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A European Solution Germany Can Feel Good About

German Chancellor Angela Merkel speaks with Mario Draghi, president of the European Central Bank, on the second day of the G20 Summit in France.
Chris Ratcliffe
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Getty Images
German Chancellor Angela Merkel speaks with Mario Draghi, president of the European Central Bank, on the second day of the G20 Summit in France.

There are basically two solutions to the European debt crisis. One, someone can show up with really deep pockets and bail out all the countries. Or, two, the European Central Bank can create a bunch of money and loan it to the countries who need it. The problem is there's a barrier blocking both these potential solutions — a certain European country known for its beer and brats: Germany.

Germany doesn't want to have to use its own money to bail out its neighbors because if it doesn't work, they stand to lose a lot. And they don't want the European Central Bank to do it because they're worried creating more euros could lead to hyperinflation.

Philip Coggan writes the Buttonwood column for The Economist. He says Germany is afraid of history repeating itself.

"If you go back over history and look at examples of hyperinflation, that is when prices were going up 10 to 20 percent a month or a week, those examples have all been when governments have been unable to borrow money from private investors and have got the central banks to buy all its debt to print the money to finance the deficits, " Coggan says.

In other words-- governments got themselves into trouble and asked the central banks to print a bunch of money to get them out of it.

The most famous example of a government abusing the power of the central bank is Germany in the 1920s. The country was in horrible debt so its central bank printed more and more money. The result was chaos. Prices doubled within hours. People carted around money in wheelbarrows. Ever since World War II, Germany has insisted that its central bank never repeat that mistake. and that was its main condition for entering the euro.

"Germany only gave up the deutsche mark, its cherished currency, on the condition that the new European Central Bank, which replaced all the individual central banks, would not be involved in funding the deficits of individual countries," says Coggan.

So far, the ECB is sticking to what Germany wants. It's been focusing on its mandate of preventing inflation, and its new president Mario Draghi has been aggressively fending off calls from the rest of Europe to intervene by creating more money.

But observers in Europe say the stance at the ECB could change. The only way for that to happen of course would be somewhat on Germany's terms. For Germany to feel comfortable with the ECB printing more money, the rest of the European countries would have to make some big changes. They would have to agree to new rules to get their spending under control.

Right now finance ministers from the 17 eurozone countries are talking about these changes, mulling over the possibility of closer fiscal ties. And just this morning, Mario Draghi hinted that the ECB might take more action. He said that if leaders can reach an agreement, "other elements might follow."

Copyright 2022 NPR. To see more, visit https://www.npr.org.

Zoe Chace explains the mysteries of the global economy for NPR's Planet Money. As a reporter for the team, Chace knows how to find compelling stories in unlikely places, including a lollipop factory in Ohio struggling to stay open, a pasta plant in Italy where everyone calls in sick, and a recording studio in New York mixing Rihanna's next hit.