By Bill Wilson — Germany would rather the periphery of the Eurozone collapse into cascading defaults before it ever again weakens its currency.
That is at least the impression one gleans from a recent UK Telegraph piece by Ambrose Evans-Pritchard, who wrote, “Any such attempt to correct North-South imbalances from both ends requires an inflationary boom in Germany. That is the price that Germany must pay. But as events have made all too clear over recent months, this runs smack into German ideology and the Teutonic granite of the Bundesbank.”
Implicit in this analysis is the Weimar Republic experience, when to pay its World War I reparations to France and Great Britain, Germany attempted to simply print the money. Not only were the payments rejected, it resulted in hyperinflation, wrecking the German economy — and creating the conditions that in part enabled the radical rise of the Nazi Party.
It is in this context perhaps that Germans consider with trepidation their nation’s role in financing much of the €440 billion European Financial Stability Fund (EFSF). If used to recapitalize European banks by means of a leveraging scheme up to €2 trillion — as U.S. Treasury Secretary Timothy Geithner has proposed — the European Central Bank would flood the continent with new euros to refinance the debts of troubled sovereigns Greece, Portugal, Ireland, Spain, and Italy.
No politician in Berlin would dare to rekindle the memory of Weimar, right? Plus, the Bundestag should be able to plainly see what has become of the other European states that have thrown good money after bad in the current crisis, in the U.S after 2008, and in Japan after 1989. The politicians assuredly see that weakness coming to them. They must fear it. Right?
Besides, such a plan to leverage the fund would violate a recent German constitutional court ruling declaring that “the Bundestag, as the legislature, is also prohibited from establishing permanent mechanisms under the law of international agreements which result in an assumption of liability for other states’ voluntary decisions, especially if they have consequences whose impact is difficult to calculate.”
Leaving no mistake, the head of that court, Andreas Vosskuhle, recently told the Frankfurter Allgemeine, “The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature even with its powers to amend the constitution.”
He added, “There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit — which might be politically legitimate and desirable — then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people.”
In other words, the EFSF cannot lawfully expose German taxpayers to additional liabilities beyond the nation’s €211 billion stake in the fund — and any attempts to do would violate Germany’s basic sovereignty.
So, there is no way Germany would pursue such a dastardly path. Right?
Wrong. Despite the shortcomings outlined above, that is precisely what the German administration under Chancellor Angela Merkel is apparently planning to do, according to Evans-Pritchard: “We are told too that the EU’s €440bn bail-out fund (EFSF) — at last approved after high drama in Slovakia — will be ramped up with ‘leverage’. It is assumed that German lawmakers will tamely go along with this, a mere three weeks after finance minister Wolfgang Schäuble seemed to promise that no such leverage would occur.”
Already, Germany is caving on the ECB simply printing money to refinance or bail out the creditors of Greece and the other bankrupt states. It’s not waiting for the bank failures to begin. And apparently it has indeed forgotten Weimar.
Germany is left between choosing its poisons. It could wind up with the worst of all worlds: bank failures, followed by an inflationary plunge into further leveraging by EFSF and the ECB in the midst of worldwide panic — creating zombie institutions, and leaving the entire continent without a rudder in the face of a gathering storm — followed by Germany’s court striking down the entire bailout.
Such an outcome would likely have a spillover effect in the U.S., where the Congressional Research Service recently estimated that American financial institutions are exposed to the European debt crisis to the tune of $640 billion, which may prompt another Federal Reserve rescue of banks. That alone probably explains Treasury Secretary Geithner’s insistence that the EFSF be used to recapitalize banks — Germany’s constitution be damned.
It is hard to find the silver lining in all of these clouds. Like here in the U.S. where logical solutions like cutting spending, balancing the budget, and paying down the debt are nowhere to be found, one must wonder whether leaving the Eurozone even occurs to Merkel as her people’s only salvation.
Is not liberty and sovereignty — and the scourge of inflation that nearly brought an end to democracy in Europe once already — too much of a price to be paid for blind adherence to the failed pan-European project?
Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.
