There is a big battle going on over the future of the Euro. If the easy money people win, the issue is will Germany stand behind all those bonds the ECB buys up? Will German taxpayers after all be expected to stand behind Greek and Spanish banks if they get into trouble? Will the Euro architects find a way of allowing newly created Euros to find their way, if indirectly – into financing the deficits of less fiscally prudent countries within the zone?
Indeed, the question is how can Germany avoid being dragged in to Quantitative easing if the zone as a whole decides on that route? By virtue of being the largest shareholder in the ECB, Germany will become the proud part owner of a wide range of government bonds from other countries in the zone as the ECB seeks to do what the Fed, Bank of Japan and the Bank of England have already done. If those bonds subsequently lose money, Germany surely loses as well.
Some say they have found a way round this dilemma. Why not, they say, empower the individual national central banks of the zone to simply buy up their own government debt, and to take the losses if losses there subsequently are. However, the individual central banks do not have the power to create euros. So presumably they will have to borrow the euros from the ECB to buy these bonds. What if they get into trouble? How do they repay the ECB? Surely there has to be recourse by the national central banks to the ECB, so in the end Germany will be pushed into supporting the whole edifice.
There is also the little problem of the Swiss franc. When the Swiss authorities wisely decided to quit their link to the Euro, their currency shot up. Markets revealed just how depressed the Swiss unit was by its forced association with the Euro. Imagine what the value of the DM would now be against the Euro if Germany had done what Switzerland did, and declined to actually join the Euro.
The Swiss event and the agony of QE reveal the continuing strains of the Euro project. If it is to work in the longer term Germany has to put her tax revenue and banking system behind it. She is still reluctant to do so. It is a bit like London refusing to stand behind the rest of the UK – an absurd idea which would damage the pound greatly if anyone tried it.