Germany fires cannon shot across Europe's bows

In a cannon shot across Europe’s bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem.

“I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said.

“This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said, speaking at a forum of half the world’s Nobel economists on Lake Constance to review the errors of the profession over recent years.

Mr Wulff said the ECB had gone “way beyond the bounds of their mandate” by purchasing €110bn (£96.6bn) of bonds, echoing widespread concerns in Germany that ECB intervention in the Italian and Spanish bond markets this month mark a dangerous escalation.


He did not explain what else the ECB could have done once the bond spreads of these two big economies began to spiral out of control in early August, posing an imminent threat to monetary union and Europe’s financial system.

The blistering attack follows equally harsh words by the Bundesbank in its monthly report. The bank slammed the ECB’s bond purchases and also warned that the EU’s broader bail-out machinery violates EU treaties and lacks “democratic legitimacy”.

The combined attacks come just two weeks before the German constitutional court rules on the legality of the various bailout policies. The verdict is expected on September 7.

The tone of language from two of Germany’s most respected institutions suggests that both markets and Europe’s political establishment have been complacent in assuming that the court would rubberstamp the EU summit deals in Brussels.

Nobel laureate Joe Stiglitz told the forum that the euro is likely to fall apart unless Germany accepts some form of fiscal union. “More austerity for Greece and Spain is not the answer. Medieval blood-letting will kill the patient, and democracies won’t put up with this kind of medicine.”

Mr Stiglitz said Argentina’s 8pc annual growth rate after breaking its dollar peg in 2001 showed that “there is life after default, and life after breaking out of an exchange rate system”.

He warned that Germany is “going to lose a lot of money one way of another” since the exit of southern states will inflict large banking losses. The country might as well opt to shore up EMU and prevent its great dream of European unity “going down the drain”.

Chancellor Angela Merkel has struggled all this week to placate angry critics of her bailout policies within the Christian Democrat (CDU) party. Labour minister Ursula von der Leyen said countries that need rescues should be forced to put up their “gold reserves and industrial assets” as collateral, a sign that rising figures within the CDU are staking out eurosceptic positions as popular fury mounts.

Mrs Merkel insisted that this was “not the way to get things done” in the eurozone. She appears to have enough votes to back the EU summit deal in late July, which gives the bailout fund (EFSF) broader powers to shore up bond markets.

However, the simmering mutiny kills off any chance that Germany will agree to a major boost to the EFSF in coming months, let alone quadruple its firepower from €440bn to €2 trillion or more, the sort of figure deemed necessary by RBS, Citigroup and others to prevent the crisis engulfing Italy and Spain.

Marc Ostwald from Monument Securities said Germany is drifting towards a major constitutional crisis. “This has all the makings of the revolt that unseated Helmut Schmidt [in 1982], and indeed has political echoes of the inefficacy of the Weimar regime,” he said.

Mr Wulff said Germany’s public debt has reached 83pc of GDP and asked who will “rescue the rescuers?” as the dominoes keep falling. “We Germans mustn’t allow an inflated sense of the strength of the rescuers to take hold,” he said.

“Solidarity is the core of the European Idea, but it is a misunderstanding to measure solidarity in terms of willingness to act as guarantor or to incur shared debts. With whom would you be willing to take out a joint loan, or stand as guarantor? For your own children? Hopefully yes. For more distant relations it gets a bit more difficult,” he said.

The carefully-scripted comments are the clearest warning to date that Germany has reached the limits of self-sacrifice for Europe. The assumption that it will always - after much complaining - sign a cheque to keep the project of the road, no longer holds.

Fear that Germany’s torrid recovery from the Great Recession is already sputtering out is likely to harden feelings in Berlin.The IFO institute’s index of German business confidence saw the biggest one-month drop in August since the Lehman crisis in October 2008.

This follows a sharp fall in the ZEW financial index to -37.6, levels that have typically preceded recession in the past. German growth wilted to 0.1pc in the second quarter on falling export demand, though the figures may have been distorted by the stoppage of eight nuclear plants.

Mr Wulff rebuked Chancelor Merkel, saying political leaders should not break their holidays every time there is trouble in the markets. “They have to stop reacting frantically to every fall on the stock markets. They mustn’t allow themselves to be led around the nose by banks, rating agencies or the erratic media,” he said.

“This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies.”
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