End of the age of stability

Institutions are sluggish creatures. They live by a schedule of habitual, well-worn procedures, which does indeed give rise to some confidence in what comes out at the end of the day. Loathing uncertainty, institutions find it tough to keep up with a changing environment. In most cases, changes spur debates about the meaning of the institutions. What are they actually supposed to be doing? This question was also posed by Juergen Stark, who resigned on Friday as chief economist of the European Central Bank (ECB).

The ECB has always been considered a legitimate child of the Bundesbank, dedicated solely to the stability of the currency. What Stark believes will happen if the central bank goes in for buying government bonds from highly indebted countries in a big way is clear. His contrarian stance he sets out as follows: “In the current environment one can assume that positive effects on confidence due to sound fiscal policy are considerable, and this is backed up by case studies that show that ambitious adjustment programmes are, after a short time, associated with positive effects on growth.” By “sound fiscal policy” and “ambitious adjustment programmes” Stark means “to save”, and nothing else.

Translated from the German by Anton Baer

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Germany

Karslruhe may have killed eurobonds

It has been largely ignored by commentators, but last week’s ruling by the German Constitutional Court mays have closed the door to the idea of eurobonds as a solution to the European debt crisis.

“The court’s verdict leaves me no alternative but to conclude they are indeed unconstitutional”, points out Wolfgang Munchau in the Financial Times. The Karlsruhe judges, notes the columnist, stated that “the German government must not accept permanent mechanisms – as opposed to the EFSF (the European Financial Stability Facility), which is temporary – with the following criteria: if they involve a permanent liability to other countries; if these liabilities are very large or incalculable; and if foreign governments, through their actions, can trigger the payment of the guarantees.”

“A eurobond is, of course, a permanent mechanism. It also involves a permanent loss of control. Its size is very likely to be substantial”, observes Munchau and that is why, event if German officials are starting to open to the idea of eurobonds, they may not be able to allow their creation.