Stark shock widens German euro faultline

Stark shock widens German euro faultline

Berlin: The surprise exit of Germany’s top official at the ECB has ripped a hole in Chancellor Angela Merkel’s strategy of tackling Europe’s debt crisis with closer integration, raising new doubts about the euro project at home and widening divisions in her party and coalition.

Juergen Stark’s premature departure from the European Central Bank because of his opposition to its controversial bond-buying programme was described by German policymakers and editorial writers as a “wake-up call" for Germany.

It comes roughly seven months after Axel Weber, another monetary hawk in the post-war German tradition, abruptly resigned his post as head of the Bundesbank and withdrew his candidacy for the top post at the ECB.

That decision shocked the German policy establishment, but at the time many saw it as a one-off move by an impulsive man who had clashed loudly and publicly with President Jean-Claude Trichet over the extraordinary measures taken by the ECB to safeguard the single currency.

The resignation of Stark, a loyal, dedicated central banker who had kept his doubts about ECB policies to himself, tells a very different story, and has unleashed a wave of anxiety across Germany about the direction of 12-year-old single currency bloc.

Taken together, the departures are seen by many as indications of a southern European takeover of the ECB’s policy-setting council, a worry sharpened by the looming presidency of Italian Mario Draghi, who takes Trichet’s place in November.

Former Bundesbanker Edgar Meister called at the weekend for changes to the ECB’s one-country, one-vote rule, saying it was “unbelievable" that a country such as Germany that was shouldering the biggest burden in the crisis could be overruled by central bankers from smaller countries that have already been rescued or are at risk of a bailout.

Norbert Barthle, a senior lawmaker from Merkel’s Christian Democrats (CDU) who sits on parliament’s budget committee, told Reuters that Stark’s exit was “a rejection of the policies that the ECB has pursued and a clear signal that the situation in the broader euro zone has reached a really critical point".

“More Europe" strategy

The implications for Merkel and Berlin’s approach to the euro zone crisis are profound.

Criticised for focusing too much on domestic politics and failing to provide clear leadership in the bloc, Merkel shifted her approach this summer and began demanding “more Europe" as the solution to the bloc’s deepening crisis.

She made clear last week in a speech to the Bundestag, the lower house of parliament, that changes to the EU’s Lisbon Treaty to bring about closer fiscal integration between the euro zone’s 17 member states should no longer be taboo.

After Stark’s resignation, the domestic hurdles to that goal have risen substantially.

Julian Callow, an economist at Barclays Capital, said the political effect of Stark’s resignation “could complicate Germany’s involvement in additional bailout programmes".

Merkel received a boost last week when the Constitutional Court rejected lawsuits seeking to retroactively block Berlin’s participation in bailouts of Greece, Ireland and Portugal, albeit while giving parliament more say in future bailout moves.

But after Stark, her drive to secure a conservative majority in parliament for a bigger, bolder euro zone rescue facility on 29 September may have become more difficult again.

Merkel still seems likely to deliver that, but subsequent Bundestag votes on a second aid package for Greece and the launch of a permanent bailout fund -- the European Stability Mechanism (ESM) -- present a huge challenge to her leadership.

The Free Democrats (FDP), junior partners in her ruling coalition, are considering asking their 66,000 members whether to support the ESM. If a majority vote against, the leadership will be obliged to adopt that position as FDP policy.

Merkel’s other coalition partner, the Bavarian Christian Social Union (CSU), is also agitating -- to boot Greece out of the euro zone.

A CSU policy paper obtained by Reuters over the weekend states that countries that do not respect rules on budgetary discipline should “expect to have to leave the currency union".

Default more likely

A Greek exit from the euro zone still seems remote, and in any case, German officials say in private, such a decision would ultimately be for the government in Athens to take.

But a default no longer seems out of the question. The FDP economy minister, Philipp Roesler, said in an article published on Sunday that an orderly bankruptcy of Greece was no longer a taboo and demanded automatic sanctions for heavily indebted countries that did not meet their obligations.

Despite Greek Prime Minister George Papandreou’s pledge on Saturday to do all in his power to avert bankruptcy, it is no longer a given that inspectors from the EU, IMF and ECB will sign off on the next aid payment after leaving Greece in a huff over missed deficit targets this month.

A German finance ministry source told Reuters at the weekend that Berlin’s working hypothesis now was that Greece would ultimately default on its 340 billion euro debt mountain.

In a possible sign that markets are being prepared for this, French central banker Christian Noyer, speaking on Friday after a G7 finance ministers’ meeting in Marseille, said Greek debt did not represent a threat to any bank outside of Greece.

Barthle, the budget expert in Merkel’s party, told the news agency: “The problems in Greece are not getting smaller, they are getting bigger, and will create significant problems for the bloc ...

“I am eager to see what the troika report says. The way things are looking, you can’t rule out a restructuring of Greece’s debt any more."

Would a default force Greece out of the euro zone? A senior European banker told Reuters that one would have to follow the other, even if there is no legal mechanism for a country to leave the bloc.

But senior sources in Berlin and Brussels said all would be done to avoid such a humiliating setback for the currency union.

The focus instead appears to be on ensuring national parliaments approve new powers for the bloc’s rescue mechanism -- the European Financial Stability Facility (EFSF) -- as soon as possible.

Only after that would the EFSF be really in a position to minimise the damage from a Greek default by providing credits to stricken member states and banks across Europe.

Given the time needed to win EFSF approval in all 17 euro states, the chances seem good that EU, IMF and ECB inspectors will nod through the latest Greek aid tranche within weeks.

But Merkel’s real test will come in an eventual parliamentary vote on the permanent ESM.

The vote is already shaping up as a referendum on her leadership; if she fails to secure a majority from within the ruling coalition, the pressure to call an election from the opposition and parts of her own party will be huge.

“The resignation of Juergen Stark is a devastating signal for Angela Merkel," the conservative daily Die Welt said on Sunday. “Life is only going to get more difficult for her."