The Bundesbank against the World: German Central Bank Opposes Euro Strategy

Published on Spiegel Online International, by Christian Reiermann, Michael Sauga and Anne Seith, August 27, 2012.

The European Central Bank plans to resume buying the bonds of crisis-hit countries on a large scale. Jens Weidmann, head of the German central bank, is firmly opposed to the idea, arguing that it will lead to inflation and lessen pressure on governments to carry out reforms. But he is becoming increasingly isolated within the ECB and in the political world … //

… Feelings of Desperation:

  • But those European politicians who are determined to rescue the euro have been ignoring democratic principles for a long time. They are feeling desperate because, after 17 monetary summits, they still haven’t been able to stop the crisis. And now they are pleased to see Draghi doing the work for them.
  • The purchase of government bonds sounds technical and harmless, and yet the weapon with which Europe’s top monetary policy experts are now going into battle is essentially no different from the euro bonds that German Chancellor Angela Merkel famously said she will oppose as long as she lives. Not surprisingly, Merkel’s take on the Draghi proposal is characterized by her typical doublespeak. At home, her advisers insist that it’s a good thing that someone is upholding the principles of the Bundesbank. In Brussels, on the other hand, Merkel indicates that the Draghi plan enjoys her full support.
  • But the two positions will in reality be incompatible if the euro crisis continues to escalate. Weidmann wants the monetary union to be able to force crisis-ridden countries to withdraw from the euro zone if there is no other way to ensure monetary stability. Merkel, on the other hand, wants to preserve the monetary union at all costs, even if this means inflation and financial crashes.
  • Now Weidmann is even losing the chancellor as an ally, even though he served as Merkel’s economic adviser for five years.

The Talking Paperclip:

  • When Merkel appeared before the press at financial summits or to discuss monetary issues, Weidmann, as her adviser, always stood in the background, a thin, youthful-looking man with his brown briefcase wedged under his arm. As an adviser, he was exactly what she wanted: quick-witted, discreet and loyal to the point of self-denial.
  • Weidmann, who holds a doctorate in economics, spoke only when he was asked. And when he did state his position at length in off-the-record conversations, he had no trouble coming up with even more tedious wording than his boss. Journalists nicknamed him the “talking paperclip.”
  • Given his nature and reputation, observers were convinced that Weidmann would prove to be even more flexible in his new position than his predecessors. Previous Bundesbank chief Axel Weber, for example, had resigned over his opposition to bond purchases, and ECB chief economist Jürgen Stark followed suit shortly after Weidmann came into office.
  • It was all the more surprising that the new Bundesbank president was soon openly championing Germany’s positions even more staunchly than his predecessors. Whereas Weber and Stark tended to keep their criticism to themselves, Weidmann, in speeches, op-ed pieces and interviews, warned of the dangers of a misguided euro crisis policy. He was regularly outvoted in the ECB’s Governing Council. Nevertheless, ECB President Draghi soon realized that it would be foolish to ignore Weidmann’s most powerful weapon: the deep-seated and well-founded mistrust that always takes hold in the population when politicians push for banks to start printing money.
  • When Draghi talked of a possible new bond buying program a few weeks ago, Weidmann’s resistance was to be predicted. In light of rising interest rates for Spanish and Italian bonds, Draghi felt the need to send a strong signal to the markets. Without consulting with his colleagues on the ECB Governing Council first, he announced, during a speech in London at the end of July, that the ECB would do everything in its power to save the euro. “And believe me, it will be enough,” he added cheerfully.

Buying Time: … //

… Fatal Consequences:

  • The consequences can be fatal. With its bond purchases, the ECB is flooding the markets with money. If it doesn’t claw back the money elsewhere, it continues to inflate the money supply. Experience and theory have shown that the injection of funds into the markets could eventually lead to rising prices — in other words, inflation, which central bankers are required by law to prevent.
  • Weidmann also suspects that the ECB indirectly contributes to funding the national budgets of crisis-ridden countries, which it is prohibited from doing under the European Union treaties. Although the ECB is not lending money directly to governments, its policy “is too close to state financing via the money press for me,” says Weidmann. With his comment, he is articulating the fear that the crisis-hit countries will exploit the bond-buying program to constantly issue new debt.
  • In addition, the bond buying reduces pressure on governments to institute reforms. That’s something that the ECB’s bankers learned a year ago, when they bought large numbers of Italian government bonds, only to look on as the government of then Prime Minister Silvio Berlusconi promptly put its reform efforts on ice. To prevent this, Draghi now wants to ensure that future bond purchases are subject to strict conditions. But this makes the ECB even more dependent on the political world, because it prevents it from intervening in the future when it sees fit. Instead, it will have to wait until politicians have created the necessary preconditions.
  • This raises new questions. For instance, will the ECB even have the option of refusing assistance? And how will it justify buying one country’s bonds at an interest rate of 7 percent while it buys those of another at just 5 percent?

(full text).

Links
:

Whatever Happened to Iraqi Oil? on TomDispatch, by Greg Muttitt, August 23, 2012;

Greg Muttitt’s new book: Fuel on the Fire, Oil and Politics in Occupied Iraq, on amazon;

Book: The American Way of War: How Bush’s Wars Became Obama’s, on amazon;

Evidence in Delhi Embassy Bombing Suggests Journalist Was Framed, Part 1*, on Dissident Voice, by Gareth Porter/also on World People’s Blog , August 27, 2012.

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