A European Solution Germany Can Feel Good About

Dec 1, 2011
Originally published on December 2, 2011 11:15 am

There are basically two solutions to the European debt crisis. One, someone can show up with really deep pockets and bail out all the countries. Or, two, the European Central Bank can create a bunch of money and loan it to the countries who need it. The problem is there's a barrier blocking both these potential solutions — a certain European country known for its beer and brats: Germany.

Germany doesn't want to have to use its own money to bail out its neighbors because if it doesn't work, they stand to lose a lot. And they don't want the European Central Bank to do it because they're worried creating more euros could lead to hyperinflation.

Philip Coggan writes the Buttonwood column for The Economist. He says Germany is afraid of history repeating itself.

"If you go back over history and look at examples of hyperinflation, that is when prices were going up 10 to 20 percent a month or a week, those examples have all been when governments have been unable to borrow money from private investors and have got the central banks to buy all its debt to print the money to finance the deficits, " Coggan says.

In other words-- governments got themselves into trouble and asked the central banks to print a bunch of money to get them out of it.

The most famous example of a government abusing the power of the central bank is Germany in the 1920s. The country was in horrible debt so its central bank printed more and more money. The result was chaos. Prices doubled within hours. People carted around money in wheelbarrows. Ever since World War II, Germany has insisted that its central bank never repeat that mistake. and that was its main condition for entering the euro.

"Germany only gave up the deutsche mark, its cherished currency, on the condition that the new European Central Bank, which replaced all the individual central banks, would not be involved in funding the deficits of individual countries," says Coggan.

So far, the ECB is sticking to what Germany wants. It's been focusing on its mandate of preventing inflation, and its new president Mario Draghi has been aggressively fending off calls from the rest of Europe to intervene by creating more money.

But observers in Europe say the stance at the ECB could change. The only way for that to happen of course would be somewhat on Germany's terms. For Germany to feel comfortable with the ECB printing more money, the rest of the European countries would have to make some big changes. They would have to agree to new rules to get their spending under control.

Right now finance ministers from the 17 eurozone countries are talking about these changes, mulling over the possibility of closer fiscal ties. And just this morning, Mario Draghi hinted that the ECB might take more action. He said that if leaders can reach an agreement, "other elements might follow."

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Transcript

GUY RAZ, HOST:

There are essentially two fixes for the European debt crisis: a savior with deep pockets or print a bunch of money and loan it to the countries that need it.

As Planet Money's Zoe Chace explains, the same barrier is blocking both paths.

ZOE CHACE, BYLINE: Here's the problem with the two potential paths out of Europe's crisis.

PHILIP COGGAN: Both of them are disliked by Germany.

CHACE: Philip Coggan writes the Buttonwood column for The Economist, and he explains Germany is the one in Europe with the deepest pockets. They're the region's biggest economy, so they have the most to lose from solution number one. But why are they against solution number two, create a bunch of new money to help out the countries in need?

To understand their concern here, you have to understand a little bit about a mysterious place called the European Central Bank, the ECB. The ECB has a special, unique power. It actually creates euros. It can click a button and, like magic, new euros show up. But like any special power, it has to be used sparingly. If you use it too much, bad things can happen.

COGGAN: If you go back over history and look at examples of hyperinflation, that is when prices were going up 10 to 20 percent a month or a week, those examples have all been when governments have been unable to borrow money from private investors and have got the central banks to buy all its debt, to print the money to finance the deficits.

CHACE: In other words, governments got themselves into trouble and said: Hey, central bank, print as much money as we want.

The most famous example of this is Germany, 1920s. Germany was in horrible debt. They asked their central bank to print more and more money, and the result was chaos. Prices doubled within hours. People carted around money in wheelbarrows. Ever since the war ended, Germany has insisted that its central bank never repeat that mistake. And that was its main condition for entering the euro.

COGGAN: Germany only gave up the deutsche mark, its cherished currency, on the condition that the new European Central Bank, which replaced all the individual central banks, would not be involved in funding the deficits of individual countries.

CHACE: Fast-forward to today, a bunch of individual countries - Greece, Ireland, Portugal, maybe Spain, Italy - need loans. And they are asking for help from the European Central Bank. To Germany, it seems like the beginning to a story they've already seen turn into a nightmare.

The new head of the ECB said as much in his first press conference. Mario Draghi is Italian, but when it comes to creating money, he sure sounds like a German.

MARIO DRAGHI: No, I don't think that is really in the remit of the ECB. The remit of the ECB is maintaining price stability over the medium term.

CHACE: That's keep inflation in check. That is all the ECB is supposed to do. To underscore that point, when Germany insisted the ECB focus on inflation, they wanted the bank headquartered in their own country.

I went to Frankfurt to report on the debt crisis a couple months ago and outside the ECB, I found Heinz Voigt.

HEINZ VOIGT: Inflation is controlled by the European bank. That's here, the bank, over here. That's the bank.

CHACE: He closed his nudey(ph) tabloid and pointed just over his shoulder.

VOIGT: I think we are in good hands with the European Central Bank.

CHACE: You trust them?

VOIGT: So far. If they don't make mistakes, OK.

(SOUNDBITE OF LAUGHTER)

CHACE: OK.

VOIGT: So far, the ECB is hewing very close to its German roots, aggressively fending off calls from the rest of Europe to intervene by creating more money.

CHACE: Here's chairman Mario Draghi.

DRAGHI: The answer is that we are not forced by anybody, really. We are independent. We make up our own judgment. So that's it.

CHACE: Observers in Europe say the stance at the ECB could change. But it would really have to be on Germany's terms. They'd do the unthinkable: Print money. But the rest of the European countries would have to change big time. They'd have to agree to new rules to get their spending under control.

Zoe Chace, NPR News, New York. Transcript provided by NPR, Copyright NPR.