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Stark warning for eurozone's future

Yesterday's shock resignation of ECB chief economist Jurgen Stark demonstrates just how divided the organisation is as the single currency faces the most serious crisis in its 13-year history.

With yields on the government bonds of peripheral eurozone countries once again rising to dangerous levels, the timing of Mr Stark's departure was unfortunate to say the least.

Mr Stark's resignation finally brings out into the open what many had long suspected. As the eurozone crisis has dragged on with no resolution seemingly in sight, an ever-widening gap has opened up between the eurozone's Germanic core and the peripheral countries, including Ireland.

Even as rumours of internal divisions within the ECB grew louder, we were assured that all was sweetness and light in Frankfurt. Yesterday's dramatic developments finally proved that the rumours of internal ECB divisions were true.

Which, contrary to what one might think, is probably no bad thing. While the ECB may be based in Germany's financial capital Frankfurt, the euro is the currency for all of the eurozone rather than merely of Germany, the Netherlands, Austria and a handful of other traditional "hard currency" countries.

Unfortunately, the institutional architecture of the ECB tended to disguise this fact. For most of its existence, Germany has, with the assistance of its economic allies and the ECB executive board, been able to totally dominate the ECB. This has meant that the ECB has pursued policies that have favoured German interests rather than those of the eurozone periphery.

As a result the ECB kept interest rates far too low for far too long during the middle of the last decade. While this suited Germany, which was experiencing sluggish economic growth at the time, it had disastrous consequences for the peripheral economies, fuelling the Irish and Spanish property booms.

Now, with the German economy growing strongly, the ECB is keeping interest rates too high, which is once again hitting the peripheral economies hard.

While Mr Stark's resignation was ostensibly provoked by his opposition to the ECB's policy of buying the government bonds of peripheral eurozone countries, the real reasons almost certainly go deeper.

As the crisis has deepened the representatives of the peripheral countries on the ECB council, which sets eurozone interest rates, have reputedly been taking a more assertive line.

With the disastrous consequences of the tight-money policies favoured by Germany and her ECB allies becoming ever clearer, the opposition of the peripheral countries has become stronger.

They are no longer prepared to meekly accept that Germany and the ECB executive board know best.

Yesterday's resignation is the second German resignation from the ECB this year. In February, Axel Weber, head of the Bundesbank and an ECB council member, also stepped down. He too apparently objected to the ECB straying from Germany's tight-money orthodoxy.

That's not something that those of us on the periphery should lose too much sleep over. It is well past time that the ECB evolved into a central bank that serves the interests of the entire eurozone rather than those of its most powerful member.

Irish Independent