Central Bank “Doing Nothing” to Save Eurozone?

The European Central Bank has alarmed the Germans by doing too much!

European Central Bank president Mario Draghi in Berlin, Germany, March 26, 2012
European Central Bank president Mario Draghi in Berlin, Germany, March 26, 2012 (Bankenverband/Frank Ossenbrink Media Group)

The European Central Bank has purchased more than €200 billion worth of Greek, Irish, Italian, Portuguese and Spanish government bonds but apparently it’s not enough. Quartz‘ Simone Foxman complains that the central bank is “still doing nothing” while Europe sinks into recession. Why? Because the bank kept its interest rate unchanged at .75 percent on Thursday, “continuing a policy that has done little to save the eurozone from a deepening recession.”

Foxman admits that the central bank’s decision is unsurprising. Unlike their American counterparts, the central bankers in Frankfurt conduct monetary policy, or are supposed to, with regard to price stability alone, not economic growth.

Except they haven’t, really. Throughout the European sovereign debt crisis, the central bank has stepped in repeatedly to save the day. Most recently, in September of last year, President Mario Draghi announced a potentially unlimited bond purchase program to quell what he described as “unfounded” fears about the single currency’s survival.

Germany’s central bank president Jens Weidmann was the only member of the governing council to dissent, warning earlier of the “danger that central bank financing can become addictive like a drug.” The thinking in Berlin being that if Southern European states like Italy and Spain can reduce interest rates on their bonds by having the central bank buy billions worth of them, governments there will be under less pressure to reduce spending and reform.

Indeed, the German response to Draghi’s bond purchases has been one bordering on panic. Lawmakers, from the ruling conservative and liberal parties as well as the opposition, regard in apprehension Chancellor Angela Merkel’s “concessions” to Southern European states who need help to stave off sovereign bankruptcy. Economist Jürgen Stark, who resigned from the European Central Bank’s executive board last year, warned in Handelsblatt in August of the “danger of high inflation — not today, not tomorrow but in the medium to long term” as a consequence of the bank’s expansionary policy.

The conservative Die Welt and populist Bild newspapers agreed. The former declared Draghi’s policy in September tantamount to “the death of the Bundesbank” because he had broken “with the principles of German monetary policy.”

For Germany, the nightmare begins. There it was: the word that everyone was waiting for: unlimited.

Bild said Draghi was writing a “blank cheque for debt states.” Even the liberal Süddeutsche Zeitung was alarmed, arguing that the central bank had crossed two red lines.

Saving the euro at all costs can be an economic disaster. That is the red line that must not be crossed. The other limit is the law: in a community governed by law, the ends cannot justify the means. A European community that is based on the breach of contracts will always be based on fragile foundations.

If the European Central Bank has indeed done “nothing” so save the currency union from deeper crisis, what are the Germans so upset about?

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