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Monday, September 17, 2012

Merkel caught in the middle between the Bundesbank and the ECB

In her traditional news conference following the summer recess, German Chancellor Angela Merkel walked a fine line in questions about the eurozone crisis, having to maintain a delicate balancing act with regards to different elements within her governing coalition.

For starters, she has to contend with the increasingly fractious rhetoric from the CSU – the Bavarian sister party of her own CDU – on the eurozone (see here and here for examples). The latest example being Bavarian Prime Minister Horst Seehofer’s argument that the €190bn cap on German liability imposed by the German Constitutional Court in its ruling on the ESM and fiscal treaty last week should apply to the euro-rescue effort as whole, including the ECB’s new OMT bond purchasing programme. However Merkel has rejected this interpretation on the basis the two are not linked. Speaking earlier today, she told reporters that:
“If the ECB determines that monetary transmission has become difficult, then it must take measures to ensure price stability - it is not up to us to set it limits.” 
Seehofer later confirmed that “this is the only issue which we interpret somewhat differently than in Berlin”, adding that it was nonsensical for the Court to cap Germany’s liability at €190bn only for “it to be suddenly increased by many multiples through other means”.

On the other hand however, Merkel did not issue a statement of blanket support for the ECB’s actions, adding that Bundesbank President Jens Weidmann’s recent interventions – in which he has been fiercely critical of renewed ECB bond-buying were “understandable and always welcome”, a statement widely interpreted in Germany as a subtle rebuke of Finance Minister Wolfgang Schäuble’s comments in an interview with Frankfurter Allgemeinen Sonntagszeitung yesterday in which he criticised Weidmann for his public dissent, arguing that “I'm not sure that making this debate semi-public helps to build confidence in the [European] central bank.”

Merkel is in a tough position because, having invested so much in the euro-rescue, she cannot afford to oppose the ECB’s ‘big-bazooka’ strategy. At the same time however she cannot allow Weidmann – whose views are widely respected and shared by the German public – to become completely isolated for fear this would provoke a substantial domestic backlash.

How long Merkel will be able to keep her fractious coalition together on one hand while also keeping the German public – whose support for the EU and euro has hit an all-time low – onside remains to be seen, especially in the event of unforeseen developments such as Germany actually suffering direct losses on its loans to Greece and/or losses on ECB holdings of Greek debt.


Rik said...

1. First the clear part 190 Bn overall capacity, is legally complete nonsense.
2. However the CSU is getting close to elections and it might simply want something (like a head on a plate) to show to its voters. It has several times made an u-turn you cannot keep doing that without being seen as LibDem/FDP kind of credible (which doesnot win you elections).
3. My guess is still that he will get Greece. They simply donot get the story even 1% credible to give them more time but not more money. More time is simply more money and being already at the high side of the max debt with 120.5% (probably 3 times what Greece would be allowed by markets anyway).
It is simply lie (for everybody, but the most stupid part of the electorate, to see) or pull the plug. A good warning-shot for the rest as well.
4. Merkel is simply testing the water and has been doing that since Draghi made his first speech on saving the Euro.
5. She sees too much opposition at home, likely want to wait till the outcome of the official ruling by the GCC (which might deem ECB bondbuying illegal). She has now made a close to 50% u-turn.
She has done that several times before and therefor likely will do it again. 'Climate' in Germany will most likely simply decide the outcome when she has no other option than to pick one or the other.
She will get away with it if she does. The SPD the only credible and realistic oppositionparty has ruined their electionprospects by going for an Eurobonds. Honest but unbelievably stupid politically. Iso of a big spender on Euro rescue now Merkel can play the one that saves Germany from Eurobonds (which were unconstitutional anyway).
Draghi will not. If she does make a complete u-turn (or the GCC cuts things off) he will have lost most of his credibility. Politicians going back on their word is normal, CBers have to stick to it and make it happen.

Jesper said...

It is likely that the 'monetary transmission' has become difficult due to the amount of unrecognised losses that are STILL allowed to be in the banking systems.

Stable banks do allow for the ECB interest rate changes to transmit to its customers. So how do we get stable banks?

Two main options:
1. Governments take over all the losses and the banks are profitable again. Socialised losses, privatised gain.
2. Banks recognise losses, governments take over banks where necessary and get future profits.

Both ways will get the monetary transmission mechanism to work. One is being lobbied for and eurocrats are supporting it as power would be transferred to them - damn the consequences. The other, ah well, that would mean that laws were to apply to even to connected people and that would be good/bad?

The strategies are clear, the ones offering the bad solution are pushing (it is a CRISIS, we have to act NOW or....) for a quick solution. The ones offering a better solution are allowing people time to think and make informed decisions.

Rollo said...

It is not just Merkel's position that is impossible. It is the whole Eurozone which has no possible solution to the problem, except complete assimilation of evry Eurozone ex-nation into the superstate. That is exactly why the Euro was introduced and these non compliant nations let into the Eurozone: a tool to force them into union. But this solution is implausible, and the collapse will go on and on, and the bandages get thicker and costlier until the patient suffocates.