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carl mortished

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Whether it's just electioneering or a steady drip of doubt about the euro zone project, the chatter from Germany does not bode well for the embattled states of Southern Europe. On Thursday Chancellor Angela Merkel unexpectedly delivered a frank lesson on the euro zone's fundamental monetary schism, suggesting that the European Central Bank's big problem was that it had to choose between satisfying the needs of German savers with higher interest rates or helping southern Europeans with easier money.

This is hardly news, but the comments from Ms. Merkel, made in a speech to Germany's savings banks, were delivered a week ahead of the ECB's interest rate decision and amount to a breach of protocol: euro zone politicians are expected to keep their mouths shut about interest rate policy which is the ECB's prerogative and outside national government remit. But elsewhere in the German establishment, there are more grumbling noises about the euro zone. Handelsblatt, the German financial paper, has published details of a leaked document written by the Bundesbank for the German constitutional court, in which the German central bank criticises the ECB's decision to underwrite unlimited sovereign bond purchases to rescue troubled euro zone states. (The Outright Monetary Transactions plan has yet to be used but it is widely believed to have stopped last year's speculative attacks on euro zone bonds.)

The Bundesbank argues that widening differentials in rates between euro zone countries is not something the ECB should try to fix with bond purchases. Instead, it suggests these are the normal consequences of different national fiscal policies. "Higher refinancing costs for the private sector could also reflect higher national fiscal risks… That wouldn't be a development for monetary policy to address, but rather a direct consequence of national fiscal policy."

In other words, the Bundesbank reckons the ECB should not be intervening in a market which may be correctly assessing financial risk. The document is historic, written last December but it indicates the tenor of opinion within Germany, where tempers are fraying over the cost of the bailouts and the impact of a low-interest policy on German savers.

Elections are due in September and Ms. Merkel faces a political challenge from a new anti-euro party Alternative fur Deutschland. It is unlikely to win power, but could upset the apple cart. In any event, the apples seem to be falling slowly from the back of the euro cart as it edges down a bumpy road.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights .

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