The European Central Bank is now at the center of a fierce debate about solutions to Europe’s sovereign debt crisis. Some eurozone states, including France, are calling for it to be turned into a strategic tool to save member states from defaulting – a position supported by the United States – while others, most notably Germany, are stubbornly resisting such demands.
Speaking in parliament Friday morning, Germany's Chancellor Angela Merkel made it clear she does not intend to move on the issue. She went on to stress that the ECB had a different role to that of other central banks – like the Federal Reserve Bank or the Bank of England – and that its main purpose was to secure the stability of the currency.
“Our target is a fiscal union in the eurozone,” she argued, “but as long as member states have full responsibility for their national budgets, there won’t be any common liability.”
Ahead of next week's EU summit in Brussels, Chancellor Merkel is trying to convince French President Nicolas Sarkozy, her most important partner, to support her ideas of automatic sanctions against violations of stability criteria specified in the EU Treaties and ultimate budgetary control of member states by the European Commission in Brussels. Those ideas are supported by Mario Draghi, the new ECB president.
“Financial aid for eurozone members can only be granted if these states commit to structural reforms,” says Thomas Straubhaar, director of the Hamburg Institute of International Economics.
Since May 2010, the ECB has been buying the bonds of eurozone members that have been shunned by investors because of high debt and poor economic outlook. Roughly €200 billion had been spent in what some argue is a violation of the European Treaties, which stipulate that debts of individual member states should not be the responsibility of the currency union.
“That’s not what the ECB is there for,” says Jörg Krämer, chief economist at Commerzbank. “The bank should preserve people’s trust in the currency by guaranteeing price stability.”
Like Merkel, the ECB itself has dampened hopes for increased engagement. The bank’s policy of buying up bonds of struggling eurozone members was “temporary and limited,” Mr. Draghi told the European parliament in Brussels.
No other candidates for a solution
But many say that the eurozone is well past the point at which it can choose the means to solve the crisis.
“In the short run, there is no one else but the ECB who can help to refinance eurozone members struggling to get fresh money from private creditors,” says Mr. Straubhaar. “Of course, this puts the ECB in a position it should never have found itself in.”
To put volatile financial markets at ease, the ECB would have to make a commitment to buy unlimited amounts of government bonds for the foreseeable future.
“This would be a signal to investors that no eurozone member will be allowed to default,” Mr. Straubhaar says. “International capital would return to the eurozone, so in the end the ECB wouldn’t actually need to act. It would solve the crisis.”
The sovereign debt crisis is no longer affecting only a number of eurozone states – it has created fears of a global banking crisis similar to that of 2008. Interbank lending has decreased rapidly in the past few weeks, and on Wednesday, the world’s leading central banks – the ECB, the Federal Reserve, and the Bank of England among them – agreed on a refinancing program that would offer banks fresh capital.
Financial markets around the globe surged in reaction to the announcement, and analysts welcomed it as the right move at the right time. “It shows that all parties involved have finally realized the gravity of the situation,” says Ralf Umlauf, an economist at Helaba Bank in Frankfurt.
The consensus on needing to protect the financial sector does not extend to the question of what to do about sovereign debt, though. Before Germany gives up its resistance to the ECB buying more sovereign bonds or issuing its own common bonds, it wants some agreement on a more disciplined fiscal policy for the eurozone.
At next week's summit, Germany would also propose the installation of special national funds for sovereign debt higher than 60 percent of GDP, German Finance Minister Wolfgang Schaeuble announced on Thursday. “The funds should be supported by own revenues and dismantled within 20 years,” he said.
Is French-German agreement possible?
Whether France and Germany will manage to reach a common position ahead of the summit is unclear. President Sarkozy has to convince his own voters that it is in their best interest to give in to German demands for sacrificing parts of their national sovereignty and accept the prospect of possible austerity measures. With presidential elections in France only a few months away, such unpopular moves could pose a problem for Sarkozy's ambitions for another term.
But sharing the glory with Merkel for being the savior of the euro could help getting reelected. The French daily “Liberation” quotes one of the president’s advisers: “It’s a high risk gamble."
At today's meeting, Merkel counseled patience, suggesting the eurozone was in a long-distance race, not a sprint for quick solutions.
“Marathon runners often say that a marathon gets especially tough and strenuous after about 35 kilometers [22 miles],” Merkel said. “But they also say you can last the whole course if you’re aware of the magnitude of the task from the start.”
[ Video is no longer available. ]