Key member of Europe central bank quits, adding to economic gloom

The sudden resignation Friday of a key member of the European Central Bank aggravated a sense of disarray over how to rescue the continent’s debt-laden countries, adding to gloomy economic news out of Europe that hammered global stock markets and sent the euro currency plunging.

German economist Juergen Stark said he was quitting his post on the central bank’s policy committee, a move widely seen as a repudiation of the bank’s strategy of purchasing government bonds from heavily indebted countries such as Italy and Spain in order to keep their borrowing costs down.

Stark, 63, was the bank’s leading internal opponent of that approach, arguing that the central bank’s role was to check inflation rather than lead a rescue of what some Europeans — and a majority of Germans — see as less disciplined, high-spending countries.

His resignation came a day after European leaders chastised Greece for failing to meet its promises to cut public spending, a condition for receiving bailout funds. Alarm over the rising cost of saving Greece from bankruptcy has led to an escalation of hard-line talk in recent days, with some politicians musing about expelling Greece from the common currency zone or abandoning it to deal with financial markets alone.

Worries about sovereign debt contributed to falling share prices in London, Paris, Frankfurt and Milan, with financial stocks among the worst hit. Many European banks are heavily exposed to Greek sovereign debt.

Stark’s departure — he will stay on until a replacement is found, a central bank statement said — added to the markets’ unease. Eric Heyer, head of the Center for Economic Research at France’s Institute of Political Sciences, said Stark had little option but to leave after he “openly criticized” central bank chief Jean-Claude Trichet over the decision to buy bonds from troubled nations. “There were cross words between them, and then he resigned,” Heyer said.

Some observers described the departure as a warning that the central bank’s bond-buying spree was misguided. Kurt Lauk, president of the economic council of German Chancellor Angela Merkel’s Christian Democrats, told journalists that Stark’s departure was a “dramatic alarm signal which shows the ECB must correct its course.”

“It’s also a clear signal that the ECB must be freed from the role of aid provider that was foisted on it due to bad decisions by politicians,” he said.

Others said Stark’s was a minority view inside the central bank, and that his decision to quit will not change its policy of buying sovereign debt. Nor, they argue, did he have the support of Merkel and her senior allies in government, who have supported the institution’s move to assume the cost and risks of buying Spanish and Italian bonds.

“The only entity with the capacity to support countries as large as Spain and Italy is the ECB,” said Jacob Kirkegaard, a Europe specialist at the Peterson Institute for International Economics. “It suits the German government to have the ECB as an interventionist bank. If the ECB doesn’t do what it’s doing, the German government would have to ask the German taxpayer to pay for it directly.”

Willsher is a special correspondent.