredible museum called the Geldmuseum.

It looked like a German rite of passage to me. Schoolkids initiated into the cult of stable money: low inflation and low debt. Germany’s central bank steered its post-war economic miracle after the ravages of 1920s Weimar hyper-inflation and wheelbarrows of cash, when money became “so worthless that it was cheaper to burn it than to buy fuel”.

Germany could not even find the paper to print its worthless money on. Remarkably, in a pull-out draw, you can see German currency written on playing cards, on gift wrap, and even embroidered currency. Then there’s a real trillion mark note.

And it was the Bundesbank that permanently solved this with a strong and stable Deutsche Mark. But now the euro, run by the ECB, is in trouble, and again people are talking of trillions. Global pressure on the ECB essentially to print trillions by buying huge quantities of Italian and Spanish government debt.

So, slowly, the ECB is being backed into a corner that is forcing its German sponsors to ask serious questions. Already two senior German officials have resigned from the ECB over its limited purchase of government bonds.

Politicians want more Germans on its executive board. They fear that the ECB is losing its Bundesbank DNA. They fear that inflation is at 3 per cent, and the ECB’s new Italian president, Mario Draghi, is cutting interest rates. Martin Murtfeld, a retired 76-year-old top German banker, put his hand next to his heart as he explained to me the historical origins of the fears in Germany that the ECB was moving away from its stability role.

The ball is now in the court of paymaster Germany, because in Greece and Italy there has actually been some progress towards a solution. Lucas Papademos was sworn in as prime minister of a technocratic Greek government today, vowing to keep Greece in the euro. In Rome Mario Monti was welcomed to the Italian senate as it voted to back a new budget law.

Both moves pave the way for Mr Berlusconi’s exit this weekend at the expense of another government of technocrats led by former European commissioner Monti. In both countries elections have been averted, for now.

Yet on the streets of Frankfurt, the sense is that Germany is stuck with paying the price. And that it is willing to pay the price for Italy, but perhaps not for Greece. Chancellor Merkel’s CDU party will discuss legislation allowing a country to exit the euro next week. Pandora’s box has been opened.

Frankfurt’s glorious opera house has become an unlikely symbol of the extreme efforts to by Europe’s political elite – Sarkozy, Merkel, Brussels and Frankfurt – to keep the grand euro project going. I visited the space where the Groupe de Francfort, formed just three weeks ago as an eight-piece ensemble of the Merkozy, Juncker, Lagarde, Draghi, Viceroy Rehn, Von Rompuy, and Barroso, and now driving through euro stability with limited democratic oversight.

Of the eight, three are elected and five are selected bureaucrats. They seem to have removed Berlusconi, as I predicted on this blog before the EU Summit. They are pulling rank on the euro periphery with their allies Monti and Papademos. Democracy seems to be taking a back seat.

But what of the democratic process in Germany?

Certainly, the professor responsible for Germany’s legal challenge against sharing all of Europe’s debts says Germany’s is at its limit. Professor Markus Kerber told me it was a “myth” and “French propaganda” that Germany had benefited from the euro and should write the cheque. Germany got to its low unemployment through tough labour market reforms that are sadly lacking in southern Europe, I was told. Eurobonds: “no way,” said Kerber. ECB formal money printing: “no way,” he said.

Remember, it was the independent Bundesbank that warned Germany to veto Greece’s entry to the euro a decade ago.

The two totems of post-war German politics – an aversion to debt and a commitment to European solidarity – are in conflict in this crisis. Germany’s economic elite is turning frosty on the steps being taken to preserve the euro. Its political elite are muddling through. Its people are somewhere in the middle.

The ECB and German policy making is now under siege, not just from the tents of the global Occupy movement but from global leaders trying to get this country to forget a painful part of its history.

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12 reader comments

  1. StuartM says:

    Germany is right to fear inflation. They appreciate the damage it does to growth. when you have high inflation people go into “close-down” mode i.e. buy value range, don’t buy luxuries, no meals out, etc. Basically worry about the future and how little your money buys result in people spending the minimum – which kills demand and however much banks lend to companies without the demand and people to buy it they will default and go bust.

    Cameron and his Bullingdon Boys from Millionaire Row do not appreciate this aspect of human nature. To them, well you just get more money from Daddy. The UK millionaires do not appreciate the impacts inflation has on so many people’s lives and thus the Germans are right; they must do everything in their power to avoid inflation. In the UK we have leaders how care little out the public (the “little people”) and it is more about getting money to those who already have far more than they could ever manage to spend in several lifetimes.

  2. nick purcell says:

    I have an almost morbid fascination with this predicament and how it is unfolding, possibly soon to be collapsing. Such a simple and yet complex problem. The consequences will no doubt be amplified for many years to come.

    Did you ever think you’d be reporting on an (economic) event of this magnitude in your life time Faisal?

    Keep up the good work, asking the right questions, bringing reasoning, the personalities and their perspective of the story to light is no doubt, not easy to do.

  3. Charles Jurcich says:

    “The ECB and German policy making is now under siege, not just from the tents of the global Occupy movement but from global leaders trying to get this country to forget a painful part of its history.”

    German should not forget it, they should simply understand the truth about Weimar. That is, it was caused by the terms of the Treaty of Versailles, which caused a massive supply shock.

    They already had triple-digit inflation before they expanded broad money, due to the French occupation of the industrial heartland, and import export restrictions.

    No such severe supply shock exists today, so expansion of broad money will not lead to hyper-inflation..

    1. e says:

      All true, but is there a question of when will the printing end because it won’t deal with the underlying fundamentals? And doesn’t this bring you back to the lack of sovereign control; maybe this is what they’re really grappling with?

    2. Charles Jurcich says:

      e, the thing to understand about the expansion of the broad money supply, is that it is nothing new. It has happened continually for the past 30 years more-or-less, with at least 3%GDP printed every year. The only difference is that this has been in the form of bank lending until now.

      In the absence of net bank lending, there is no reason to regard an expansion of broad money by the Government as a bad thing. Banks only lend under license from the Govt anyway. The correct form this should take is Govt spending without a corresponding debt issuance, to ensure money gets to where it is needed in the economy, and in the form of grants, not credit.

    3. e says:

      Yes but doesn’t broad money supply have to have an element of control (something to do with productivity) and doesn’t this have to be political; hence the need for some form of overarching sovereignty?

  4. Pierre Gonzalez says:

    Germans are very good at adapting the reality to what fits them now .
    They want more representation at the ECB but they forget that their candidate to replace Trichet pulled out because he got a better paid job in the private sector.
    This is no other country’s fault.
    As I mentioned in another post , they also forget that after the war THEY STARTED the all country has been rebuilt with foreign help ; not to speak about absorbing the shock of the reunification.
    What would have happened without foreign help ?
    And as Charles Jurcich says it today’s situation has nothing to do with Weimar’s problems .
    But it fits them because they selfishly don’t want to pay and because they have this traditional arrogant attitude of those who say ” I have the money , so I have the power and I decided what is good for me now ! You helped me yesterday , but that’s the past “

  5. TUT_TUT says:

    The Euro problem is somewhat artificial, and it seems to me that there is a very simple way of solving it.

    No country comes out of this very well. The PIGS for getting in to the mess they are in and Germany for blocking the way to solve it.

    What needs to be done is for Germany to allow the European Central Bank (ECB) to act like any other Central Bank, including their own. The ECB should not print money, which is what Germany is afraid of, but to issue Euro Bonds. These bonds could be backed by Germany, France and many other EU countries, including the UK. Let’s say for the sake of argument that they carry an interest rat of 3%, which is higher than Germany. This would allow Germany to make a profit on the Euro Bonds they buy. It could be, that these bonds would also be attractive to the BRIC countries. The cash that the ECB would then have could be used to buy up bonds from the PIIGS. The amount that the ECB would need to buy would be just sufficient to lower the interest on PIIGS countries bonds. The ECB would be making a profit on those bonds it buys where the rate is something like 5-6%

    The ECB could also buy bonds from the European Investment Bank (EIB),…

    1. Pierre Gonzalez says:

      Of course it is one of the best solutions , but Germans will oppose to any solution they don’t control 100% .
      If the ECB president would have been German , the story would be different.
      They invaded Europe to take control in 1940 , they simply try to do it another way.
      German supremacy is the basis of German thinking.

    2. TUT_TUT says:

      …incidentally you can buy those bonds yourself. The EIB could then invest in projects in the PIIGS that would improve their economies. It could also take on the state assets of those countries as collateral thus ensuring that they are repaid when the projects come to fruition. If the country receiving the investment defaults their assets should be put into the equivalent of administration and for the ECB to step in order to make sure that taxes are properly collected, and corruption dealt with.

  6. Meg Howarth says:

    A nice little history lesson on printing of money: http://bit.ly/tD4Jhn

    Problem isn’t banks/countries but the no-longer-fit-for-purpose GDP model, obsession with (profiteering) growth – (for who/what?), and the ideology of the 8-hr working day. Need to put human needs, not abstract profit, at heart of new socio-economic model. Citizens/Basic Income, 4-hr day, LVT land-value tax, alongside urgent discussion of ‘work’ in C21 globalised world would go long way towards that. We can’t all go on exporting often socially useless, environmentally damaging goods, using scarce natural resources etc. In the north/west of post-industrialism we’ve all become greedy, expecting over-comfortable retirements etc, so backing ‘the market’. etc etc

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