The first major crisis in the era of independent central banks is severely testing that independence – nowhere more so than the Eurozone. This column argues that the ECB is monetising the sovereign debt – a view widely held in Germany. It argues that the ECB is the Eurozone’s economic government with the power to enforce comprehensive rescue measures, up to and including a fiscal transfer union.
Fortunately, Nicolas Sarkozy is not getting his banking licence for the EFSF. The Luxembourg rescue fund is not going to buy government bonds of endangered countries with freshly printed money. The ECB, however, may continue to do this. The French president pointed out as much defiantly after his defeat, and in the preliminary negotiations for the European Council and Eurozone summit of 26 October. He even sought support for an appeal to the ECB to continue its bond-purchase policy.
In doing so he aroused opposition of the German Bundestag. According to its interpretation, the whole purpose of the bailout was to extricate the ECB from the fiscal rescue measures. ECB chief Jean-Claude Trichet had also promised to end this policy when he forcefully advocated carrying out the European bailout.
The German MPs have been rankled for some time by the fact that, with regard to purchasing decisions, Germany is constantly in the minority in the Central Bank Council, where it has no more to say than Malta and Cyprus – the reason why the two German ECB representatives, Axel Weber and Jürgen Stark, have resigned. They know that President Christian Wulff criticised the ECB for continuing to circumvent the Maastricht Treaty.
Sarkozy’s insistence was thus reason enough for the Bundestag to declare formally, in its decision on the leveraging of the rescue plan, that it assumes that the ECB will end its policy of buying government bonds, news of which must have made Sarkozy’s blood boil.
Whether the ECB Council will be influenced by the declaration of the Bundestag remains to be seen. The Council, after all, is independent – not least because this is what the Bundestag originally insisted on.
The Bundestag may indeed threaten to block the use of the EFSF rescue funds with further decisions in future should the ECB continue its bond-purchase programme, but ultimately the ECB is in a stronger position. It is the master of public finance in the Eurozone, and it can always start up its own rescue machinery if it deems the rescue efforts of the international community insufficient. It determines who is rescued and when and where, not the Bundestag or any other authority in Europe.
Parliaments can at best decide on the type of rescue by offering a formal bailout as an alternative to the ECB’s rescue efforts. Then they must pray that their plan is accepted, and to improve its chances they must make the rescue fund attractive enough and refrain from attaching too many provisos to it.
When a year ago Ireland refused to seek shelter under the rescue ‘umbrella’, and almost had to be bludgeoned by Trichet to do so, people were puzzled. Did the country prefer to go under rather than be saved? Of course it didn’t. The answer to the puzzle was that Ireland had been using its right to rev up the money-printing press at only 1% interest and that it was already being rescued. The ECB rescue facility was more attractive than the official rescue funds of the community of states, which demanded 6% interest.
And so it was also with Greece, Portugal, Spain and, more recently, Italy. All these countries rescued themselves with the printing press. As long as the ECB was prepared to play along, there was little incentive for these countries to seek out the expensive official rescue funds or to submit themselves to the conditions imposed by the rescuers.
Indeed, the ECB system has organised a lot more help than the public is aware of. It allowed Greece and Portugal to completely finance their current-account deficits since the crisis erupted four years ago by means of the printing press. In Spain, the ECB tolerated the fact that about a quarter of the current-account deficit was financed with newly printed money, and in the case of Ireland and Italy, it allowed these countries to compensate the gigantic flight of capital with the printing press.
Because the printing presses in the periphery are still running at full speed, the Bundesbank has had to turn its own presses into shredding machines in order to destroy the money that has flooded in from the South. Since September, the Bundesbank has given no net credit to the German banking system; it instead borrows from it. After deducting the deposit facility, the net refinancing of credit the Bundesbank gave to German banks is now negative.
The European parliaments have no control over this game, and as such Sarkozy’s defiant statement is more than an empty threat. The ECB Council is the true economic government of the Eurozone. As long as it retains its power, it can threaten the parliaments of the Eurozone with the printing press and enforce comprehensive rescue measures, up to and including a transfer union.
Editor’s note: this was first published in WirtschaftsWoche, 31 October 2011.
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