by Adrian Ash
Friday, 7 September 2012
"The objective of this programme? It is to repair monetary policy transmission and to recreate the singleness of monetary policy for the euro area."
- Mario Draghi, president of the European Central Bank, Thurs 6 Sept 2012
FOR the second time or more since May, today's Handelsblatt newspaper in Germany carries a big picture of Edvard Munch's The Scream.
This time, the picture doesn't replace the painter's tortured self-portrait with chancellor Angela Merkel's head. The headline now reads "Angst of the Germans". But the subject is the same.
"Nothing frightens the German people so much as the Euro debt crisis," says the newspaper. The most over-insured people in the world, Germany naturally shares its fears in a survey conducted for an insurance company's PR department – and at 73%, fear of the Eurozone crisis now tops even its reading 12 months ago, when the crisis tipped into what's proven its worst plunge to date.
Indeed, "This fears beats even the fear of inflation at 63%," says the R&V survey. Which is some going in Germany! "This concern is [also] likely to have increased after yesterday's Governing Council meeting of the European Central Bank."
Yes, this week's vote by the Eurozone central bank will be causing sleepless nights from the Rhine to the Elbe. No other modern nation bothers to care anything like so much about central banking. (Both the US Fed and Bank of England would have been fire-bombed if so.) But in Germany, it's ein volk, ein opinion of monetary policy. And a very sturm und drang opinion it is, too.
"The majority of Germans don't trust 'Italian' Draghi," according to a Stern survey. Every other survey in the German press today says everyone wants next week's Constitutional Court to rule Eurozone bail-outs illegal, but everyone also accepts that it won't. "Financial markets celebrating the death of Bundesbank," says Die Welt, explaining how "Draghi breaks with strict principles of German monetary policy – a nightmare begins for Germans." Tabloid paper Bild adds "Blank cheque for debt governments. Is Draghi destroying the Euro...?"
You can guess Germany's answer – a unanimous view that has already been taken right to the heart of the ECB, itself sitting in Frankfurt, much like West Berlin sat inside East Germany during the Cold War. First the German Bundesbank president Jens Weidmann broke with his 16 central-bank colleagues and voted "Nein" to the bond-buying plan. Then only two hours later, the voice of the people was raised again.
"I am a German," declared a journalist asking questions at Thursday's ECB press conference, broadcast live to the world on the web. "I really think your approach is great," he told ECB chief Mario Draghi, "but you know the markets.
"In four weeks we will be sitting here again at another press conference. I hope that this conditionality will stay and you will not give ground regarding this issue of conditionality."
Conditionality! Has such a dry, bureaucratic term ever been quite so charged? The quality of being conditional, or limited (according to Webster's 1828 edition), the word was used 10 times by Mario Draghi in Thursday's press conference. The passionate German journalist above said Draghi made it "every second word" in his announcement. The journalist himself then used it 5 times in one question!
We'll come back to conditionality in a moment. Because two other points stand out from Thursday's news:
#1. German Bunds are gonna get Mario'd, just like the debt of Italy, Spain and the rest. Only in the other direction. The "policy transmission mechanism" by which the central bank controls interest rates is broken, said Draghi (or rather, "impaired"). And "if bond markets are distorted in the Euro area, they are distorted in all directions," he added, replying to a question about German debt's current sub-zero interest rates. So to restore unity in the currency union – the stated aim of this week's news – German Bund yields must rise as Italian, Spanish and the other bond yields fall.
#2. Sterilization makes it plain. Because to salve everyone's fear of money-printing, wheelbarrows, and sweaty speed-freaks with Chaplin moustaches, the ECB is not going to inject extra cash into the economy. Not like the US Fed, Bank of England and Bank of Japan claim to have done. Oh no. Instead, the purchases of weak Eurozone debt will be "fully sterilized", with precisely the same amount of cash that's spent by the ECB being taken back in by selling other, non-weak Eurozone debt.
Guess whose? The aim, Draghi repeated, is to "recreate singleness". Selling Bunds is the ying to buying Spain's yang. Sterilization demands it. So too, perhaps without knowing it, does Germany.
"The intervention purchases must not be permitted to jeopardise the capability of monetary policy to safeguard price stability in the Euro area," said Bundesbank president Jens Weidmann in a statement Thursday afternoon. Issued to confirm that he was the 1 dissenting voice on the Council (widely guessed, but secret information according to Draghi), it's been reported worldwide. Yet it doesn't – oddly – appear on the Bundesbank's own press release pages.
Nevermind. At the ECB meeting, says Weidmann's statement, he "reiterated his frequently substantiated critical stance towards the purchase of government bonds by the Eurosystem. He regards such purchases as being tantamount to financing governments by printing banknotes.
"Monetary policy risks being subjugated to fiscal policy."
There, now he's said it. How Ben Bernanke and Mervyn King must have winced! But if, in Weidmann's noble world, independent central bankers must rise above politics, then doesn't that put them in charge? Well, yes, says Weidmann. Mario Draghi agrees.
"If the adopted bond-purchasing programme leads to member states postponing the necessary reforms, this will further undermine confidence in the political leaders' crisis-resolution capability," Weidmann's statement goes on. Which brings him, and us, back to conditionality. Meaning conditions set by the pan-European government in Brussels. Which the ECB says must be agreed if it's to buy a member-state's debt, and which must then be met if it's to keep buying or not sell.
The unelected team led by Super Mario (as the Italian press first called him in a bout of journalistic laziness during the early '90s) thus becomes supra-Mario. All-seeing, all-knowing and all-powerful, he now wields – in the name of "unity" – cross-border oversight of national budgets, plus the ultimate sanction of selling your bonds and so raising your debt costs if you don't behave.
Amongst private-sector investors, that power used to belong to the fabled "bond vigilantes" – professional money and wealth managers apparently motivated to protest against big-spending governments by selling that country's bonds. That raises the country's debt costs, curbing its deficit and capping its debt. Yes, the vigilantes have clearly gone AWOL in the US, UK, Japanese and even German debt markets. But it's just the role private-sector investors have taken in punishing Greece, Ireland, Portugal and the rest.
Vigilantism is rough justice, however. The human catastrophe in Greece and Spain proves that. Which is why the calm, cool heads of the ECB are stepping in. Weidmann asks if supra-Mario will punch and kick the weaker Eurozone states should they fail to fix their debts and deficits. But judging by the gold price in Euros – now a tick or two below all-time record highs – plenty of private capital says no, he won't. And judging by Germany's reaction, the Eurozone's single-biggest economy and creditor believes unsterilized aid for weaker states will show up in due course, too.