Jean-Claude Trichet, Call Your Office

Greece’s financial crisis has taken a turn for the worse, and it is forcing the European Union to confront an identity crisis of its own. The decision by Standard and Poor’s, a leading credit agency, to cut Greek government bonds to "junk" status rattled the European markets Tuesday, and led Deutsche Bank chief economist Thomas Mayer to warn that the country was entering "a death spiral of government insolvency." S&P also downgraded Portuguese and Spanish debt this week, sending markets tumbling further.

Amid fears that Greece could default on its international debt, International Monetary Fund Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet met in Berlin Wednesday in an attempt to convince Germany to fund a large portion of a planned 45-billion-euro bailout for the Greek economy.

The conventional narrative paints this debate as a duel between Berlin and Brussels. The seat of the European Union delivers strident promises of support, advocating a kind of proto-federalism that cannot countenance a Greek default. The German government, however, remains skeptical at being saddled with the lion’s share of the debt burden. Even the inclusion of the International Monetary Fund in the EU rescue package announced earlier this month was generally interpreted in terms of the Berlin-Brussels debate. While the tension between these two power centers is undeniable, a third player has been largely overlooked: Frankfurt, home of the European Central Bank (ECB).

Unlike the U.S. Federal Reserve, which has roughly a century of precedent to guide its behavior, the ECB is a new institution with barely a decade of history. With the euro briefly dipping below its lowest level in a year against the dollar on Tuesday, the ECB faces the greatest challenge in its short history — and a crisis that will help shape the organization for years to come.

The ECB has essentially three models from which to choose. It could solidify its mandate as an institution completely independent from the EU leadership, in the manner of the German central bank, by deliberately limiting its portfolio to the preservation of the euro’s value. It could achieve a similar level of independence from Brussels but with a broader economic brief, like the Fed, assuming more power and more responsibility. Finally, it could devolve into a technocratic instrument of executive power, subordinating itself to Brussels in the same manner as the Bank of France subordinates itself to the powers that be in Paris. From the perspective of Frankfurt, which is largely concerned with avoiding overt responsibility for saving Greece, a hybrid of the latter two models represents the worst possible solution.

The ECB leadership has good reason to avoid being tasked with bailing out Greece, and therebv the euro. Saving the euro requires a number of unpleasant actions, such as shouldering the burden of enforcing austerity measures on an unwelcoming populace. Frankfurt does not want to bear this political responsibility while the EU and the powerhouses of Europe carp on the sidelines. Trichet wants to avoid being forced into the mold of the Fed and the Treasury Department, which have taken the political heat for the U.S. bank bailout since 2008.

So far, Frankfurt has navigated these dangerous waters without taking responsibility for either saving Greece or calling for the expulsion of the Eurozone’s more problematic debt-laden members. It is maneuvering as an independent power center to force the national governments — Berlin, of course, but also the proto-federalists in Brussels, Lisbon, Madrid, Paris, and Rome — to make the necessary decisions. The 45-billion-euro proposed bailout announced earlier this month was such a decision. While the ECB has made provisional moves in support of the measure, it has also emphasized the responsibility of national governments to maintain fiscal discipline and carefully ensured the onus of the bailout is distributed across several players.

The ECB is essentially playing a waiting game, buying time to define its role in Europe’s future. As long as it accepts Greek bonds as collateral, a default is essentially impossible. However, this logically entails that the ECB has the power to effectively coin money in the manner of the Fed. This is an outcome Brussels would like, but Berlin would not. For now, Frankfurt’s institutional interests pull it in opposing directions: The ECB has a vested interest in the success of the European project, which tilts it towards Brussels, but also in preserving its independence and its financial reputation, which favors Berlin. As eyes turn to the German constitutional court for a possible challenge to the bailout, it appears that the ECB has skillfully hedged its institutional bets.

In a few years, the rules governing Frankfurt’s relationship with Brussels and Berlin will be clarified as future sovereign debt and fiscal crises, like the one currently facing Greece, further define the position of the ECB. Ultimately, the question facing Europe is whether protecting the eurozone means that the EU will be forced into the next stage of federalism, despite decades of public assurances to the contrary. Brussels says yes, but Berlin says no. The continent awaits Frankfurt’s answer, and it is one Jean-Claude Trichet may not yet know.