It seems the wheels are coming off the European experiment. Yesterday, we had a huge meltdown in Greek bonds. Media reports suggest that a recent article in German daily Frankfurter Rundschau are what triggered the latest selloffs in Greek sovereign debt (See the Telegraph’s account here; hat tip Swedish Lex). This article leaked portions of a Bundesbank report which demonstrated its vehement opposition to the joint EU-IMF bailout cobbled together by Angela Merkel and Nicholas Sarkozy.
The Bundesbank paper goes as far as to suggest such an aide package is unconstitutional. However, it also indicates that it fears the IMF will be less stringent than the Eurogroup, something that flies in the face of all logic. To me this suggests an institutional bias against a bailout for which the internal memo provides intellectual cover. Clearly, this level of institutionalized opposition to a bailout in Germany makes a bailout less likely, even with IMF involvement.
In the interest of bringing you this perspective, I have translated a portion of the article below.
The German Bundesbank picked apart the EU rescue plan for Greece which was largely designed by the German federal government. According to an internal document which the Frankfurter Rundschau has obtained, the high priests of the Stability and Growth Pact fear that the International Monetary Fund (IMF) would require less financial discipline of the Greeks than would the Eurogroup.
"This decision by the heads of state and government of the Eurogroup, which, to our knowledge was made without the involvement of relevant central banks, bring problems with it, which cannot be underestimated from the point of view of policy stability," says the board document. The Bundesbank confirmed the document’s existence but tried to play it down; it was an unauthorized paper which a mid-level functionary out together as a first reaction to the decision. "The process to form an official opinion has not yet taken place," said a spokesman.
The paper rips into the generally public-praised rescue operation for Greece with the intervention of the IMF. This solution leads neither to adherence of the Maastricht treaty nor to a situation in which no German money would flow to Athens. On the contrary, in the end the Bundesbank will deliver the euros with which the IMF helps Greece.
The Bundesbank criticises the involvement of the IMF also because the days are gone in which the Fund considered fiscal discipline of the highest virtues for policy and forced aid-seeking countries into a strict privatization course. Ever since the Frenchman Dominique Strauss-Kahn took over the post of Executive Director at the end of 2007, the IMF has changed course. "The extreme market orientation has been abandoned," says finance professor Marcel Tyrell of the Zeppelin University in Friedrichshafen.
I should stop here because it goes on in this fashion for some time. I think you get the picture. Regardless of whether a Sachbearbeiter (mid-level functionary) wrote this paper, it accurately reflects the view of many in German policy circles.
The full German version is linked below.
Bundesbank contra IWF – Anna Sleegers, Frankfurter Rundschau