Why Germany Might Dump the Euro
Germany has named a successor to ECB executive board member Juergen Stark, whose resignation last week sparked chaos in the markets. The reason Stark quit is so important to Berlin it may decide the EU's fate.
Stark resigned over a seemingly abstruse issue -- the central bank's decision to buy sovereign debt. Stark believed -- and he is right about this -- that doing this was a violation of the law.
Article 104 of the Maastricht Treaty prohibits "the purchase directly from [Member States] by the ECB or national central banks of debt instruments." The central bank is doing this for what its directors believe are very good reasons: to hold down borrowing costs for debt-strapped countries like Greece and Portugal. Extreme times call for extreme measures, right?
Why Article 104 matters
The problem is Germany insisted on Article 104 if it was going to join the EU central bank system in the first place. Why do the Germans care so much about this? Because it means the bank is taking sides in politics. The Germans were willing to sign on to the new single currency only if they were guaranteed the ECB would do two things: Stay out of politics and focus on monetary stability.
It wasn't just the German government who thought this was important. It was of overwhelming importance to the entire nation. NPR's always excellent Planet Money podcast quotes a German newspaper editor as saying, "There are two things in German psyche that are important: monetary stability, and soccer." (I would add beer to that list, btw.)
Planet Money gives copious proof that this is not hyperbole. Taxi drivers can quote the inflation rate off the top of their heads and shopkeepers still keep track of how much items would cost in Deutschemarks, a currency that vanished 12 years ago.
Why?
Weimar memories
It has to do the Weimar Republic of the 1920s and 1930s, when Germany got fanatical on far uglier issues. During that time the nation witnessed hyperinflation on a unimaginable scale. In December 1919 a dollar would buy you 47 marks. In December 1923 that same dollar would get you 4,200,000,000,000 marks. Germany got this under control in the mid-20s thanks to massive borrowing from the U.S.
But then 1929 hit: the Americans called in their loans, Germany's unemployment rate went over 30 percent and the Communists and Nazis started fighting for power. The Germans (and a lot of other people) believe this turmoil was what allowed Hitler to rise to power.
Although this all happened 80 years ago, it has understandably left a permanent stamp on German culture. This fear of being pulled into a financial maelstrom is one of the reasons the German public is so set against bailing out Greece. Chancellor Angela Merkel's coalition has been defeated or lost votes in all six state elections this year because voters don't want to pay for it.
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