The ECB is the one institution that has kept the euro zone afloat in the sovereign debt crisis and prevented a bond market meltdown. The European Union has no federal government or common fiscal authority and speaks with many dissonant voices.
Juergen Stark’s departure from the ECB’s Executive Board in despair at the policy of buying government bonds to prevent the crisis spreading comes as policymakers in Berlin and beyond are preparing for the growing possibility of a Greek default.
It seems bound to complicate the next round of crisis management because it has injected the poison of inter-state politics as well as ideological division into the independent central bank.
“It’s the ECB that is holding the show together, so anything that weakens the ECB is bad news,” said an EU official involved in financial crisis management.
Stark’s walkout will further sap the ECB’s credibility with Germany’s conservative financial establishment, which saw the bond-buying as an improper means of financing government debt, and among voters in Europe’s largest economy.
That could make greater fiscal integration in the euro zone politically harder to achieve at a time when Chancellor Angela Merkel is coming to realize that a big leap forward in economic governance is needed to preserve the single currency.
It risks importing a north-south divide, between self-styled virtuous creditor countries and peripheral states seen as profligate and feckless, into the central bank.
At worst, Stark’s departure may constrain the ECB’s ability to act decisively in the coming months when the debt crisis enters an even more dangerous phase.
“This comes at a very, very bad time and it’s certainly serious,” said Jean Pisani-Ferry, director of the Bruegel economic think-tank in Brussels.
“If the ECB is shackled in its ability to buy Italian and Spanish bonds and at the same time we have to do a real restructuring of Greece’s debts, with a proper haircut, we risk a contagion shock spreading to other countries. If the ECB is hamstrung by a lack of consensus, that is the risk.”
A growing number of policymakers, as well as market economists, are convinced it is only a matter of time before Greece, which keeps falling behind on its fiscal targets, will have to default.
A source at this weekend’s G7 finance chiefs’ meeting in Marseille said the troika of EU, ECB and IMF inspectors, who suspended talks with Athens last week, would probably find a formula in its progress report to allow the next 8 billion euro ($11 billion) tranche of bailout funds to be paid in October.
That would keep Greece going for a couple more months until European parliaments approve new powers for the EFSF rescue fund to give preventive credit lines to euro zone member states, buy bonds in the secondary market and lend money to recapitalize banks.
The source said the German Finance Ministry was increasingly convinced that Greece will not be able to avoid default for much longer, so ring-fencing the euro zone’s weakest debtor and limiting contagion will be crucial.
Even when the EFSF has its new powers, it will require the unanimous agreement of the 17 euro zone member states to use them, with the German parliament having just gained a bigger oversight role on those decisions. Political hurdles abound.