The Hollow Euro Specter of Inflation Haunts Europe

If Europe's single currency is really to be saved, fundamental reforms have to follow the emergency bailout by euro-zone members. The biggest danger comes, however, from the European Central Bank, which has given up its role as the protector of price stability. The risk of inflation is increasing. By SPIEGEL staff.

A Hungarian money changer corrects the sale price of foreign currencies in Budapest: The euro zone is running the risk of inflation.

A Hungarian money changer corrects the sale price of foreign currencies in Budapest: The euro zone is running the risk of inflation.

It's Friday morning, the day after Ascension Day, which is a public holiday in Germany, and most people in the country are taking the day off to enjoy a long weekend. On top of that, it's raining in Munich, making this an ideal morning to sleep in late. But the premises are already jam-packed at Pro Aurum, a private trading house for gold and other precious metals. Business has been booming for a week now.

Clients receive coffee and newspapers to make their wait more pleasant. They all want to buy gold bars or coins, Canadian Maple Leafs, Australian Kangaroo Nuggets and Austrian Vienna Philharmonic coins -- anything, as long as it's made of gold and will retain its value.

Pro Aurum boss Robert Hartmann and his 45 employees at the Munich headquarters have barely been able to handle the rush. Hartmann even had to temporarily shut down Pro Aurum's online shop. "We are all working to the hilt," he says.

Hartmann has experienced a similar run in the past -- in September 2008, when the investment bank Lehman Brothers went bankrupt. This time, however, as a result of the euro crisis, even people who previously paid no attention to precious metals are taking an interest in gold, he notes. Many feel very unsettled, some are even "slightly panicky," he says.

Gold Endures

Pro Aurum's clients are taking refuge in a form of currency that people have trusted through the ages. The Reich mark, the East German mark, the German mark, the euro: Paper currencies may come and go, but gold endures. Or so they tell themselves, studiously ignoring the fact that the value of gold can also fluctuate enormously.

The precious metal has never been so coveted. Within a year, the price has soared by one-third, and over the past few weeks it has climbed from one record to the next. The price of gold hit a new high in euros on Monday, trading at over €1,000 a troy ounce. Meanwhile the euro also fell to a new four-year low against the dollar, slumping to around $1.23.

The price of gold is an indicator of people's lack of trust in their currency. And these doubts about the stability of the euro increases virtually every day -- despite, or perhaps precisely because of, the recent spectacular bailout of the European common currency system.

The €750 billion ($950 billion) rescue package has calmed financial markets, at least for the time being. Stock markets have recovered and risk premiums on government bonds from the southern euro states have declined.

Birth of a New EU

Still, the price for this bailout is high -- possibly too high. The events on that dramatic weekend in Brussels marked the birth of a gigantic European transfer union, where previously unthinkable sums of money are made available to rescue southern euro-zone members. But over and above that, a number of determined politicians under the leadership of French President Nicolas Sarkozy have managed to undermine the independence of the European Central Bank (ECB).

Ever since the launch of the euro over 11 years ago, the French have been annoyed that the common currency generally adheres to German principles. While the French central bank is traditionally viewed as an executive organ of government growth and employment policies, the European Central Bank is politically independent and exclusively committed to the goal of achieving price stability, just like the Bundesbank in postwar West Germany.

Over the past few years, Paris has repeatedly tried to bring the European monetary authority to heel. French government representatives complained at times about interest rates that they felt were too high. At other times, they called for a devaluation of the euro to boost their own exports. Their requests were never granted. Until recently, the ECB enjoyed a reputation for combating inflation even more resolutely than the legendary guardians of the German mark.

All of that has changed since last week. Under the mounting pressure of waves of speculation against the euro, German Chancellor Angela Merkel has allowed herself to be talked into a bailout package that is nothing less than a general overhaul of the monetary union according to the agenda set by the French. In addition to letting the European Commission use the central bank to achieve its own aims, the Germans have accepted the fact that several monetary policy principles are being cast by the wayside. The central bankers are making their printing presses available to finance government loans. They have accepted that European countries are liable for the debts of individual states. They are putting more money in circulation, even though there is already so much liquidity on the markets that a number of experts anticipate that this will soon trigger a rise in inflation.

Now the guardians of the euro are purchasing government bonds from troubled countries like Greece, Spain and Ireland -- thereby breaking a taboo that the ECB has always tried to respect. The central bank, which has always prided itself on its independence, has capitulated to the wishes of the politicians.


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