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Merkel hoist on her own petard

It must surely be one of the great ironies of the Euro sovereign impasse that Germany is now the biggest obstacle blocking the solution it most craves. As it becomes increasingly demanded within the Eurozone that the obvious solution to continuing bond market turbulence is that the European Central Bank (ECB) should take on the role of lender of last resort, it is paradoxically Germany, which ever more grudgingly has largely underwritten the European Financial Stability Facility (the EFSF which serves as the Euro bailout fund), which is now baulking at this extension of the ECB role.

Germany has provided most of the original €440bn bailout, then the second €850bn dailout, and finally the insurance-underwritten €1.2 trillion facility which German taxpayers consented to on the grounds that this was the ultimate down-payment to secure the banks (which were always the target rather than the rescue of Greece itself). Now that has collapsed in the aftermath of the aborted Greek referendum, there is little or no option to the ECB proposal. Yet Merkel remains adamantly opposed. Why?

It is hardly surprising that the thrifty German taxpayer is deeply incensed and refuses any further aid to protect Italy’s €1.9 trillion debt when an ever beaming Berlusconi says there’s no problem when Italian restaurants are still bustling! There are then very few alternatives left. One , earlier much favoured but now fading, is fiscal union. But that is now a non-runner when many Euro states have made clear they will not sacrifice control over the management of their own economy. The obvious second alternative, blocked till Merkel relents which looks unlikely, is for the ECB to adopt the view that its constitutional independence give its the right to print the money needed to buy up the southern euroland’s distressed debt.

The third alternative is for the Germans to acknowledge that whilst their thrift and financial and industrial discipline has allotted them their dominant position within the EU, the counterpart to their surpluses has been the deficits of their Euro partners. As Keynes presciently argued at Bretton Woods in 1944, the responsibility for restoring equilibrium should lie with the creditors as well as the debtors. If fiscal union is ruled out and the Germans won’t budge on allotting a role for the ECB for financial as well as price stability, the only way for the weaker Euro brethren to adjust in the face of overriding debt is for the German economy to spend more, enabling their partners to increase their exports.

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