Bailout critics get their chance to say ‘I told you so’

As the first rays of sun in Frankfurt struck the skyscrapers of Germany's financial capital, people hurrying to work were shocked but not surprised that zero hour had come and gone for Greece. At the central train station, bankers sipped coffee and laughed at the front-page image on the influential Frankfurter Allgemeine daily: a pile of smashed crockery that the bailout-critical newspaper said summed up best Greece's relations with its creditors.

There’s no shortage of broken Greek crockery lying around in Frankfurt, thanks to the faultline running through this city between two antagonistic central banks, at war over monetary policy.

European Central Bank president Mario Draghi promised in 2012 to do "whatever it takes" to save the euro and rumours circulated yesterday that, behind the gleaming facade of the new ECB headquarters, bank employees had pulled an all-nighter to crunch numbers in a last-ditch plan to avoid a Greek default and euro zone exit. But there are limits to "whatever it takes", bank officials said yesterday, and no further ECB action is likely ahead of Sunday's Greek vote.

Grim satisfaction

Across town in the fortress-like

Bundesbank

, meanwhile, the mood is somewhere between grim satisfaction and deflated vindication. For four years, the hawkish Bundesbank president

Jens Weidmann

has warned his ECB governing council colleagues not to get involved in Greece and other crises, and that the road to monetary policy hell is paved with good intentions. Now Weidmann fears the worst: after propping up crisis countries by buying their bonds, which he opposed, the ECB has been captured by politicians by extending almost €90 billion in emergency liquidity to Greek banks that are effectively bankrupt, which he also opposed.

Senior Bundesbank officials say their worst fears have come true. The ECB is a political prisoner of its own actions by “closing its eyes and ears” to the obvious: Greek banks are insolvent. “Respecting the core principles on which our monetary union is built is not a matter of dogmatic German stubbornness,” said Weidmann last week, “but a key policy condition for long-term economic prosperity in the euro area.”

After years of being dismissed as fiscal pedants, German bailouts critics say flaunting euro rules is undermining the wider project. This is where the most vocal bailout critics in Frankfurt depart from others in Europe. Their primary concern is not the social cost of austerity or Keynsian economic theories that state spending should increase, not decrease, in an economic downturn.

This is the land of ordoliberal or supply-side economics, where it’s considered best practice to minimise state intervention. If an emergency requires action, the state must prune waste first before an injection of taxpayers’ money – with the aim of boosting competitiveness not stimulating demand.

In a front-page editorial, the Frankfurter Allgemeine attacked politicians who play economists by noting a curious coincidence. Under the headline "Two currency unions, the same mistake", it noted the Greek International Monetary Fund deadline coincided with the introduction of the Deutschmark in East Germany on July 1 1990, three months before unification. A one:one exchange rate delighted East Germans but left eastern companies unable to compete.

State debt orgy

The joy of unifying two Germanies helped bridge the resulting economic gaps, the

Frankfurter Allgemeine

argued, but no such unifier exists in an economic monetary union without real political union. “One looked on as the greatest gift of monetary union, low interest rates, was abused for private and state debt orgies,” it argued, “while the ECB abolished the instrument that could have brought debt sinners to reason: the market’s interest rate club as price for investor risk”.

Given the state of Greece, Germany’s centre-right establishment believed no amount of pruning would make it a good investment. After breaking their own rules on Greece, Frankfurt’s EU bailout critics say European leaders have been presented with a bill today, and uncertainty tomorrow. In Frankfurt, the satisfaction is grim indeed.