“It is a question of survival” intoned German Chancellor Angela Merkel upon announcing a ban on naked short-selling in Germany and driving home her support for still-tougher regulatory measures to bring stability to financial markets. Merkel went on to denote the current crisis facing the Eurozone as the single largest economic challenge facing Europe since the Treaty of Rome in 1957 marked the Continent’s postwar journey towards economic and monetary union. Markets did not take kindly to the German leader’s words, continuing the negative tenor that has characterized the past several days and extending the roller-coaster volatility that has become the norm since Greece’s debt woes boiled over and sent markets into a tailspin on May 6. The move casts a spotlight on the relationship between the EU and its largest member with the most economic influence.
The Greek debt crisis has made clear what has long been at least tacitly acknowledged by observers: the EU is less a monolithic entity than it is a collection of sovereign nations with very different economic structures and prospects. These different structures are the result of decades-long traditions of domestic economic management with conservative, inflation-averse Germany on one end of the spectrum and the more inflation-prone, cyclically volatile economies of the likes of Italy and Greece on the other. The Bundesbank, Germany’s national central bank, is a byword for monetary prudence whose policies throughout the postwar period ensured the Deutsche mark’s unassailable position as the anchor of EU stability. The Bundesbank’s postwar mandate, after all, was established when memories of the disastrous hyperinflation of the Weimar Republic – and the even more disastrous descent into the Third Reich that followed – were fresh and raw in the minds of Germans. Although those days are now thankfully distant and far-removed from the present, German economic policymakers have never lost their intense abhorrence of the slightest hint of loose money and the specter of inflation.
Chancellor Merkel’s announcements today were unilateral – the ban on short selling and other measures addressed represent a singular German position and were not put on the table for consultation with its EU partners, many of whom voiced annoyance and concern in published comments today. Merkel, of course, has to heed the vox populi of her German constituents as well as coordinate policy with other national leaders to contain the ongoing crisis in the region. That’s proving to be a difficult balancing act. In announcing dramatic liquidity measures last week the EU provided temporary relief from the specter of outright debt defaults by weaker EU sovereigns. It did not, as we noted at the time (see our 5/11 commentary piece “Volatility: The Sequel”) ensure any measures for a return to solvency among these teetering economies nor a solution for saving the Euro itself. For the Germans, saving the Euro is exactly that “question of survival” referred to by Angela Merkel. For the Germans the Euro is what the Deutsche mark used to be, and history has shown that this nation takes its currency seriously. That may be good news in the end for the integrity of what is collectively the world’s second-largest economy, but for now the rough waters are not going away.