Wooing the Germans

Jun 17, 2012·James Turk

It has been over a year since Mr Axel Weber made his surprise decision not to seek the top post at the European Central Bank, which led soon thereafter to his resignation as president of the Bundesbank.

These events transpired at a critical moment for the euro. The Greek crisis was still simmering, and borrowing costs across southern Europe were rising, raising fears that other countries might follow the path of Greece, Ireland and Portugal in needing bailouts.

The Wall Street Journal reported at the time that Mr Weber’s announcement “undermined a key plank” of Chancellor Angela Merkel’s “strategy to restore Germans' confidence in the euro.” It went on to say that she “had hoped to win back Germans' trust in the single currency by installing a German as head of the ECB.”

It was a logical strategy, given the confidence the German people place in the leaders of the Bundesbank, and indeed, in that venerated institution itself. It is a trust well-deserved given that for 50 years the Bundesbank guided the Deutschemark to a record of stability unmatched by any other central bank, except Switzerland, which was pursuing a similar policy based upon German monetary discipline.

A German appointee to the all-important ECB role was, however, not to be. Germany would have to wait for one of their own to assume the ECB’s top spot because Mario Draghi was appointed to head up the single currency’s central bank. As a consequence, Ms Merkel has resorted to other measures to bolster confidence in the euro.

It has been an ongoing effort for Ms Merkel because the euro has seemingly lurched from crisis to crisis since Weber’s decision. Numerous measures have already been taken, with more to come, like the proposed European Stability Mechanism due to launch in July. But a simple, obvious step is being overlooked by senior eurozone politicians. An accurate accounting and reporting of central bank gold reserves would go a long way to reassuring Germans and Europeans generally about the future of the euro.

If the single currency experiment succeeds, an accurate gold accounting will just be “icing on the cake”. It will add little to bolster confidence in a currency that over time proves successful. But many still have doubts whether the euro will survive given two interlinked, ongoing crises – sovereign debt and bank solvency. For people worried about the future of the euro – and indeed, the European banking system as a whole – their concerns can be allayed with the knowledge that the aggregate weight of gold owned and safely stored within each European central bank is sufficient to provide a sound base to establish a successor to the euro, should that step become necessary.

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