Don’t Berate Schäuble for Speaking His Mind

Germany’s discomfort with the European Central Bank’s expansionary monetary policy has been known for years. So it’s a little odd to see commentators and politicians from other countries rush to censure Wolfgang Schäuble when the German finance minister should make his unease known.

The normally sober Financial Times calls Schäuble “desperate” for attacking the ECB and alleges that other conservatives in his country are conspiring with commercial banks to whip German savers into a revolt against the Frankfurt-based central bank.

If Schäuble has doubts about the bank’s policy, “such conversations are best conducted in person, not in public,” according to the Financial Times.

Since central bankers correctly regard credibility and independence as one of their most powerful tools, they will go out of their way to be seen resisting political pressure.

Schäuble’s counterpart in Paris, Michel Sapin, chimed in, saying, “France learned the hard way that one must absolutely, completely and fully respect the independence of the central bank. I hope our German friends remember this point, which they helped prevail.” Read more “Don’t Berate Schäuble for Speaking His Mind”

Dutch, German Central Banks Criticize Quantitative Easing

The chief central bankers of Germany and the Netherlands have criticized the European Central Bank’s “quantitative easing” policy, voicing concern that “easy money” will discourage less competitive euro states from enacting liberal economic reforms.

The Financial Times reports that Jens Weidmann, head of the Bundesbank, has cautioned that cheap government financing could convince politicians in France and Italy that further reforms are unnecessary:

If the member states get used to such financing conditions, it could lead to a lessening of their motivation for further consolidation or reform measures. Read more “Dutch, German Central Banks Criticize Quantitative Easing”

Dutch, Germans Critical of European Quantitative Easing

European Central Bank president Mario Draghi said on Thursday his institution would start pumping €60 billion per month into the European economy until September next year or until inflation reaches its 2 percent target. Media in Germany and the Netherlands did generally not take kindly to the announcement.

The policy of quantitative easing is controversial in both countries. Dutch and German officials worry that “cheap money” will discourage budget consolidation and structural economic reform in other states, such as France, Greece and Italy.

The central bank says it will accomplish its stimulus by buying government bonds from member states relative to their size, meaning Germany will be the largest direct beneficiary of the policy, even if it borrows little and already pays extremely low interest rates.

Draghi’s announcement was widely expected because the eurozone was looking at deflation. Falling oil prices pushed the bloc’s inflation rate below zero at the end of last year. Read more “Dutch, Germans Critical of European Quantitative Easing”

Germans Apprehensive About Quantitative Easing

Whereas most financial markets seem to relish the prospect of quantitative easing by the European Central Bank, the eurozone’s most powerful member is apprehensive about an “easy money” policy that it fears will discourage structural economic reforms in the periphery of the currency union.

European Central Bank president Mario Draghi is expected to announce a new bond-buying program on Thursday in an effort to stave off deflation.

Falling oil prices have pushed the eurozone’s inflation rate below zero for the first time in five years. Last week, the euro also touched an eleven-year low against the American dollar.

The Frankfurt bank’s inflation target is close to 2 percent. It has been well below that target since the European sovereign debt crisis began in 2008. Read more “Germans Apprehensive About Quantitative Easing”

Is Austerity Losing the Battle in Europe?

The different measures implemented in Europe in order to boost growth through increased monetary action, investment and structural reforms have replaced austerity as the new dominant dogma. While Angela Merkel is adapting to the new situation, Bundesbank president Jens Weidmann disagrees with more budget flexibility and a possible QE by the European Central Bank (ECB) in 2015.

In the past few days, Andrea Bonanni, Brussels correspondent for the Italian newspaper La Repubblica, published an article in which he announced that Angela Merkel and Germany had lost the long battle over austerity in Europe. Read more “Is Austerity Losing the Battle in Europe?”

Central Bank “Doing Nothing” to Save Eurozone?

The European Central Bank has purchased more than €200 billion worth of Greek, Irish, Italian, Portuguese and Spanish government bonds but apparently it’s not enough. Quartz‘ Simone Foxman complains that the central bank is “still doing nothing” while Europe sinks into recession. Why? Because the bank kept its interest rate unchanged at .75 percent on Thursday, “continuing a policy that has done little to save the eurozone from a deepening recession.”

Foxman admits that the central bank’s decision is unsurprising. Unlike their American counterparts, the central bankers in Frankfurt conduct monetary policy, or are supposed to, with regard to price stability alone, not economic growth.

Except they haven’t. Throughout the European sovereign debt crisis, the central bank has stepped in repeatedly to save the day. Most recently, in September of last year, President Mario Draghi announced a potentially unlimited bond purchase program to quell what he described as “unfounded” fears about the single currency’s survival. Read more “Central Bank “Doing Nothing” to Save Eurozone?”

Necessary Financial Correction Has Yet to Come

The recent quiet in the eurozone and American politicians’ cavalier teetering on the brink of a “fiscal cliff” seem to suggest that the crisis is over. But the lack of urgency on the part of policymakers mustn’t be mistaken for an actual improvement in the economic prospects of both Europe and the United States.

The crisis that started in the American housing market in late 2007 and became a global financial panic in 2008 isn’t over. Rather the necessary contraction has been extended by government deficit spending and central bank financing. The former has seemingly run its course. The latter may go on for much longer, perhaps even as long as it takes for the economy to rebalance itself. Or it may not. In which case the collapse will be all the greater when it does happen. Read more “Necessary Financial Correction Has Yet to Come”

Britain, Sweden Opt Out Centralized Banking Oversight

European finance ministers agreed early Thursday morning to empower the European Central Bank to supervise the bloc’s largest banks, a deal that is expected to be ratified by European leaders on Friday. Britain, the Czech Republic and Sweden opted out of the arrangement.

Under the agreement, the ECB will monitor banks with assets that are worth more than €30 billion or the equivalent of 20 percent of their state’s gross domestic product, excluding small and regional banks that aren’t heavily exposed to sovereign debt. Some two hundred out of the roughly 6,000banks in the eurozone would fall under the new regime. Read more “Britain, Sweden Opt Out Centralized Banking Oversight”

European Central Bank Unveils New Bond-Buying Program

Despite German resistance, the president of the European Central Bank Mario Draghi on Thursday announced a potentially unlimited bond purchase program to quell the “unfounded” fears of investors about the survival of the euro.

“Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios,” Draghi told a news conference after the central bank’s monthly meeting in Frankfurt. Bundesbank president Jens Weidmann was the only dissenting member of the governing council.

Weidmann warned last month of the “danger that central bank financing can become addictive like a drug.” If Southern European states like Italy and Spain can reduce interest rates on their bonds by having the central bank buy billions worth of their debt, their governments will be under less pressure to reduce spending and liberalize their economies.

In an interview with the German weekly Der Spiegel, Weidmann added that buying government bonds is “too close to state financing via the money press.” Read more “European Central Bank Unveils New Bond-Buying Program”

German Opposition to Central Bank Debt Financing

There is strong opposition in Germany to the European Central Bank possibly buying peripheral bonds to rein in the borrowing costs of countries in the periphery of the eurozone.

Jens Weidmann, president of the German Bundesbank, warned in Der Spiegel this week of the “danger that central bank financing can become addictive like a drug.” If Southern European states like Italy and Spain can reduce interest rates on their bonds by having the European Central Bank invest billions in them, as it did in August of last year, their governments will be under less pressure to reduce spending and liberalize their economies.

Weidmann added that the central bank buying bonds is “too close to state financing via the money press.” Indeed, that is exactly what it amounts to for the money used to buy peripheral debt is created out of thin air.

Jörg Asmussen, the other German on the European Central Bank’s executive board, said on Monday that “the ECB will only buy bonds with short maturities.” Central bank president Mario Draghi inisted earlier this month that countries “need to go to the EFSF” first, the European Financial Stability Facility, to request aid before the ECB could step in. He stressed, “the ECB cannot replace governments,” repeating the mantra of his predecessor Jean-Claude Trichet.

However, Italy and Spain are reluctant to apply for a bailout through the EFSF because, as was the case in Greece, Ireland and Portugal, such a rescue operation should come with string attached: more austerity measures that are increasingly unpopular in both countries.

Italian prime minister Mario Monti has campaigned for intervention from Frankfurt since January. “Despite these sacrifices,” he said at the time, referring to Italy’s budget and economic reforms, “we do not see concessions from the EU, such as in the form of lowered interest rates.” In an interview with Il Sole 24 Ore this week, he argued that inaction on the part of the European Central Bank somehow actually heightens the risk of inflation in Germany, which is the long-term effect of monetary expansion feared by the Germans.

Preventing the ECB, as the Bundesbank wants, from intervening in the sovereign bond markets to temper [borrowing costs] imbalances may turn out to be, from Germany’s point of view, an own goal with paradoxical effects.

Economist Jürgen Stark, who resigned from the ECB’s executive board in dismay in September of last year, wrote in the paper Handelsblatt on Tuesday that, “There is a danger of high inflation — not today, not tomorrow but in the medium to long term.” He added that the central bank has “repeatedly crossed red lines” and that plans to buy government bonds amounts to “illegaly financing states.”

The same newspaper last June observed that “the balance of power in Europe has changed” from north to south. The prospect of a “transfer union,” the permanent bailing out of weaker states in the periphery of the single-currency union at Germany’s expense, is starting to become a reality.

An editorial in the conservative Frankfurter Allgemeine Zeitung at the time similarly warned that “the conditions for EU aid are increasingly blurred.”

German parliamentarians, from the ruling conservative and liberal parties as well as the opposition, regard in apprehension Chancellor Angela Merkel’s “concessions” to Southern European states who need help to stave off financial panic and sovereign bankruptcy. €100 in European support for the Spanish banking industry was pledged without conditions of economic reform on the part of Madrid. The European Central Bank has already purchased more than €200 billion worth of Greek, Irish, Italian, Portuguese and Spanish bonds without strings attached. How long will the Germans tolerate such rescue efforts if there appears to be no structural improvement in the economic and fiscal health of peripheral eurozone states?