Reminiscing about the D-Mark

By Katja Mann. Originally published on 2012/10/08

When the ECB’s president Mario Draghi announced after a council meeting on 6th September that the ECB is – under certain conditions – going to buy unlimited amounts of government bonds of troubled Eurozone countries (the so called OMT – read the blog by David Grodzki on it), he stirred up enthusiasm all over Europe. The European Commission, the European Parliament and the IMF greeted the decision in unison, and some journalists even dreamt of it as “the beginning of the end of the Euro crisis”. Spanish bond yields fell considerably in the weeks after Draghi first sketched his plan (from 7% to 3%)  while the Euro has gained ground with respect to the US dollar. In brief, the ECB’s announcement seems to have made everybody happy – everybody except the Germans.

The president of the German Bundesbank, Jens Weidmann, has been the only one out of the 23 central bankers of the Governing Council that voted No in the council meeting. For months he has voiced his criticism about what he calls “state financing via the printing press”. But he isnot the only German to criticise the ECB decision. Prominent German politicians like the minister of finance, Wolfgang Schäuble, or the minister of economics, Philip Roesler, support the Bundesbank’s position. If Angela Merkel hasn’t joined the club, it is only because she knows that the ECB’s bond-buying programme removes pressure for further political action, which would inevitably mean another dodgy vote in German parliament. Famous German economists (For example Jörg Krämer, chief economist of Commerzbank, Peter Bofinger, one of the five members of the German Council of Economic Experts, or Markus Kerber, professor of economics at TU Berlin) are screaming out against the programme and there has even been an emergency appeal to German Constitutional Court.

Three German particularities

Why is it that the Germans react so differently to the ECB’s policies than the rest of Europe? Three national particularities account for the German position.

The first one isn’t new. Germany is paying the highest share into the European Stability Mechanism (ESM) and other rescue programmes, it has also in the last years undergone severe and painful structural reforms while other countries did not. Now many Germans feel that they are forced to pay for Southern Europe’s excessive lifestyle. “The ECB tolerates and even rewards mismanagement”, claims the renowned daily newspaper Sueddeutsche Zeitung. What is more, by heading in the direction of a limited form of debt mutualisation, it removes pressure from crisis countries to undergo drastic reforms themselves.

But when it comes to the OMT, there are also other reasons for German resistance.

Germans are scared to death about inflation. And inflation is the first thing that comes to their minds when they hear about “unlimited” bond purchases. It is true that a moderate rise in inflation can result from the ECB’s policy. However, while economists talk of an inflation rate of up to 4 %, the typical German associates the notion with the hyperinflation of the 1920’s, when piles of bank notes were carried around in wheel barrows and children built toy houses with them. In those times, inflation fed the destabilisation of the Weimar Republic and indirectly contributed to Adolf Hitler’s rise to power.
But next to this historical trauma, Germans have pragmatic reasons for being afraid about inflation: in comparison to many other European countries and the US, German savings rates at around 11% are relatively high. Germans also own less property than for example people in Europe’s South: while 8 out of 10 Spaniards and 7 out of 10 Italians own a house, only 4 out of 10 Germans do. Thus Germans are more vulnerable to inflation than others.

The negative stigma of inflation is closely connected to another German particularity: the D-Mark as a hard currency has been a success story, one of the few things Germans felt they could rightfully be proud of. During the epoch of the D-Mark, Germany experienced on average less inflation than other European countries, and the German Bundesbank has never fostered inflation by politically motivated bond-buying schemes (as for example the French and Italian central banks did). For many, the post-war economic success of Germany is closely connected to prudent central banking.

Germany was reluctant to give up the D-Mark and agreed to do so only when it was secured that the ECB’s mandate would be as strict as the Bundesbank’s. In fact, it is even stricter when it comes to central bank independence. The Treaty on the Functioning of the European Union reads, “The primary objective of the ESCB [European System of Central Banks, composed of the ECB and the national central banks of all EU member states] shall be to maintain price stability” (Treaty article 127). Price stability has been defined by the ECB as an inflation rate below 2%.

Paradigm shift in European central banking

With the introduction of OMT, a paradigm shift has taken place away from inflation targeting towards fiscal dominance. In conditioning its bond-buying scheme on structural reforms in the target countries, the ECB is no longer just concerned with keeping the price level stable, but partly takes over the job of policy-makers. It may claim the right or even feel the imperative to do so because of the obvious failure of European politicians to solve the Euro crisis themselves. Nevertheless, the ECB is taking over duties which should be left to democratically legitimised institutions – and which go way beyond what, according to German thinking, a central bank should do. The German standpoint should give reason for a general debate on the role that the ECB should play.