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German president questions ECB bond-buying spree

One of German President Christian Wulff's few powers is moral suasion, and he chose to wield it with gusto Wednesday, using a speech before an audience that included more than a dozen Nobel laureates in economics to question the legality of a crucial element of the European effort to contain its sovereign debt crisis.

Mr. Wulff was in Lindau, Germany, a Bavarian village on the shores of Lake Constance, to participate in the opening of the fourth gathering of living recipients of the Nobel Prize in economics and several hundred young scholars.

The German President, whose political standing is similar to that of the Governor-General in Canada, went beyond ceremonial niceties, opening a window for the conference's international audience on the deep reservations many Germans have for the extraordinary policy measures taken to save several of their partners in the euro from bankruptcy.

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In a speech that called bankers "freeloaders" and that accused politicians of allowing themselves to be "led around the ring by the nose of banks, rating agencies or the erratic media," he saved his most stinging criticism for the European Central Bank, which earlier this month began buying Italian and Spanish debt to keep rising interest rates from busting the euro zone's third- and fourth-biggest economies, respectively.

"In the long term, this can't be good, and therefore should be tolerated at best for a short period of time," Mr. Wulff said in the English text of his remarks, which were delivered in German. "The guardians of the currency, too, must quickly find their way back to the agreed principles. I regard the huge buy-up of government bonds of individual states by the European Central Bank as legally questionable."

ECB President Jean-Claude Trichet reluctantly entered the secondary market for Italian and Spanish debt this month to reverse a sharp rise in interest rates. The decision, which came with promises from European governments to bolster their crisis programs, probably kept the continent's debt issues from spinning out of control.

But bailout fatigue is becoming an ever more serious political issue for the leaders of the euro zone, threatening investors' confidence in governments' ability to follow through on their promises to get their budgets under control to shore up the long-term value of their currency.

Mr. Wulff's views are reflective more of the mood of the rank-and-file of Germany coalition government than of the government itself. German Chancellor Angel Merkel said in the eastern German city of Mageburg Wednesday that she would vigorously fight the breakup of the currency bloc.

"Do we peoples of Europe want to return to going it alone?" Ms. Merkel asked in a speech, according to an account by Bloomberg News. "Or do we want to move forward together? Are we ready to recommit to Europe and sacrifice more for Europe, so Europe and the euro can survive the severe test it is facing during these months and emerge stronger than before? I'm in favour of us daring to do exactly that."

The yield on two-year Greek debt surged to a record Wednesday, as investors demanded interest of more than 44 per cent to buy the security. Faith in the latest European effort to rescue Greece is waning as several of its euro-area partners demand collateral in return for aid payments. Greece earlier sent Finland cash to secure the Nordic country's contribution to the pan-European bailout plan.

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For people like Mr. Wulff, the solution to the debt crisis lies in strict budget discipline. The rules written for the euro zone call on members to keep their budget deficits below 3 per cent of gross domestic product, and their debt below 60 per cent of GDP. More than half of the 17 euro countries fell short of the debt mark last year, including Germany, which had a debt equivalent to 83 per cent of its economy, Mr. Wulff said.

The economic and political strains in Europe are causing a growing number of economists, including Mohamed El-Erian, the chief economist of Pacific Investment Management Co., to predict the euro zone will shrink to a core group of stronger members.

In Lindau, a couple of Nobel laureates urged leaders to resist that solution.

"It's hard to unscramble a scrambled egg," said Joseph Stiglitz, an economics professor at Columbia University in New York.

Robert Mundell, the Canadian economist who pioneered the theory behind currency blocs, said Germans should recall that their economy has long benefited from its inclusion in the euro zone because the addition of weaker economies such as Greece depressed the value of the euro, a boon to Germany's export-led growth model.

"Germany has had enormous benefits from the union, now it's getting some costs related to it," Prof. Mundell, who also teaches at Columbia, told a group of reporters. The problem in Europe is that no country, including Germany, "stood up" several years ago, when fiscal discipline was waning across the euro zone, he said.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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