The markets took another hard hit today following the abrupt resignation of Jürgen Stark, Germany’s member of the European Central Bank’s board. The euro hit six month lows against the dollar, bank stocks tumbled five percent, the Dow was down 3 percent, and the FTSE All-World index fell 3.07 percent amid near certainty that Greece would default on its debt and send another shockwave throughout the Eurozone.
Phillip Inman and Helena Smith, reporting for Guardian, say Stark, “a German hardliner and former member of the Bundesbank board, has lobbied for the ECB to impose stricter austerity measures on Greece and Portugal and to reject using its funds to purchase Italian and Spanish bonds until Rome and Madrid have made further efforts to reduce their debts and institute reforms” and that “Stark has been a consistent critic of the ECB’s programme of purchasing government bonds of debt-ridden European nations in the markets. He has said eurobonds, which many economists believe are the only way to save the euro, would create false incentives for indebted countries. The cost of borrowing for the German government has increased as investors price in the risk of it absorbing the debts of all eurozone members through the creation of eurobonds.”
My colleague Alexei Monsarrat, director of the Atlantic Council’s Global Business and Economics program, believes “Mr. Stark’s departure deeply underscores the existential decisions facing Europe – decisions that are largely in Germany’s hands. With this move, Stark is attempting to wrench the ECB back from its expanded role and striking a blow to Angel Merkel’s efforts to rally German support for efforts to shore up Europe’s periphery. This deepens uncertainty about the ECB’s future moves amplifies Germany’s internal divisions over its approach to Europe.”
Speculation abounds, with Inman and Smith reporting “Some analysts said Stark’s departure signals a victory for Angela Merkel and French prime minister Nicolas Sarkozy, who have lent on the ECB to relax its rules on lending to Greece, Italy and Spain.” Meanwhile, Bloomberg’s Alan Crawford reports that “three coalition officials” tell him that “Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults.”
This would seem to be bolstered by multiple reports that German deputy finance minister Joerg Asmussen , who DRW market strategist Lou Brien terms “a Merkel insider,” will replace Stark.
Tero Kuittinen of Forbes speculates that, “If Germany has started accepting the likelihood of a Greek default, the Euro zone may see printing presses run like they haven’t in 80 years. Stark’s resignation was linked in several news reports to the recent ECB decision to buy Italian and Spanish debt with increased aggression. But it’s also possible that what is even more unpalatable for him is the coming era of far more aggressive ECB moves.”
But FT‘s Ralph Atkins, Quentin Peel, and Gerrit Wiesmann see the resignation as “a huge political dilemma for Angela Merkel, Germany’s chancellor, just as she is seeking to persuade her restive Christian Democrat supporters to increase Germany’s financial guarantees for its eurozone partners.” They contend that “Mr Stark was seen by many German conservatives as the one man holding the line at the ECB.” They quote Kurt Lauk, president of the ruling Christian Democratic Union’s business advisory council, saying that Stark’s resignation was “a dramatic alarm signal” for the ECB to be “brought back on to the right path.”
For his part, Stark declared “a large reform of decision-making mechanisms and sanctions” is necessary and that “We find ourselves in a situation where risks to public budgets undermine financial stability.”
James Joyner is managing editor of the Atlantic Council.Photo