Breaking Taboos Concerns Mount in Germany Over ECB Bond Buys

The euro drama is escalating in Berlin. In order to save the common currency, the European Central Bank is now purchasing large volumes of Italian government bonds. German central bankers and politicians in Chancellor Merkel's government oppose the move, which they see as a dangerous threat to the ECB's independence.

Axel Schmidt


The timing was very cunning. It was 7:50 p.m. on Sunday, Aug. 7, when Germany's Federal Press Office released a joint statement by Chancellor Angela Merkel and French President Nicolas Sarkozy. Though hedged in diplomatic terms, the Continent's two most powerful political leaders were demanding that the Frankfurt-based European Central Bank (ECB) take an active role in helping Spain and Italy weather the euro crisis. Either the bank supplied money, they said, or the euro was finished.

It wasn't long before the wire agencies transmitted the first news alerts. It was a carefully planned chain of events -- and an insidious one, too.

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Indeed, Merkel and Sarkozy knew only too well that, at that very moment, the ECB's governing council was holding a conference call to discuss the next steps. The council's 23 members had been arguing for almost two hours over whether the ECB should buy up Spanish and Italian sovereign bonds to prop up their value.

It took the central bankers almost two more hours to cobble together a majority to support the plan. The toughest resistance came from Jens Weidmann, the president of the Bundesbank, Germany's central bank. He stubbornly opposed the decision till the bitter end -- but all was in vain. The next day, the ECB launched the greatest purchasing of government debt in its history.

The move shakes the already fragile foundations of the monetary union. But it's not just the stability of the euro that's at stake; it's also the credibility of the very institution charged with preserving its value.

When the ECB was founded 13 years ago, it was meant to be a European version of Germany's Bundesbank and the heir to its steadfast principles: The sole duty of central bankers is to maintain price stability while remaining politically independent. And their supreme task is to deny the government access to the money printers. Indeed, things at Europe's central bank were supposed to go just like they did under Karl Otto Pöhl and Helmut Schlesinger, the legendary pair of Bundesbank presidents who served between 1980 and 1993 and primarily solidified their reputations by being able to say "no" at the crucial moment.

'Europe's Biggest Bad Bank'

But, under the pressure of the euro crisis, Europe's central bankers have assumed duties listed nowhere in their statutes. For example, the ECB is drafting austerity programs for heavily indebted countries, including Greece, Ireland and Italy, bailing out major banks and propping up the value of the sovereign bonds of five euro-zone countries.

Critics have come to ridicule the ECB as "Europe's biggest bad bank," and the reputation of ECB President Jean-Claude Trichet has also suffered. Indeed, even some of Trichet's close companions believe he has become all too eager to bend to political will. For example, in a guest contribution published in London's Financial Times on Aug. 8, former ECB chief economist Otmar Issing criticized the bank for considering an amendment to its "no bail-out" clause. Doing so, he wrote, would be "a move on a slippery road to a regime of fiscal indiscipline drowning hitherto solid countries in the morass of over-indebtedness."

Indeed, the common currency that was supposed to unite the Continent is now threatening to split it apart. And one of the deepest fissures runs straight through the ECB itself.

Trichet and his colleagues from heavily indebted countries in southern Europe favor a massive effort to purchase sovereign state bonds. But the head of the Bundesbank and his colleagues from the EU's "net payer" countries, such as Luxembourg and the Netherlands, believe that would be a major mistake because they fear it would only trigger inflation.

Almost two years after Greece's government acknowledged that the country was much more indebted than previously known, the currency crisis has reached a whole new stage. Until now, euro-zone governments have been trying to protect the common currency by piling more and more money into bailout funds. But that's not enough for investors anymore. Now they're demanding that the net-payer states offer practically unlimited guarantees for almost every conceivable amount, even when it comes to seriously indebted countries, such as Spain and Italy.

Germany's Tough Choices

"Germany is in the driver's seat," says George Soros, the major investor and hedge fund manager based in New York. As he sees it, Germany's government is facing a difficult decision: Either it accepts that the ECB will provide long-term assistance as a financer of state debt, or it clears the way for the introduction of so-called "euro bonds," ones common to all euro-zone member states. In effect, the latter option would mean that Germany would automatically be jointly liable for any loans taken out by fellow euro-zone countries, such as Italy or Greece.

German Finance Minister Wolfgang Schäuble opposes this second option and believes that economic assistance should only be given out under strict conditions. "We're not going to bail out countries at any price," Schäuble told SPIEGEL in an interview published this week. Although he left open the question of potential consequences, there's no denying they would be significant: Greece would go bankrupt and possibly abandon the monetary union. The whole euro zone could break up.

Indeed, with ECB President Trichet saying this "is the worst crisis since the second world war," it's hardly surprising that the government coalition in Berlin -- made up of Merkel's center-right Christian Democratic Union (CDU), its Bavarian sister party, the Christian Social Union (CSU) and the business-friendly Free Democratic Party (FDP) -- is getting increasingly nervous. Senior party officials are worried they might not secure majorities in the upcoming votes on the euro bailout package in the Bundestag, Germany's federal parliament. What's more, they're afraid that Trichet's controversial bond plan might spark opposition within their own ranks. "It would be a serious matter if we reached the point where Germany was outvoted on the ECB's governing council by the debtor countries," says Alexander Dobrindt, the CSU's general secretary. "The ECB needs to regain its political independence as quickly as possible and only make decisions based on stability principles."

Such displeasure is understandable given the considerable political pressure the ECB has been facing in making its decisions. For example, when the risk premiums on Italian government bonds rose to all-time highs in early August, the ECB initially bought up Irish and Portuguese bonds, just as it had already done a number of times before.

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