G20: Germany

The G20 summit held in Cannes, France was dominated by talks on the European financial crisis. As President Obama said to reporters on the first day of the meeting, finding a solution to the Eurozone crisis was at the top of the agenda. It is needless to say that Germany had a central role in the discussions.

Angela Merkel and Nicholas Sarkozy summoned George Papandreou, the Greek Prime Minister, to an emergency meeting before the G20 kickoff to discuss the proposed referendum on the Greek bailout. The talks resulted in the Greek PM repealing the referendum.

France, Great Britain and the U.S. suggested that national gold reserves and Special Drawing Rights, an international reserve asset based on international currencies, should be contributed to boost the financial firepower of the euro zone. However, Steffen Seibert, the Merkel government’s spokesperson, announced that German gold reserves are off limits.

The idea was that the central banks of the member states should have contributed €50 to 60 billion worth of SDRs.

The reason behind this proposal is that G20 countries do not want to invest any more money in the European Financial Stability Facility, a special purpose vehicle created to provide financial assistance to euro zone countries; therefore, Europe has to look somewhere else to find funds.

An article in the Irish Times claims, however that “all roads lead to Frankfurt,” meaning it will come down to Germany having to choose between debasing the European Central Bank or breaking up the euro zone.

Even though the European Central Bank has €3 trillion war chest that could be used for buying bonds as the Fed did in the U.S., the consequence of which was inflation, the ECB cannot directly buy the bonds of its member states. This is because the ECB is modeled on the German Bundesbank and its policies are aimed at keeping inflation down.

G20 members cannot accept Germany’s reluctance to let the ECB buy national bonds. Their argument is why should any of them risk investing more in something Germany fears investing in.

Therefore, Germany was under pressure to abandon its veto on the proposed ECB rescue package, when all the finance ministers of the Eurozone countries with the exception of Germany demanded a full-scale ECB intervention at the crisis talks in Brussels last night.

-Adrienn Szlapak