Monday, November 21, 2011

Germany Should Take Wisdom From Keynes Instead of Weimar

November 21, 2011

Germany, with the help of the European Central Bank, has achieved a level of dominance in Europe it hasn’t enjoyed since World War II. It is to that period, and a bit earlier, that it might look for lessons on how to save a troubled European project.

The rapid fall of euro-area governments in recent days demonstrates the enormous influence Germany and the ECB have gained over sovereign nations. By withholding the money needed to restore confidence in struggling countries’ finances, they have helped topple the leaders of Greece, Italy and -- pending the outcome of a vote Sunday -- possibly Spain, in favor of governments more focused on austerity.

This meddling by inaction has a noble goal. German politicians and central-bank officials want to push euro-area nations to stabilize their debts, and ultimately to cede some sovereignty to a new European authority that could prevent chronic deficit spending. They rightly see reform as crucial to the survival of the euro, itself a linchpin in a broader unification project designed to ensure that the horrors of two wars will never happen again.

In their zeal, though, ECB officials are practicing a sort of monetary extremism that has brought the union to the brink of disaster. At a time when a brutal combination of economic paralysis and deep budget cuts is bringing rioters into the streets of Europe, the ECB has restrained its bond purchases to 187 billion euros ($253 billion) and allowed borrowing costs in many countries to rise to euro-era highs. By contrast, the Federal Reserve has been buying trillions of dollars in bonds to keep U.S. interest rates down and support growth. The ECB’s categorical refusal to backstop the debts of solvent governments has unnerved investors, threatening a market rout that could be beyond the bank’s ability to control.


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