Inter-state politics, ideological division threaten to complicate matters.
The resignation of the top German official at the European Central Bank (ECB) could hardly have come at a worse time for euro zone policymakers as they grope for a way out of the deepest crisis in the single currency’s 12-year history.
The ECB is the one institution that has kept the euro zone afloat in the sovereign debt crisis and prevented a bond market meltdown. The European Union has no federal government or common financial authority and speaks with many dissonant voices.
Juergen Stark’s departure from the ECB’s executive board in despair at the policy of buying government bonds to prevent the crisis spreading comes as policymakers in Berlin and beyond are preparing for the growing possibility of a Greek default.
It seems bound to complicate the next round of crisis management because it has injected the poison of inter-state politics as well as ideological division into the independent central bank.
“It’s the ECB that is holding the show together, so anything that weakens the ECB is bad news,” said an EU official involved in financial crisis management.
Stark’s walkout will further sap the ECB’s credibility with Germany’s conservative financial establishment, which saw the bond-buying as an improper means of financing government debt, and among voters in Europe’s largest economy.
That could make greater fiscal integration in the euro zone politically harder to achieve at a time when Chancellor Angela Merkel is coming to realise that a big leap forward in economic governance is needed to preserve the single currency.
It risks importing a north-south divide, between self-styled virtuous creditor countries and peripheral states seen as profligate and feckless, into the central bank.
At worst, Stark’s departure may constrain the ECB’s ability to act decisively in the coming months when the debt crisis enters an even more dangerous phase.
HAMSTRUNG
“This comes at a very, very bad time and it’s certainly serious,” said Jean Pisani-Ferry, director of the Bruegel economic think-tank in Brussels.
“If the ECB is shackled in its ability to buy Italian and Spanish bonds and at the same time we have to do a real restructuring of Greece’s debts, with a proper haircut, we risk a contagion shock spreading to other countries. If the ECB is hamstrung by a lack of consensus, that is the risk.”
A growing number of policymakers, as well as market economists, are convinced it is only a matter of time before Greece, which keeps falling behind on its fiscal targets, will have to default.
A source at this weekend’s G7 finance chiefs’ meeting in Marseille said the troika of European Union, ECB and International Monetary Fund inspectors, who suspended talks with Athens last week, would probably find a formula in its progress report to allow the next euro 8-billion ($11 million) tranche of bailout funds to be paid in October.
That would keep Greece going for a couple more months until European parliaments approve new powers for the EFSF rescue fund to give preventive credit lines to euro zone member states, buy bonds in the secondary market and lend money to recapitalise banks.
The source said the German finance ministry was increasingly convinced that Greece will not be able to avoid default for much longer, so ring-fencing the euro zone’s weakest debtor and limiting contagion will be crucial.
Even when the EFSF has its new powers, it will require the unanimous agreement of the 17 euro zone member states to use them, with the German parliament having just gained a bigger oversight role on those decisions. Political hurdles abound.
Markets may bid up euro zone bond yields again in anticipation of the ECB pulling out of bond-buying and handing over to the inexperienced EFSF, traders say.
The ECB has bought a total of euro 135 billion worth of Italian, Spanish, Greece, Irish and Portuguese bonds so far.
The rescue fund may find itself short of firepower in a crisis. It will have about euro 380 billion in uncommitted funds. Italy alone has euro 1.9 trillion of outstanding government bonds, of which 45 per cent are held by foreigners.
HARDER LINE
The replacement of Stark on the ECB board by the more pragmatic German junior finance minister Joerg Asmussen, the seasoned crisis manager proposed by Berlin on Saturday, may reduce ideological tensions at the central bank.
But it could also force incoming ECB President Mario Draghi, who succeeds Jean-Claude Trichet on November 1, to take a harder line on ending bond purchases and sticking to the bank’s core mandate of fighting inflation.
Draghi has already warned governments, including his native Italy, that continued bond-buying cannot be taken for granted.
“The next step will be increased pressure on the ECB to keep its hands clean. Stark is from the German school that sees this kind of intervention as bad in principle,” said Josef Janning, director of research at the European Policy Centre in Brussels.
“His likely successor will be less orthodox and more of a political crisis manager. But Stark may use his new freedom to speak out. That could make things more complicated for Merkel and for Draghi,” the German political scientist said.
Stark’s resignation could also affect international confidence in the ECB and the euro zone at a crucial moment.
“Politics has never been completely absent from the ECB but this has now been reinforced. This awakens the idea that the ECB is still a structure that amalgamates national institutions and views, not primarily individuals belonging to its board,” Pisani-Ferry said.
“You have to think about how this looks from New York. It looks as if these people can’t even sit around the same table and work things out.”
