Germany, central bank at odds on euro recovery

FRANKFURT, Germany — Europe’s economy needs help — fast. Yet the two powers that could take action, the European Central Bank and Germany, don’t see eye to eye about what to do.

That leaves Europe’s currency union stuck in a dangerous policy limbo that now has investors worried.

Concern that the 18-country currency union, which accounts for 17 percent of the world economy, has no clear path out of its economic trouble is among the key factors in this week’s global market turmoil. After a mere four quarters of sluggish recovery from its crisis over government debt, the bloc saw no growth at all in the second quarter.

Not only that, but the eurozone has dangerously low inflation, which can depress

growth over years, if not decades, as happened in Japan. A sudden decline in exports and industrial activity in Germany, long the region’s source of growth, heightened those concerns.

There are several big ideas about how to improve growth — for the long term. A freetrade agreement with the United States, a Europe-wide investment fund to put $382 billion into infrastructure, looser employment rules in France and Italy. A European Central Bank review of bank finances due this month could purge hidden losses from the financial system and get more credit flowing to companies.

Yet those ideas will take months or even years to help economic activity. More immediate help would come from more monetary stimulus from the central bank or increased spending from governments.

Those ideas, however, are running into friction from Berlin, which is pushing for governments to balance their budgets and is skeptical of the European Central Bank’s stimulus plans.

European Central Bank President Mario Draghi has put forward a three-part strategy to help the eurozone: more monetary stimulus from the central bank, more spending from governments that can afford it and probusiness changes from more troubled governments.

Draghi went ahead with his part: The central bank announced in September that it would buy bundles of bank loans, a way of stimulating the flow of credit to businesses. In June, it also offered cheap, long- term loans to banks on condition they lend the money on to companies. And Draghi has said the central bank is open to the more drastic step of buying large amounts of bonds to increase the amount of money in the financial system — so-called quantitative easing.

Yet governments have not followed Draghi’s advice to spend more where possible within EU rules. That, however, has run into insistence from Germany, the eurozone’s dominant political and economic force, that governments focus on reducing their deficits.

Some countries, l i ke France, have deficits above the EU limit of 3 percent of gross domestic product. They argue that shrinking the deficit rapidly is now less important than boosting growth through government spending. Others, including Germany, have their public finances in order and could in theory increase spending.

But Berlin isn’t moving on this point. It argues Germany should not fall into the temptation of borrowing to spend on growth, even though the eurozone economy might need it now, and that countries like France should not be allowed to break the EU rules.

“These rules must be applied credibly to all member states — only then can the pact fulfill its function as a central anchor for stability and above all for confidence in the eurozone,” Chancellor Angela Merkel said Thursday.

Even Draghi’s part of the stimulus seems to be under question, in Germany at least. The head of the German central bank, Jens Weidmann, has complained about the risks of the bond purchases, saying any losses could be felt by taxpayers. That’s in line with commonly expressed fears in Germany that its taxpayers will wind up paying for mistakes made by less prudent governments.

Weidmann has just one vote on the 24-member central bank council — but it’s an influential one, especially if backed by Merkel.

The policy standoff is a sharp contrast from what analysts have praised as Draghi’s finest moment — his July 2012 promise to do “whatever it takes” to save the euro. To do so, he offered to purchase the bonds of troubled governments, a move so effective in easing market turmoil in Europe it didn’t even have to be used.

Back then, Merkel and Schaeuble gave Draghi a green light. Now the light is yellow at most, or maybe red.

There’s still a chance that things will get bad enough that Draghi and the central bank will pile in with their last big stimulus weapon — huge purchases of government bonds.

Many German economists and politicians don’t like the idea. But Merkel might agree if a new recession and debt crisis is the alternative.

If there’s “a huge flareup of tensions in the eurozone,” said economist Holger Schmieding at Berenberg Bank, “Berlin would give the ECB the nod to do it.”