'Run For Your Lives' Euro Zone Considers Solution of Last Resort

Giesecke & Devrient

Part 3: Printing Money with the IMF


Obama, at any rate, felt that they would have little value. Instead, he confronted the Germans in Cannes with a suggestion so radical that it alarmed both Merkel and Schäuble. To save the common currency, Obama proposed that the Europeans follow the example of the American Federal Reserve, which buys up almost unlimited amounts of US treasury bonds when necessary.

The Germans pointed out feebly that the ECB operates within a completely different tradition than the Fed, and that it also pursues a different mission. But it is becoming increasingly clear to Merkel and her finance minister that, in the end, only the ECB will be able to save the euro if the crisis continues to escalate. It is the only European fiscal policy institution capable of taking action, and it also comes equipped with unlimited firepower. It can never run out of money, because it can simply print new money when needed.

This is an approach Germany's representatives in the ECB council have strongly resisted. Former Bundesbank President Axel Weber and former ECB chief economist Jürgen Stark resigned from their posts in the dispute over ECB purchases of Greek and Portuguese bonds. Jens Weidmann, the new Bundesbank president, is likewise strictly opposed to funding government deficits by printing money. This position is understandable, given that the Germans have, twice in the last century, seen how this sort of monetary policy can end in hyperinflation and national bankruptcy. But how long can the Germans resist the pressure from other members?

Most European leaders have nothing against using the central bank's reserves as a source of financing, as became evident at the Cannes summit. Important politicians like European Council President Herman Van Rompuy and French President Sarkozy proposed making IMF "special drawing rights" available -- a move which would enable the funding of major bailout packages in Europe. The US also supported the idea.

Another Open Flank

But Bundesbank President Weidmann was deeply troubled and made his concerns known to the chancellor. Special drawing rights, he argued, as well as gold and foreign currency, are part of the currency reserves that the Bundesbank is required by law to safeguard. The Bundesbank fears that issuing the special drawing rights would open yet another door to monetary state-financing. Special drawing rights, the bank notes, are akin to an artificial currency against which foreign currencies can be borrowed at the IMF. Making them available, Germany worries, would be tantamount to opening up yet another flank to the crisis.

Following Weidmann's intervention, Merkel informed her counterparts that the autonomous Bundesbank would not participate in the release the special drawing rights. A battle had been won but not the war itself, as officials at the Bundesbank fear. At the Cannes summit, Van Rompuy spoke of a "trust" at the IMF that could be fed with artificial money from the special drawing rights.

It appears that the euro crisis is approaching its endgame. Many promises made when the common currency was introduced have already been broken. The initial stipulation that only stable countries be allowed in, for example, quickly proved illusory once Italy and Greece were accepted.

Unlimited Fund

German taxpayers were also promised that they would never be held liable for the debts of other countries in the euro zone. But then came the first and second bailout packages for Greece and the European bailout fund.

And now another breach of confidence is on the horizon, with the Germans being expected to accept the notion that the ECB will be available to ailing euro countries as an almost unlimited reserve fund.

The question the German government now faces is whether to preserve the monetary union or have a stable currency. The decision can no longer be put off for long. "To stabilize the situation," says former US Treasury Secretary Lawrence Summers, the bailout measures would have "to go well beyond the measures proposed to date."

BY ALEXANDER JUNG, ALEXANDER NEUBACHER, CHRISTOPH PAULY, CHRISTIAN REIEMANN, MICHAEL SAUGA, HANS-JÜRGEN SCHLAMP AND ANNE SEITH

Translated from the German by Christopher Sultan

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