Stark warning on euro

WHEN Germany’s top representative at the European Central Bank quit his posting as member of the ECB Executive Board and as its de facto chief economist, it caused a shudder across world financial markets.

The departure of Jürgen Stark, a well known fiscal and monetary hawk was spectacularly ill-timed, coming at the end of a period when stock markets across Europe were plummeting amid growing indications that Greece was about to default on its huge sovereign debts.

As he left the building, Stark fired a few parting words of advice in the direction of the Irish Government, suggesting that it needed to implement further cuts in public service salaries and social welfare, and to act more decisively to get ahead of the curve when it comes to reining in public spending.

Stark is a deeply controversial figure, respected and reviled in almost equal measure. He is presumed to be one of four members of the ECB board who voted against the decision by the bank to start buying the sovereign bonds of Italy and Spain after these countries’ cost of financing began to escalate in the second week of July, provoking the latest, most dangerous phase in the European sovereign debt crisis.

In a recent speech, in Hong Kong, he showed few signs of abandoning his hard line views. He referred tellingly to the “Great Inflation” of the 1970s and attacked the failure of weak monetary regimes to rein in high inflation.

He praised the strong emphasis on price stability in the 1980s but accused policymakers of complacency in the run up to the 2007/8 credit crunch.

He declined to attach any blame to his then employer, the ECB, but praised the bank for acting swiftly to provide banks with unlimited liquidity in late 2008.

Then he set out his stall: “I believe that price stability is the best contribution that monetary authorities can make to overall economic welfare.”

And he added: “The crisis should mark a clean break with short-termism and ‘fine tuning’ demand management by monetary authorities.”

In other words, no more access to the punch bowl for thirsty voters.

Some believe that we would already be over the cliff by now if Stark’s rigorous advice on bond purchases were heeded.

The ECB has had poor press in recent times — and with good reason. It failed to act to tackle the credit bubble that blew up in the noughties across much of Europe on its watch.

It inexplicably chose to raise rates into the summer of 2008 as the world economy lurched towards disaster.

Last November, it was to the fore in forcing harsh terms on Ireland as part of the bailout package, a stance that was finally abandoned on July 21 last at the behest of the European Commission.

This spring, the bank jacked up interest rates as it feared the consequences of another spike in the price of oil and other commodities. It has belatedly abandoned this stance amid signs of growing debt deflation.

Yet, at times, the ECB can be decisive. It won praise for its speedy action to prop up the financial system after the collapse of Lehman Brothers in September 2008.

It has pumped almost €140bn into purchases of the bonds of struggling Euro sovereigns. Perhaps €80bn has been pumped in short term money into the Irish banking system by the ECB.

This weekend, the world’s five top central banks have been back, plugging more gaping holes, pouring hundreds of billions of dollars into the vaults of European banks to compensate for money removed by banks in a near panic and no longer trusting each other.

The figures are staggering — it might explain why a German “hawk” economist might reach for his raincoat and head for the door.

Many Germans look with horror at the suggestion that a strong bout of quantitative easing, a weaker euro and a boost to inflation is just what many EU sovereigns, caught in a strangling debt deflation trap, need right now.

Deliberations within the ECB have clearly been heated.

Stark’s views are not necessarily shared by everyone in his home country.

It is important to realise that within Germany, there is a countervailing tendency, strongly pro-European, concerned about the consequences for the future of the Continent of uncontrolled defaults and a collapse in the euro, and perhaps in that of the European project as a whole.

Many Germans realise that a collapse of the project posses a real threat to the German banking system and to the country’s export led economy.

Equally, many ordinary Germans are appalled at the prospect of open-ended funding of what in their view are profligate societies with rotten political classes and creaking, uncompetitive economic structures.

The task of persuading Germans to accept the idea of large fiscal transfers and a common guarantee of sovereign debts as a necessary price of a continued EU remains a hard sell.

Stark himself was born in 1948, three weeks before the launch of the deutschmark. His country was on its knees, its former capital blockaded and relying on the good offices of the RAF and US Air Force to survive.

He learned, early on, the virtues of thrift and self reliance.

After graduating from Tubigen University in 1973, he joined the Economic Ministry in Bonn, specialising in the labour market.

He moved to the Chancellor’s office (that of the Prime Minister) in 1988 in time for German unification.

From there it was on to the Finance Minister in time for the bursting of the post unification economic bubble.

The 1990s were a tough period for Germany, particularly East Germany which lost jobs hand over fist.

In 1995-98, he served as deputy Finance Minister under the ruling right of centre CDU party. When they were ousted, Stark went with them. He played a key role in putting together the Stability & Growth Pact with its emphasis on fiscal targets and budgetary limits.

Ironically, Germany was among the first states to break the rules. Stark did not approve.

When the CDU returned to power under Angela Merkel, she levered Stark on to the board of the ECB and into the job of chief economist.

By resigning, now, albeit on a point of principle, Stark has added to the woes of his patron.

Merkel, a figure not to be underestimated, is unlikely to forgive him easily.

For now though, his departure has given ammunition to those in Germany who have grown dangerously weary about the whole euro project, and have yet to really grasp the consequences that could follow on from its collapse.