German Tempers Boil Over Back-Door Euro Rescues
Professor Hans-Werner Sinn, head of Germany’s IFO Institute, said German taxpayers are facing a dangerous rise in credit risk from a plethora of bail-out schemes. “The euro-system is near explosion,” he told Austria’s Economics Academy on Thursday.
Dr Sinn said Germany is on the hook for much of the €2.1 trillion (£1.72 trillion) in rescue measures for EMU debtors - often by the back-door - that will saddle Germans with ruinous losses one day.
“It is a horror scenario,” he said, warning that the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors, exactly the opposite of what was hoped.
Earlier this week, the Foundation for Family Business in Munich filed a criminal lawsuit against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens.
The furore follows a sharp jump in the Bundesbank’s “Target2” claims within the European Central Bank’s internal payment network from €547bn in February to €616bn in March. Bundesbank claims have risen sixfold since 2008, a rise mirrored in Holland and Luxembourg.
Target2 transfers are automatic credits to fellow central banks in the ECB family, chiefly in Italy, Spain, Greece and Ireland. They offset capital flight from the eurozone’s core, reflecting extreme stress in the system.
There has been a dramatic rise in outflows from Spain, despite the ECB’s €1 trillion blast of three-year liquidity. The exodus indicates that the ECB action has so far failed to restore basic trust in Spain’s banks.
Critics say Target2 allows the vast sums to pile up for ever, unlike the US “FEDwire” that mandates the settlement of regional imbalances within months.
The Target2 saga has become a daily theme in the German press, with Dr Sinn emerging as a television superstar. The coverage is eroding confidence in the euro. The latest poll shows that 56pc of Germans want a return to the D-Mark.
Bundesbank chief Jens Weidmann has fanned the flames by demanding collateral from weaker states for Target2 transfers. The imbalances are not a problem “as long as the eurozone stays together”, he said.
Mid-level officials at the German and Dutch central banks say the concerns are overblown. Any losses would be shared by the whole ECB family. Yet nobody knows what would happen if the eurozone collapses in acrimony. One official confessed that he “worried about it every night”.
Professor Karl Whelan from University College Dublin said the debate is absurd, whipped up by populists and the German media. “If the euro breaks up, there are still assets to go along with the liabilities. The likely outcome would be a ‘Bretton Woods weekend’ with a gentleman’s agreement to carve up the losses.”
“Even if countries told each other to go to Hell, the euro would simply cease to exist and the Bundesbank could write a cheque to itself. There would be no inflation and no loss to the German taxpayer,” he said.
“We live in a world of fiat currencies, not the Gold Standard. People making these claims don’t understand how a central bank works,” he said. His views are shared by ECB experts.
However, the issue has taken on a life of its own in German politics. There is deep concern among German officials that ECB monetary stimulus will leak into inflationary credit within Germany, which has the lowest unemployment in 20 years and an incipient housing boom.
The Bundesbank is preparing a raft of measures to choke credit before it leads to the sorts of problems seen in Spain. These include lower loan-to-value limits on mortgages.
Financier George Soros accused the Bundesbank of launching a “counter-attack” against the ECB. He said the Bundesbank’s efforts to shield itself from loses may become a “self-fulfilling prophesy” and destroy the euro.
Mr Soros said EU politicians are “leading Europe to its ruin” by trying to enforce misguided contraction on the EMU weaker states, adding that he would “bet against the euro” if he were still an active investor. His Quantum Fund famously made €1bn betting against sterling and the lira in 1992, a gamble triggered by Bundesbank comments at the time.
Even defenders of Target2 admit that such vast transfers need proper scrutiny. The International Monetary Fund said the system is a back-door means of financing the trade deficits of Italy, Spain, Ireland and Portugal.
Dr Sinn’s IFO Institute has refused to back down. Its latest report said Target2 violates democracy. “Who are the losers from this process? The savers in those remaining European countries that still have sound economies,” it said. They have been pledged their assets “without their knowledge or consent”.
“This enormous international credit should have been subjected to the parliaments of Europe,” it said.