Tuesday, September 13, 2011

Jurgen Stark Sparks More Euro Jitters

I'm writing this post on Monday afternoon, while listening to some really serious black crepe-paper hanging on Bloomberg concerning Europe's debt problems. Yesterday's latest Euro-panic was apparently sparked by the resignation from the ECB of Germany's Jurgen Stark.

Here's what the weekend edition of the Wall Street Journal reported on the subject,

"Germany's top representative on the European Central Bank resigned in an apparent protest Friday, dealing a severe blow to the steward of Europe's common currency amid the Continent's worsening debt crisis.

The ECB said J├╝rgen Stark, its chief economist, was resigning for "personal" reasons with nearly three years remaining in his term. But people familiar with the matter said his decision was driven by frustration over the bank's expanding role in backstopping the region's finances.

The surprise exit of Mr. Stark—the second senior German official to depart the ECB over ideological differences in recent months—jolted markets in Europe and the U.S., as concerns over the stability of the central bank's senior leadership added to fears about Greece and Europe's banks. The euro suffered its biggest one-day drop in two months, finishing at $1.3657, its lowest finish since February.

ECB officials have taken pains in recent weeks to counter growing criticism that the bank is overstepping its charter and assuming untold financial risk with its actions. Such worries are strongest in Germany, where the country's own central bank, the Bundesbank, is firmly rooted on the principle of independence from politics. Many Germans believe that tradition is at the core of their country's own economic success and worry that it is now being undermined.

"From a German perspective, this is not a very good sign," said Kai Karstensen, an economist at Ifo Institute in Munich.

The resignation is fueling a debate in Germany about whether the euro will become a less-stable currency thanks to the escalating euro-zone debt crisis. Such a debate could indirectly make it harder for Chancellor Angela Merkel to justify expensive government policies to prop up the euro.

"Stark is the second German central banker to leave the ship because he sees that the German stability culture can't be upheld in Europe," says Thorsten Polleit, economist at Barclays Capital in Frankfurt. "There's a clear potential now that the German public will become increasingly disenchanted with the euro project."

That disenchantment is already being expressed by leading politicians. German President Christian Wulff, whose position is largely ceremonial, has called the ECB's bond purchases "politically and legally questionable." The head of German's center-left SPD party, Sigmar Gabriel, has also denounced the purchases.

There are worries within Germany that vulnerable countries in Southern Europe will soon have a stranglehold on ECB decision-making. That impression could further undermine Germans' confidence in the euro at a time when their country is being asked to foot much of the bill to bail out the flagging members.

In an op-ed for the German business daily Handelsblatt, released late Friday, Mr. Stark wrote that government efforts to save the euro zone have fallen short. He called for a "far-reaching reform of the mechanism for decisions and sanctions."

"We find ourselves in a situation in which massive sustainability risks in public budgets are eroding financial stability," he wrote. "

The ECB, like the US Fed, is supposed to be apolitical. But, just as our Fed has shamelessly returned to the financing of Treasury debt since 2008, so, too, is the ECB working closely with the the EU by purchasing sovereign debt of countries in trouble. Now, however, it's clear that those countries include Spain and Italy. Two countries whose economic size will almost surely doom any Euro-wide attempt to rescue them. Italy is, in fact, the third-largest sovereign debt issuer in the world. Spain's economy is no Greece- it's substantial and it's in serious difficulty.

Yesterday afternoon's Bloomberg discussion rather bluntly included predictions of failure for many large European banks. Parallels to the situation of the US financial markets and banks just three years ago this month were explicitly made.

Don't forget that on several occasions, business media such as the Wall Street Journal have reported that US money market funds have significant positions in European bank commercial paper. Guess what happens if those banks become insolvent.

The Euro-funding crisis which is spreading from their sovereign debt to their private sector banks will arrive quite quickly on US shores in the form of 'broken-buck' money market funds which will then need...surprise, surprise....another Fed bailout!

Somehow, it seems truly ironic that eighty years after Hitler's Germany provoked such fear in Europe, the countries of that region are now running to (back) to Germany for financial rescue from their subsequent sovereign economic and financial mistakes. Who'd have guessed that the Germans would ultimately dictate the future of Europe not from the strength of their military, but from the strength of their economy?

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