German finance minister Wolfgang Schauble, right, shakes hands with French finance minister Christine Lagarde after a meeting in late October. Germany got most of what it wanted in the Council of Ministers when France agreed to set up a new crisis mechanism to handle future sovereign debt dramas, such as the Greek, Irish and Portuguese problems.ODD ANDERSEN
The contempt in Germany for U.S. monetary policy is almost visceral. What nation would set out to trash its currency in the vague hope that citizens who are almost insolvent might be encouraged to borrow and spend more money? What kind of politician encourages such behaviour? The rationale behind the Federal Reserve's new round of money-printing does not compute in Germany, where sound money is seen as a moral principle, not just a target on a monetary index.
You can hear Germany's distaste in a carefully placed interview in Der Spiegel, the German news magazine published Monday, in which Wolfgang Schauble, the German finance minister, almost sneers at America's desperate monetary gyrations and derides Washington's plea that China and Germany curb their trade surpluses. Germany's export success is not the result of currency manipulation but more competitive companies, says Mr Schauble. "The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies."
As for $600-billion of quantitative easing: "There is no lack of liquidity in the U.S. economy, which is why I don't recognize the economic argument behind this measure."
They might as well scrap the G20 meeting in Seoul, where Washington had hoped to corral its G20 partners into some sort of trade rigging deal where surplus nations, such as China and Germany would seek to curb their exports and promote domestic consumption for the common, that is to say, American good. Tim Geithner, the U.S. Treasury Secretary, seems to have agreed to drop his call for targeted reductions in trade surpluses and deficits. Indeed, Mr Schauble suggests the U.S. would be better off if it freed up more trade by reviving the now-comatose Doha talks in Geneva, instead of manipulating trade balances.
So much for the row but Germany's moralistic posture in this currency cold war is interesting because it may tells us more about the future of the euro zone than of the greenback.
Germany got most of what it wanted in the Council of Ministers when France agreed to set up a new crisis mechanism to handle future sovereign debt dramas, such as the Greek, Irish and Portuguese problems. The important point is not whether Germany managed to bind its euro zone partners to a regime of fiscal rectitude and compulsory punishment for offenders (that was always going to be impossible).
What seems to now be on the table is a regime whereby lenders to troubled sovereigns will be forced to undergo a managed process of default, in which bond maturities will first be lengthened and then, if that isn't enough, bond holders will suffer a partial loss of capital.
No surprise that Irish and Greek bonds are being pounded. It costs almost €600,000 to insure €10-million of Irish debt while Greek 10-year bonds are yielding almost 9 percentage points more than German bunds. Bond investors have been saying loudly for some time that the euro zone project as it stands is unworkable, and the voices are now shrill. What is new is that Germany is finally contemplating the managed default of euro zone member states. When that happens, I reckon that Germany will begin to work on the endgame, which is a two-tier euro zone of core members, mainly comprising the northern states sheltering under the bundesbank's iron apron and a gaggle of Club Med states, with currencies loosely linked to the euro but free to devalue to perdition.
Carl Mortished