Euro Crisis Crucible: Rift Grows Between Germany's Bundesbank and ECB
There are growing divisions among European Central Bank leadership about how to handle the euro crisis, not to mention between the ECB and the Bundesbank, Germany's central bank. While ECB head Mario Draghi is pleased with his recent decision to flood the markets with cheap money, Bundesbank President Jens Weidmann warns of the dangers.
By the time European Central Bank (ECB) President Mario Draghi made his appearance at the most recent G-20 meeting in Mexico City, most participants were already thinking about the long trip home, but he still had no trouble spreading a bit of good cheer. "Super Mario" casually sat on a dark chair and, with an impish smile on his face, explained in a gentle voice why his loose monetary policy -- which he himself has dubbed "Big Bertha" -- is precisely what's needed. "The euro is now a safer place than it was at the time of the last G-20 summit in Cannes," he said.
Shortly after he returned home, Draghi used his wonder weapon again. Last week, the ECB pumped more than half a trillion euros into the markets to maintain the money flow in the monetary zone. Europe has experienced a painful lack of liquidity ever since a large number of northern European banks reacted to the euro crisis by severing nearly all lines of credit to financial institutions in the south. Now, with the help of Draghi's second cash injection within just a few weeks, ailing southern European banks were once again able to grant loans and purchase sovereign bonds from their home countries.
Although this has eased the ongoing debt crisis on the Continent, and made Draghi into "Europe's rescuer" in the eyes of many politicians and financial managers, one of his leading partners views this approach with growing concern. Only two days before Draghi made his G-20 presentation, Jens Weidmann, president of Germany's central bank, the Bundesbank, spoke at the Mexico summit, and he had an entirely different message for his listeners. "The crisis cannot be resolved solely by throwing money at it," he said.
There is a rift among top-ranking officials at the ECB, and it also extends between the majority of the ECB's Governing Council and the Bundesbank. First, two leading German ECB officials -- chief economist Jürgen Stark and Bundesbank President Axel Weber -- resigned because the monetary authority was buying up sovereign bonds from Greece and Portugal. Then Weber's successor Weidmann objected to the ECB's purchase of government bonds from heavily indebted Italy.
Now, Weidmann is rebelling against the manner in which Draghi is giving European banks one new cash injection after another. Although Weidmann admits that the measures are basically correct, their conditions are "very generous," he complains -- and expresses his total opposition to this policy in the jargon of the central bankers: "This can particularly become a problem if banks are discouraged from taking action to restructure their balance sheets and strengthen their capital base."
Only a few weeks ago, it looked as though Draghi's arrival in office would usher in an era of harmony at Frankfurt's Eurotower, the ECB headquarters. Germany's monetary policy hardliners had resigned, and even Germany's mass circulation Bild newspaper welcomed the former head of Italy's central bank as "quite German," and even as "very Prussian." But the conflict between Europe's two most important monetary policymakers has become increasingly apparent, and it's compounded almost on a weekly basis by contentious new issues. One day Weidmann votes against special conditions for the ECB with regard to the Greek debt haircut, the next day he objects to the long maturities on Draghi's loans to banks.
Last week, the conflict escalated to a new level. Weidmann complained in a letter to ECB President Draghi that the central bank was accepting increasingly lower-grade collateral in exchange for its cash injections. This poses a danger, he warned, as the central banks in the north of the euro zone are owed ever growing amounts of money by their counterparts in the south. If the euro zone broke apart, the Bundesbank would be left holding a good deal of its bad debt from so-called TARGET2 loans, which currently amount to some 500 billion ($660 billion), he warned.
This may sound somewhat technical to most laypeople, but among leading ECB officials the letter was seen as violating a taboo. TARGET2 refers to the central banks' internal payment system, which has accumulated massive imbalances during the course of the euro crisis. These inequalities aren't problematic as long as the monetary union remains intact. So far, the Bundesbank has always played down this risk. But Weidmann's about-face is a "disastrous signal," say ECB executives because, for the first time ever, the Bundesbank "is no longer ruling out a break-up of the euro zone."
On the surface, the wrangling revolves around loan conditions and interest rates, but in reality it has to do with the basic course of European monetary policy: the question being whether a debt crisis can be combated with even more debt, or whether it will spark the next, possibly even greater crisis.
Although debt and cheap money triggered the global financial crisis, the central banks of the US, Japan and the UK continue to reduce interest rates, flood the markets with liquidity and make it easier for companies, banks and countries to acquire new debts (see graphic).
First Signs of Inflation
But what boosts the economy and stock markets over the short term also entails significant risks over the long term, at least according to the Bank for International Settlements (BIS), which acts as an umbrella organization for the central banks. The Basel-based institution, which already predicted the big crisis back in 2003, is now warning nearly as urgently against the dangers of the lax monetary policies that prevail today. The Swiss bank says that such policies remove the incentive for political reforms, increase the risk of price bubbles on stock exchanges and real estate markets, and make it increasingly difficult to return to normal conditions. BIS Deputy General Manager Hervé Hannoun recently spoke of the "illusion of unlimited intervention." He said that this solution could have the ugly result of a "surprising inflation" rate.
Bundesbank President Weidmann takes a similar view as he notes with concern how ECB President Draghi has emulated the lax monetary policy of the US Federal Reserve since he took office last November. One of Draghi's first official acts was to lower the base lending rate -- and when it came to drafting his bank program, he ignored all requests by the Bundesbank to limit the duration and scope of the measures. Sources at the Bundesbank say that although Draghi admittedly takes pleasure in repeatedly praising Germany's culture of stability, they contend that there's a marked discrepancy between his words and actions.
These concerns are understandable now that statisticians are registering the first signs of inflation. In February, the inflation rate in the euro zone didn't decline, as expected, but instead rose by 2.7 percent, primarily due to the rising price of gasoline. Furthermore, on other markets where investors like to speculate with cheap money from the central bank, prices are currently rising -- in the German real estate sector, for example.
The impact of this development is felt on a daily basis by Florian Koch, owner of the Berlin branch of the real estate firm Dahler & Company. On a gray March afternoon, Koch is standing in front of the Bertolt Brecht monument, near the Berliner Ensemble, home of the theater company established by the leftist playwright in East Berlin shortly after World War II. Behind the Brecht statue, an investor is building a decadent capitalist manifesto made of concrete, steel and glass, which will include a concierge service, a health spa and a private café.
The basement floor hasn't even been completed, but half of the luxury apartments have already been sold -- at premium prices of nearly 15,000 per square meter ($1,840 per square foot). "Two years ago, such prices in Berlin were unimaginable," says Koch. "But today they're not unusual for the high-end sector." During the first six months of 2011 alone, investors purchased 4.5 billion in real estate and land in Berlin for -- an increase of 60 percent over the previous year.
Too Much Money
It's a similar story in major cities across Germany. Once one of the most sluggish real estate markets in the world, where prices in many areas have tended to fall rather than rise, Germany has suddenly become a hot tip for international property speculators. Andrew Bosomworth, an investment analyst for Allianz subsidiary PIMCO, is concerned about this development. "The housing market is being swept clean. Germany is now in the same situation as Spain and Ireland at the beginning of the monetary union: Real interest rates are too low and the (ECB's) monetary policy is too lax for Germany. This could be the beginning of the next bubble."
A credit analyst at a large German bank says that cheap loans are primarily driving this unhealthy development. "If we continue like this, we'll have a subprime problem in Germany in five years." Subprime loans are the mortgages that were widely granted in the US until 2007, in many cases to impoverished debtors who later defaulted in droves.
Fear breeds fear -- as is the case with the fear of inflation. Since so many people are afraid of the euro losing its value, they're investing their money in material assets, causing prices to rise -- not only for buildings and land, but also for artwork, vintage cars and timepieces. Only three years ago, for instance, Berlin merchant Falko Modla was selling watches made in the former East Germany for 85 apiece. "Now, the price range starts at 300," he says. Certain rare models go for 500 and more. "Today's market is prepared to pay the price," he says.
There's simply too much money around. Indeed, all concerns are pushed aside on the stock and commodity markets and investors are buying like mad. Ever since the announcement of Draghi's cash injections, the German stock index, the DAX, has risen by 20 percent -- and prices for copper, aluminum and zinc have also increased sharply. The price of oil has jumped by 15 percent and a fine ounce of gold costs roughly 10 percent more than it did two months ago.
If additional cheap loans of this type are granted to banks, "there's a big danger that new bubbles will form on the commodity markets," says Eugen Weinberg, a commodity analyst at Commerzbank. He says the recent stock market rally is already "alarming."
Although many experts are critical of the recent trend, the financial industry is delighted. It's a golden opportunity for banks and funds when they can use cheap loans from the ECB to go hunting for lucrative returns. This increases profits, but it also solidifies unhealthy business practices.
- Part 1: Rift Grows Between Germany's Bundesbank and ECB
- Part 2: Cash as Camouflage
Stay informed with our free news services:
© SPIEGEL ONLINE 2012
All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH
Click on the links below for more information about DER SPIEGEL's history, how to subscribe or purchase the latest issue of the German-language edition in print or digital form or how to obtain rights to reprint SPIEGEL articles.
- Frequently Asked Questions: Everything You Need to Know about DER SPIEGEL
- Six Decades of Quality Journalism: The History of DER SPIEGEL
- A New Home in HafenCity: SPIEGEL's New Hamburg HQ
- Reprints: How To License SPIEGEL Articles
MORE FROM SPIEGEL INTERNATIONAL
German PoliticsMerkel's Moves: Power Struggles in Berlin
World War IITruth and Reconciliation: Why the War Still Haunts Europe
EnergyGreen Power: The Future of Energy
European UnionUnited Europe: A Continental Project
Climate ChangeGlobal Warming: Curbing Carbon Before It's Too Late