Tuesday, June 1, 2010

European Disunion

Today's Wall Street Journal reports that Germany and the European Central Bank are at odds over the ECB's open market bond purchases. The Germans haven't liked this program since the moment it was announced, believing it to transgress the ECB's most fundamental anti-inflation mandate. Now, the Journal reports that German officials have questioned the ECB's purchases of 25 billion Euros worth of Greek bonds. Greece already relies on bailout funds to finance its debt, rather than the secondary market, and German officials evidently reason that the ECB wouldn't need to intervene in the secondary market that Greece can no longer access. However, such purchases would bail out European banks holding Greek debt. The Journal reports that French banks are the largest holders of Greek debt.

Jean-Claude Trichet, the President of the ECB, is sometimes rumored to be considering a challenge to Nicholas Sarkozy for the Presidency of France. If so, it would hardly hurt his prospects to act visibly to protect French banks. Of course, some of the money that might have been used to buy Greek bonds from French banks comes from Germany. All the better from the French perspective, but the Germans might take a different point of view, especially if the bond purchase program could advance the ambitions of a French politician they don't like.

The May 10, 2010 trillion dollar Euro bloc bailout package changed the bloc fundamentally. What was once a group of nations joined together to share the economic benefits of a common, stable currency transformed itself into a fiscal union. The wealthier Euro bloc nations are tightening their belts to protect and subsidize the poorer members. But the new "union," created in the ad hoc crisis atmosphere of a bond vigilante ambush, is voluntary. It requires, above all, the unwavering commitment of the two largest members, Germany and France. If these two heavyweights begin sparring with each other, disunion will follow. The fact that the ECB has been reticent about the details of the bond purchase program would only fuel German suspicions. Germany no doubt feels it has already been caught by surprise too many times in the sovereign debt crisis.

Enormously powerful market forces press on the Euro and the Euro bloc's sovereign debt. The May 10, 2010 Euro bloc bailout package is a slender seawall, and if it cracks even slightly, the bloc could dissolve. If the ECB were using, in part, German funds to bail out French banks holding Greek debt, that would only illustrate a fortiori why the Euro bloc can't succeed. There are no controls, there is no supervision. Accountability always comes after the fact, when the damage has been done. In a sense, many Germans now feel that they are subject to taxation without representation. Americans understand that feeling, and know where it can lead.

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