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Is Germany at Risk of Being Europe’s Fall Guy?

As Germany’s Constitutional Court looks likely to rule that the euro zone’s new bailout fund is legal, paving the way for financial support to troubled member states, Europe’s biggest economy is emerging as the ultimate “fall guy” in the single-currency bloc, says Jim Walker, Founder and CEO of research house Asianomics.

German Chancellor Angela Merkel speaks during a press statement at the Chancellery on August 24, 2012 in Berlin, Germany.
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German Chancellor Angela Merkel speaks during a press statement at the Chancellery on August 24, 2012 in Berlin, Germany.

The German Court ruling, due later on Wednesday, is seen as a key step towards ending the euro zone debt crisis. Last week, the European Central Bank (ECB) said that once countries facing financial pressure apply to the bailout fund, the European Stability Mechanism, for help, the central bank will step in with support by buying the government bonds of the troubled country.

The ECB’s bond-buying plans have sparked outrage among vocal lawmakers in Germany, including some of Chancellor Angela Merkel’s own parliamentary supporters, who threatened to block the scheme.

Walker believes the opposition is justified, saying “Merkel doesn't seem to realize that she has given the ECB a blank cheque written on Germany's fiscal balance.”

Germany, the euro zone’s largest member, contributes more than 25 percent to the euro zone rescue fund, which is worth 500 billion euros, and there are worries in Germany that funding weaker members of the euro zone will weigh on the country’s own financial position.

“Bundesbank President Jens Weidmann gets it. No one in Germany will blame him when the country's credit rating is downgraded,” Walker said, referring to Germany’s much coveted triple-A credit rating, which was placed on a negative outlook by Moody’s rating agency in July.

Weidmann was the only member of the ECB’s 23-member Governing Council to vote against the bond-buying program last week, saying that is “tantamount to financing governments by printing banknotes” and would encourage countries to postpone necessary reforms.

Walker says he is skeptical about Draghi’s willingness to cut off aid to nations that fail to meet the conditions tied to the bond-purchase agreements. Spain, which has been pressured by high borrowing costs this year, is expected to apply to the bailout fund for help.

“If Spain gets the bailout, what happens when Spain fails to meet its conditions 6 months down the line? Of course Draghi won't pull the plug as he says and (Spanish Prime Minister) Mariano Rajoy won't keep his promises on conditionality,” he said.

Dumb and Dumber

Walker’s criticism over Western policymakers wasn’t confined to the German leader. According to the Hong-Kong based economist, Federal Reserve Chief Ben Bernanke and European Central Bank president Mario Draghi are synonymous with “dumb and dumber”.

“I feel it justified to consider Bernanke pretty dumb for someone who watched over an economy running into deeper and deeper trouble caused largely by capital mispricing who then advocates even worse capital mispricing,” Walker said.

Chairman of the Federal Reserve Ben Bernanke speaks at the Federal Deposit Insurance Corporation headquarters, on February 16, 2012 in Arlington, Virgina.
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Chairman of the Federal Reserve Ben Bernanke speaks at the Federal Deposit Insurance Corporation headquarters, on February 16, 2012 in Arlington, Virgina.

Low interest rates in the United States were the root cause of the dangerous housing and credit bubbles that triggered the last financial crisis, so keeping borrowing costs near zero is “madness”, according to Walker.

The Fed has kept its benchmark interest rate near zero since December 2008 to support economic growth.

“People are buying stocks and risk assets that they shouldn’t be buying and are likely to end up in a terrible hang over as a result of it,” he said.

“But to Bernanke's dumb, Mario Draghi is dumber. He is willing to put his faith in politicians' promises,” Walker added.

- By CNBC's Ansuya Harjani

Contact Asia Economy

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