Credit and Power. Germany and the ECB: Monetary Stability über alles
By Anna Blume and Nick Sinakusch
(article originally published in the January 20th, 2012 issue of the newspaper analyse & kritik)
EUROPE'S ELITE IS divided. The increased purchase of the state bonds of the euro countries by the European Central Bank (ECB) could stop the crisis, claims the Dutch economist Paul de Grauwe. DZ Bank even sees in such purchases “the sole possibility of breaking the vicious cycle”. The German government, on the other hand, is struggling with all its might against the purchase of state bonds by the ECB. What appears to be a conflict between finance experts is rather a struggle for power in Europe and concerning the status of the euro as a world currency. The material is complicated, so we’ll deal with things one at a time. First, what’s the underlying problem?
The financial markets – the lenders of credit to governments – have lost “trust” in some of the eurozone countries. They doubt whether their money is still well parked in euro state bonds. These doubts have led in the last few months to a decline in the market value of the bonds from some of these countries. Inversely, the interest rates on these bonds have increased. With that, new loans for governments become increasingly expensive, which further stokes the distrust of investors. The market value of the bonds declines further, interest rates continue to rise, and so on. Increasingly larger rescue packages and euro rescue funds have not been able to restore the “trust” of the markets.
Some maintain that only the ECB can break this vicious cycle, for example Holger Schmieding, chief economist of Berenberg Bank. The central bank would have to declare its willingness to purchase falling bonds in an emergency. This would once again give investors a sense of security. “The ECB can print money. It can therefore spend any amount that appears necessary. Since investors know that the ECB can never run out of money, an ECB guarantee would be credible and would prevent a panic. To put it another way: since investors know that the ECB would intervene in a panic, they would have no reason anymore to panic, and the ECB would not have to intervene at all” explains Schmieding.
In fact, the central bank is already purchasing bonds from Greece, Portugal, Spain, and Italy. Since May 2010, it has spent over 212 billion euro doing so. However, the bank continues to assert that these purchases are limited – in terms of both time and amount. Nobody knows when the ECB will stop propping up the market. As a consequence, its program of purchasing state bonds does not give investors the sense of security that would be necessary to stop the crisis. “We need a statement that there will not be a default on Italian bonds” said Oliver Bäte, chief financial officer of Alllianz SE, in November.
To calm the markets, the ECB would therefore have to make a promise to make unlimited purchases in case of an emergency. The German government in particular is fighting to prevent that, because first of all, by purchasing bonds, the ECB would sink the interest rate on bonds for crisis countries, lightening their debt load and thus lifting the pressure on them to save. And second of all, more generally, the massive printing of money by central banks is a stability risk. On this point at the latest, laymen lose interest and professional experts argue with each other.
Let’s take a step back: what is the European Central Bank, and what does it do? It is the only entity that can “print” money. What the central bank issues is an exquisite piece of printed matter: slips of paper that function as capitalist wealth. These slips of paper can do so, because the force of the state has declared them to be a means of payment. Euro notes represent the credit of the European state community.
The ECB “provides” – as it is so beautifully put – the commercial banks with these slips of paper. That occurs by means of so-called tender transactions: commercial banks give securities to the ECB – for example bonds – and in return receive from the ECB freshly printed money, which serves the commercial bank as the basis for loans to businesses, governments, or households.
So in tender transactions, the central bank forks out real money in exchange for securities, which are merely promises to pay. The central bank thus accredits these promises to pay as being as good as money – however, only for a specific period of time. After that time is up, the transaction is reversed, the commercial bank takes the security and gives the money back to the central bank.
So with its loan transactions, the central bank credits the profitable business of the commercial banks. Its credit should serve as an advance on future economic growth. If this works, and the new money created by the ECB actually stimulates increased lending by the banks and this in turn increases accumulation, then this increased accumulation basically legitimizes the increase in money supply. The quantity of money increases, but so does economic performance. That’s the goal.
Germany’s Interests with regard to the ECB
However, the German government claims that if the ECB purchases state bonds, it finances governments with printed money. It therefore eases the pressure on crisis states to pursue an iron savings course and win back the trust of the financial markets. Also, through bond purchases by the ECB, the crisis states would be less dependent upon rescue loans from the EU and consequently upon the agreement of the German government. That is exactly what the governments of the crisis countries want, but it is Germany’s desire that this should not happen.
The German government has made it clear: the power of the ECB to print slips of paper that function as money and enjoy the confidence of the world rests upon Germany’s economic power. Without Germany behind it, the euro is nothing. With its dosed rejection of Eurobonds, an increase to the euro rescue fund EFSF, or bond purchases by the ECB, the German government is demonstrating that it does not vouch for the credit worthiness of other states with its own credit worthiness, or rather, that the other states have to pay for support in return.
As compensation, the German government is demanding austerity packages, cutting the salaries of public employees, raising the retirement age, and in general more capital-friendly policies in Europe. It is using the need of other euro state for ECB support, euro rescue packages, or emergency credits as a lever for its own interests: shifting the costs of stabilizing the eurozone onto the crisis countries. This extortion is actually working: governments are saving, impoverishing their populations, and bludgeoning any resistance. Democratic procedures are being canceled out, non-elected “technocratic” governments are imposing austerity measures without regard for the voice of the electorate or the domestic economy. This is how Germany autocratically rules Europe, and shows that its power has less to do with its military than with its credit, which the other states need in order to avoid bankruptcy.
This growth in power is not an end in itself for the German government. It serves a goal – and it is this goal which the German government insists upon when it argues that the purchase of bonds by the ECB is a “stability risk”.
With its warnings about the loss of “monetary stability”, the German government is referring to the purpose of establishing the euro: by combining the economic and financial power of the European countries, a global currency was supposed to be launched – greater and more powerful than the Deutsche Mark, an unbeatable offer to the financial markets for investing their money securely. In return, the markets were to offer governments and therefore businesses credit at low interest rates.
The euro was intended as a means in the global competition between states for the credit of the financial markets, a competition which is currently intensifying: in 2012, the euro countries will have to borrow 870 billion euro from the financial markets. They are thus in a “tough contest for investor money, since the large industrial countries will have to borrow a total of 6,000 billion euro in order to extend expiring loans” according to the financial agency Bloomberg at the beginning of January 2012.
The model and the competitor for the euro is the US dollar: despite rapidly increasing federal debt, the financial markets have faith in US money, are pulling out of Europe and are instead providing the United States with credit at low interest rates.
A Stable Currency Only at the Price of More Poverty
In this competition for credit, the euro could suffer if the ECB starts to print money on a massive scale, warns the German government. According to this argument, if the central bank buys state bonds of dubious value, it does not credit – as is usually the case – profitable business by the banks, that is to say successful accumulation. Instead, it merely assumes the liability for increasingly bad state debt. To put it another way: the freshly printed euros with which the ECB purchases collapsing bonds no longer represent the credit power of the European states, but rather acts as a substitute for it. This scenario is usually formulated with the warning that with the purchase of bonds, the ECB would become a sort of bad bank: “Whoever covers himself in rotten securities at some point receives a toxic shock”, claims CSU general secretary Alexander Dobrindt.
The increased creation of credit could thus sow doubt among investors concerning the solidity of the means of credit – the euro. “It might stick in the minds of the markets that in the course of the crisis, the ECB financed state expenditures by printing money” says the Commerzbank. The German government wants to prevent such doubt.
With its insistence upon “stability” and debt reduction and its rejection of the purchase of state bonds by the ECB, the German government is risking a recession, an escalation of the crisis and consequently the end of the euro. At the same time, it insists that the euro be either a coequal rival of the US dollar or it will lose its justification for existing, from the German perspective.
What the German side is attempting to impose by means of austerity dictates, deficit rules, and debt brakes are the dictates of a stabile currency which does not allow any indebtedness that does not serve the accumulation of capital. With its warnings against the ECB “printing money” and its demand for reducing state debt, the German government is making clear that all money is allowed to exist as a result of successful capitalist enterprise and may only be used to promote such enterprise. Anything else is a risk for the stability of the euro.
The other euro governments are not attempting to seal themselves off from such demands: they are lowering the costs of their rule by means of “austerity packages” in order to minimize the unproductive use of the euro. In addition, they are increasing their “competitiveness” by lowering wages in order to guarantee the productive use of the euro. A stable currency can only be had at the price of more poverty.