The meaning of Germany’s gold decision

An article from Mohamed El-Erian

The Bundesbank, Germany’s central bank, has decided to move part of its gold holdings from the Federal Reserve Bank in New York and other central banks such as the Banque de France to Frankfurt. This unusual and highly-visible decision is sure to trigger an explosion of media commentary relating both to motivation and implications – especially since Germany joins Iran, Libya and Venezuela in making such a move.

I suspect that Germany’s motivation is purely domestic: officials are responding to growing internal pressures ahead of elections later this year.

Since the start of the European debt crisis in 2009-10, citizens have gotten increasingly concerned about other countries’ ability to access their income. It is one thing for Germany to commit to a one-off loan to Greece. It is another for it to be part of recurrent bailouts, both direct and indirect, for a potentially expanding set of European countries.

Germans also realise that the more loans they make to struggling economies, the less likely they are to get fully repaid. Already, there is — understandable and realistic — talk that official creditors will have no choice but to forgive part of their financial claims on Greece.

It is not unusual for concerns about open-ended income transfers to evolve into broader worries about the integrity of the nation’s wealth and well-being. After all, German citizens are still paying a tax to cover the politically-driven decision just over 20 years ago to unify at parity the currencies of both East Germany and West Germany.

Over the last few months, there has been a debate in Germany about the safety of the country’s gold stock held in other countries – amplified by recognition that the historical case for holding the gold abroad is no longer as valid.

So, as I see it, domestic factors explain most of the motivation for Germany’s highly-visible and unusual decision. As much as conspiracy theorists may wish otherwise, this is not about the safety of the US Federal Reserve, nor is it about the state of German-US relations. And the backdrop of growing EU-UK tensions has nothing to do with all this either. After all, Germany is also repatriating gold from Paris.

Yet the systemic significance of Germany’s unusual announcement does not end here.

We are living in a world of growing multilateral economic tensions. As an illustration, witness the number of references in the media to “currency tensions” and “currency wars”. See also the extent to which many foreign governments have already expressed their displeasure about policy approaches adopted by the US Federal Reserve and Congressional dysfunction.

Given all this, Germany’s domestically-driven decision carries international risk.

In the first instance, it could translate into pressures on other countries to also repatriate part of their gold holdings. After all, if you can safely store your gold at home — a big if for some countries — no government would wish to be seen as one of the last to outsource all of this activity to foreign central banks.

If developments are limited to this problem, there would be no material impact on the functioning and wellbeing of the global economy. If, however, perceptions of growing mutual mistrusts translate into larger multilateral tensions, then the world would find itself facing even greater difficulties resolving payments imbalances and resisting beggar-thy-neighbor national policies.

The most likely outcome right now is for Germany’s decision to have minimum systemic impact. But should this be wrong and the decision fuel greater suspicion – a risk scenario rather than the baseline – the resulting hit to what remains in multilateral policy cooperation would be problematic for virtually everybody.