By Yanis Varoufakis, Professor of Economics at the University of Athens. Cross posted from his blog
Any fair minded reading of the Bundesbank’s latest Constitutional Court deposition must lead to one of two conclusions: Either the Bundesbank has failed to recognise the existentialist threat to the Eurozone (that was placed in suspended animation during the past eight months or so), or the Bundesbank has intentionally opted for a strategy that will, sooner or later, see the disbanding of the current Eurozone. Loath to assume naiveté on the Bundesbank’s part, I opt for the latter. Here is why:
The 12th June Moment
On 12th June, 2013, Germany’s constitutional court is scheduled to rule on the legality of Mr Mario Draghi’s OMT (outright monetary transactions) program. Of all the institutional interventions during the past three years of cascading Euro Crisis, OMT (together with Germany’s reluctant acceptance that Grexit was too risky) was the single most significant measure that has calmed the bond markets and allowed the euro not to fragment (beyond the recent de facto exit of Cyprus from the Eurozone).
This is not the first time that Germany’s constitutional court has heard cases against Europe’s institutional reforms the purpose of which was to calm markets and buy the Eurozone (and its political class) additional time. It was only last September that it ruled, through clenched teeth, that the ESM (the European Stability Mechanism) could go ahead, while imposing massively constrictive conditions on Germany’s participation in it (e.g. limiting Germany’s contribution to the ESM to less than €200 billion, specifying that the ESM would not be able to make a move without the Federal Parliament’s consent etc.)
While no one really expects that Germany’s Constitutional Court will dare a ruling that explicitly bans Mr Draghi’s OMT, almost everyone expects that it will attempt to weigh in regarding the form of conditionality that will accompany any bond purchases under the OMT – exactly, in other words, as it did with the ESM; i.e. give it a grudging green light while binding its operations in a manner that, effectively, renders it ineffective. Then, of course, the proof of the pie will be in the eating, both in terms of how the markets will react and, more importantly, how the ECB will act if it needs to activate OMT quickly to assist, say, Italy’s bond market (i.e. will Mr Draghi and Ms Merkel abide by the Court’s conditions or will they, quietly, sweep them under the carpet?).
The Bundesbank’s Deposition
In a sense, the German Constitutional Court is doing nothing new; hedging its verdict by officially saying ‘yes’ to Berlin while piling up the conditions so that it is an effective ‘no’. Yet, this time it is different. While Karlsruhe (where the Constitutional Court is situated) will, most likely, tread a fine line between obstructionism and avoiding a public clash with Berlin and Frankfurt, what makes this hearing different is a deposition that was tabled last December at the Court by Germany’s Central Bank, the intransigent Bundesbank – a document that was only yesterday released by Handeslblatt and commented upon extensively in the financial press.
Three statemets make this is bombshell of a deposition. The first openly questions whether the ECB has a mandate to preserve the integrity of the euro; that is, to prevent the currency’s collapse. The second, in reality, questions the joint decision of Mrs Merkel and Mr Draghi to keep Greece in the Eurozone. And the third challenges Mr Draghi’s oft-stated conviction that the ECB’s broken monetary transmission mechanism should be mended as quickly as possible. Taken together, these three passages constitute an act of war against the euro as a coherent currency; especially in view of the fact that they are official depositions by the Bundesbank to the German Constitutional Court for the purpose of invoking a constitutional ban on Mr Draghi’s monetary stance. In view of the gravity of the matter, it is perhaps important that we take a look at each of these three acidic statements:
Statement 1: It is not the role of a central bank to guarantee the irreversibility of the currency
One wonders whose role it is, if it is not the Central Bank’s? As long as the democratically elected political leadership declares (for better or for worse) a cast iron determination to keep the Eurozone intact, it would be a gross violation of the ECB’s mandate not to guarantee, to the best of its abilities, the irreversibility of the currency (nb. Besides price stability the ECB’s charter specifies that the ECB is obliged to assist the European Council in the pursuit of its borader objectives). Especially in a Eurozone that, in truth, only has one substantial common institution: the ECB! By challenging this simple assumption, the Bundesbank adopted a brand new, utterly incendiary, position: The Eurozone’s salvation is not paramount, even if its political leadership thinks it is! Nothing can damage confidence in the Eurozone more than such a position-statement by the Central Bank of the monetary union’s most powerful economy.
Statement 2: The credibility of the OMT program, by which Mr Draghi tried to guarantee the euro’s irreversibility, was cast in doubt (even before OMT was announced) by Greece’s use of its own Central Bank’s ELA (from around April to December 2012).
This statement requires some unpacking. Lest we forget, Greece was cut off the troika’s loan tranches when the Papademos government lost its credibility in the early Spring and had to call for elections. The troika, citing the impossibility of coming to an agreement with a non-existent government, suspended all payments to the Greek government till further notice. It did not resume lending to the Greek state till the end of the year, well after the election in June of an acquiescent conservative administration that accepted all its terms and conditions to the full. Meanwhile, some time in the Spring of 2012, the ECB also cut Greek banks off its own refinancing operations; something it could not avoid given the clear state of insolvency of these banks. If at that point (when the state was utterly impecunious), the Greek banks had also lost access to ELA funding, they would have closed down instantly and the Greek government, whether it liked it or not, would have had to reconstitute the drachma and exit the monetary union.
Of course, this did not happen because the ECB never approved Grexit (thinking of it, correctly, as a systemically catastrophic development) and allowed the Greek Central Bank to continue providing liquidity to the bankrupt Greek banks. Moreover, and this is not unimportant, the ECB had another reason to do this: In May and in August of 2012, tranches of Greek government bonds that the ECB had purchased in 2010 (as part of the ill-fated SMP bond purchasing program) matured. Allowing Grexit would have meant taking losses on those bonds; a political and symbolic eventuality that Mr Draghi dreaded. Thus, the Greek government issued T-Bills to pay back the ECB (while keeping a few ‘peanuts’ for itself), T-Bills that only the Greek banks bought before handing them over to the Central Bank of Greece in exchange for ELA liquidity. In this manner, Greece was kept on a drip feed until the end of the year when the loan tranches from troika started flowing again and the ECB started accepting again Greek bank collateral (on the pretense that, somehow, they had become solvent again).
This is the background to Bundesbank’s charge against the ECB’s OMT. What Mr Weidmann is saying is that, in the above case, the ECB played fast and loose with its own rule book, accepting collateral that is worthless and, even when it could no longer bring itself to do this, allowing the Greek Central Bank to create euros on behalf of clearly bankrupt Eurozone entities (the Greek banks). And if the ECB played fast and loose with its rulebook on that occasion, why should we trust it not to do the same with OMT? What will stop Mr Draghi from purchasing Italian bonds even if the Rome government is less than diligent in the implementation of agreed spending cuts, tax hikes and ‘reforms’? One must admit that Mr Weidmann has a point. But, imagine what would have happened if Mr Draghi had proposed to the ECB’s Governing Council to veto the Greek Central Bank’s ELA liquidity provisions in June, in August, in September? Greece would have exited the Eurozone overnight, defaulted on the ECB’s Greek bonds (the first time that would have happened in the Eurozone’s short history), Italy would have crashed, and the euro would have been history.
Put briefly, by castigating the ECB’s handling of the Greek debacle during those crucial months in 2012, the Bundesbank is questioning whether the Eurozone ought to have been saved. In conjunction with Statement 1 above, it sends a signal that the Bundesbank thinks it preferable to let the Eurozone collapse than adopt a ‘flexible’ interpretation of insolvency or, in the case of OMT purchases, of ‘conditionality’.
Statement 3: Mr Draghi, and almost every other commentator, laments often that the interest rate transmission mechanism of the ECB has broken down; that unprecedented reductions in ECB refinancing interest rates are not passed on even to profitable and efficient firms in the hard-hit Periphery. Uniquely amongst all European financial and economic authorities, the Bundesbank told Germany’s constitutional court this: “the question arises as to whether and why such a development must be corrected”.
This statement seemingly reveals a degree of callousness that exceeds the negative expectations of the Bundesbank’s most ardent critics. But is it callousness? It would only callousness, dear reader, if the Bundesbank truly thought that it is fine for a Spanish company to be paying interest rates of 7% when a comparable (in terms of efficiency and potential profitability) German company secures loans at a mere 2%. I am, however, beginning to tilt towards the interpretation that the Bundesbank does not think that this is a defensible situation. The reason it does not want the transmission mechanism to be ‘corrected’ may be because it is more useful to the Bundesbank’s strategy while ‘broken’. Useful in what sense? Useful in the sense that, while broken, the political climate in Europe becomes increasingly amenable to the idea of a Eurozone break-up; without the Bundesbank ever having to propose such a break-up.
Conclusion: Error or Stratagem?
Some readers may feel inclined to dismiss my hypothesis as too far-fetched; too conspiratorial. It is perfectly true that I have no evidence that Mr Weidmann has intentionally embraced a strategy of pushing the Eurozone toward disintegration (thus creating an inexorable dynamic that will lead to the DM’s re-introduction). However, a close reading of the Bundesbank’s constitutional court deposition leaves us with only two possible interpretations. One is that Mr Weidmann does not ‘get it’; that he cannot see that a Greek exit in 2012, or an Italian exit in 2014, would spell the end of the Eurozone; that he cannot see that Mr Draghi’s OMT announcement played a crucial role in stopping the disintegration of the common currency last year; that he has no appreciation of the catastrophe facing good, solid Spanish and Italian enterprises due to the broken down interest rate transmission mechanism. The other is my interpretation: Mr Weidman can see only too well that the above hold unequivocally but is tabling this deposition at the constitutional course knowingly and as part of a strategy that leads the euro to a death by a thousand, almost silent, cuts. You take your pick, dear reader: Do we behold a Bundesbank Grand Error or a Grand Strategy, the purpose of which is to bring about a new hard currency east of the Rhine and north of the Alps, unencumbered by the deficit countries and France? I know which interpretation I would place money on.
25 comments
Comments are closed.
This reminds me of the effect that all the TARP and Fed credit actions had on loan activity in the US back in 2008-2009. Remember how, even though the government pumped trillions of dollars into the banking system, it wouldn’t approve loans for cash-strapped businesses?
It’s not the same situation, of course, but it looks like similar European policies are having similarly ineffective results.
I sort of see this as an expression of where the priorities of the actors in question really lie. In both situations, the primary beneficiaries of what the central banks are saying/doing were big financial institutions; in the US case, those involved in international finance who’d come to believe their own grift, over-leveraged to milk it, and been wiped out as a result, and in the Bundesbank’s case, the German financial banks who fueled bubbles in the periphery over the last 20 years, got wiped out by the GFC, and then started calling in their periphery loans to prevent collapse.
If the Fed had actually cared about justice or about saving the real economy, they’d have instituted the TARP program or something like it through the smaller regional and local retail banks who handle the majority of day-to-day banking in the US. Instead, they sold a bald-faced recapitalization of our worst economic actors as something that would get the economy lending again, which anyone with eyes could see it wasn’t doing, because that’s how it needed to be sold for the electorate to accept it. If the Bundesbank actually cared about its Euro-partners, then it wouldn’t be providing de facto defenses of the massive rate imbalances that so benefit German banking and industry to the detriment of its neighbors.
How convenient for Deutschebank et. al. Just as German industry is screeching to a halt, they can borrow at 2% and lend it on to the periphery at 7%. No need to ever devalue the Euro at this rate.
Is it not more an more obvious that Germany has extracted the most it could from the existence of the euro by bringing the Club med countries to their knees?
The anti-German sentiment is growing everywhere, including in France now, since this country has clearly joined the Southern block after the socialist experiment: one year in power and already all the entrepreneurs are fleeing the country.
So, leaving the Eurozone to its fate and going back to a new Deutschmark may be Germany’s best option after all. This option has been aired in the British press many times already. We may be closer to this outcome than ever.
Without the Euro, the Southern Tier (and France, and Belgium, and whoever catches the Contagion next) will have no reason to not just write off the debt dragging down their economies. If they do that, then they’ll stop making their payments to their creditors, who happen to be the German banks who inflated their bubbles in the first place. Those payments are the only thing keeping the German banks, who were almost universally the Suckers US banks were selling their “AAA” mortgage securities to, above water. If the Euro goes, so too does the German banking industry. Coincidentally, this is also why scare-mongering about Chinese ownership of US debt is rather misplaced. This dynamic -how the creditor needs his debtor to be made whole or they both end up broke- is something the more conservative German commentators don’t seem to grasp.
The German’s want out, and they’re the only ones that can do it. I don’t resent this fact; I welcome it.
Nevertheless Wiedmann et al are being duplicitious about this to an enormous degree. My feeling is that they are fighting a reargauard actions against the German political establishment as well (and winning).
Why is it this Constitutional Court can make rulings on Germany’s participation in the Euro but Greece could not conduct a referendum on Greece’s participation in the Euro?
Only the Holy Roman Empire can question the Holy Roman Empire.
Vassal states like Greece are not entitled to do anything but get on their knees and beg.
“One wonders whose role it is, if it is not the Central Bank’s? As long as the democratically elected political leadership declares (for better or for worse) a cast iron determination to keep the Eurozone intact, it would be a gross violation of the ECB’s mandate not to guarantee, to the best of its abilities, the irreversibility of the currency ”
But that’s an important question isn’t it? Whos “ironclad will” is it thats holding the whole broken idea of a Eurozone together? The “democratically elected leadership” -of all member nations(I suppose you mean), don’t seem to be representing the, treated-rather-less-than ironclad will
of the vast majority of the people of those member nations. Germany has had less respect for the will of the peoples of other member nations, but maybe in asserting its own democratic rights it will strengthen the rights of others
So what´s your point Yanis,
it would seem like an almost ideal outcome if the German constitutional court ruled, that the Euro no longer is a “stable currency” ( a requirement that the court imposed, when the introduction of the Euro was challenged). Germany would leave and you´d sitll have the second largest currency area in the world lead by France, Italy&Spain.
Kind of what Soros proposed, plus the Germans would be happy, having moved to being a larger version of Switzerland and southern Europe could finaly adopt the appropriate strategies. What´s not to like?
“However, a close reading of the Bundesbank’s constitutional court deposition leaves us with only two possible interpretations. One is that Mr Weidmann does not ‘get it’; that he cannot see that a Greek exit in 2012, or an Italian exit in 2014, would spell the end of the Eurozone; that he cannot see that Mr Draghi’s OMT announcement played a crucial role in stopping the disintegration of the common currency last year; that he has no appreciation of the catastrophe facing good, solid Spanish and Italian enterprises due to the broken down interest rate transmission mechanism. The other is my interpretation: Mr Weidman can see only too well that the above hold unequivocally but is tabling this deposition at the constitutional course knowingly and as part of a strategy that leads the euro to a death by a thousand, almost silent, cuts.”
Third option: Germany isn´t Greece; and whilst it seems ok to lie to parliament, even here purposefully lying to the constitutional court or trying to manipulate it is a criminal offense and Weidmann does not have immunity…
The Fed will never get the so-called indirect bailout money back if the Euro crashes. (And it’s dubious they’ll get it while the Euro exists, so go figure.) A disintegration of the Euro ain’t gonna happen while Obama is in office come hell or QElebenty.
http://www.shomilshah.com/Deutsche-Mark-redesign
My question Yanis is how the ‘profligate periphery’ (including the UK) ever had economies that kept people in employment and developed wealth when clearly all work is more efficient in model Germany?
Next, given all the productivity rises and new technology, why do we end up in worse states than before it?
The conspiracy I see is in a control fraud that includes the ideologies of obscured money and free trade. Most people in the UK don’t remember we dive-bombed Greece in WW2 and declared Athens an occupied city. I suspect a coalescence of old imperialist interests looking for rents from fire-sale conditions. The Germans may just be the stalking horse for the cut-up by a new version of old Anglo-German banking collusion. I think the plan is to have the oligarchs’ loot in the London offshore spokes before ‘Cyprus’ is rolled into the soft underbelly of Europe leaving only ordinary people’s savings/assets for the haircut.
Honestly,I start to dont like Varoufakis.Right now he is serving the growing “anti-german” senitiments and it sells.Why I say this?
Look at this article.The germans prepare to get out of the euro?Bollocks.The moment germany leaves the euro and goes back to any kind of deutschmark its exports will go to zero because the german deutschmark will go up like a rocket making every german export much to expensive to the world.Am I wrong?
Germany will only leave the euro as the last of the current euro-members.
Yarnis is not anti-German, he is anti-hypocrisy. Weidmann is a central banker, not an exporter. He may not care or know about the export business.
I know who this guy is.But as central banker he has to act i favoir of his countrys economy,no?
Well, Varoufakis belongs to the class of economists that are worth reading, but whose reasoning is NOT reliably correct and logical. Not theorems that you can use “axiomatically” without checking the proofs. For no reason whatsoever (other than probably not understanding monetary operations; he probably thinks they are much more complicated than they really are), he says that a Grexit would be a Bad Thing, rather than a great improvement over the status quo of endless torture of Greece. The status quo is the ECB saying – sure, we will give you a blood transfusion – as long as you keep stabbing yourself.
http://www.bis.org/publ/othp16.pdf is a very standard consideration of the industrial world in debt claiming to establish levels of household (85%), corporate (90%) and government (85%)beyond which growth tails off (R & R style). The conclusion is a fairly pitiful ‘we must save more’. Much of this kind of economics is more or less saying we must go on fixing a failed system.
Yanis is at least trying to show what game might be afoot – or part of it. Germany is suspect, but who has been more perfidious in financial manipulation than my own country, Albion?
None of us can vote for a sensible jubilee, productive jobs to prevent massive poverty, removal of oligarchs and whatever else needed for an effective Plan B. Pretty much all economics I read demonstrates we have all ended up in the same sinking boats and are looking to colonise anything floating near us to mend ours.
There is much derogatory comment in northern Europe on countries south of the ‘Olive line’. We have not yet worked out Greece may be the writing on our wall.
The negative “comments” (better said ugly propaganda) against the south europeans is nothing more than “we are so fine”-psychology to keep up the big northern europe-countries economies.Everyone who REALLY knows about economy will tell you that economy is to at least 50% pure (positive) psychology.
Actually it was germany which was hit most after the lehmann-brothers crash back in 2009.They lost 6-7% of their GDP in just a few weeks.Greece and spain were still growing in that year.The germans acted fast and managed some multi-billion stimulus programs for their automobil-industry(just google “abwrackprämie”=give back your old car and buying a new one with state support) and the “euro-crisis” in greece to move all negative psychology away from themself..Ofcourse these stimulus prograns were the opposite of what they have done to us south europeans.No stimulus for us.
Anyway.Let us see how germany,UK and france will do now that the huge double dip of the worlds economy is not avoidable.
Al least 50% ? The only thing psychology can influence is the saving/consuming behaviour and perceptions of reality. It can not influence the real (lack of) income, enormous inequal distribution of wealth and job safety.
I live in the Netherlands, were the crisis and austerity are biting hard now. It’s a toxic mix of a burst real-estate bubble, deep financial crisis and lackluster growth of worldtrade, hugely aggravated by austerity. Unemployment is on a steep rise to levels unknown in 30 years.
Consumer confidence dropped to all time lows.
The prime minister, Rutte, made himself immortal recently by postponing a new austerity drive until autumn and asking the Dutch to be more optimistic, to consume more and “to beat jointly the grim forecasts of the Central Plan Bureau”.
The crisis just seems to exist between our ears….
Ofcourse.Saving/consuming sector is what the northern economies still keeping afloat.It is not anymore the exports like the mass media tells the germans.And the “everything is rosy”-propaganda the germans are bombarded every day with is what keeps the germans continuing their “almost normal” consuming behaviour.Same as in the USA or the UK.
As long as this works you wont see mass protests in germany and the netherlands despite the growing poverty and so many people on food stamps or soup kitchens.Because if these protests start as we see them in south europe the game for the banksters will be over.
You guys up there in the north are the “key”.
Germany IS different. That is why they were hit so hard by the Lehman Shock. Germany is the most industrial country of Europe, a huge exporter of industrial products, especially of machinery and highend consumer products. De Lehman Shock paralyzed world trade – and Germany (and its satelites) were hit instantly. Other economies are far more based service or building industries, and less export oriented.
The industrial nature of Germany explains also why it didn’t suffer much of a real estate crisis (although a bubble is now inflating on capital inflows). In Germany stil more then 60% of the people rent, because that’s industrial logic (to keep the cost of living and workers incomes moderate, and to keep the workforce flexible).
Germany has still important labour unions which influence politics more then in service-based economies.
The german industry profited the most from de Euro and EU. It kept the currency cheap and it ended competition from the south (stopping devaluations and by differential interest destroying the rest).
But Germany is not completely industrial – it’s more schizophrenic. You have the industrial motor which generated huge surplusses on the current account, and a huge financial sector which organized the wealth management foor de german 1% an was lending to the south of Europe.
That financial sector is in trouble. Deutsche Bank is in trouble, Landesbanken are zombies.
My impression is that three main forces explain German politics : industrial capital, financial capital and labour. Maybe we have to focus on these forces.
Industrial capital may be tempted to opt for the export as a solution – given their relative strength on the world market. They maybe thinking about an “Alleingang”.
Labour is under pressure because of the high costs of bailouts which are passed to them. The labour leadership is in the end always very cooperative to the (industrial)bosses on topics of competitiveness.
Financial capital is about wealth management en getting back those bad loans in the south.
Very good explanations my friend.But there is one thing you should not forget.Only two decades ago till the 90s 40% of the german workforce belonged to the industrie sector.In the 60s it was over 60%,untill the 80s over 50%.
Today only 5 million germans work in the industrial sector.This is a little bit more than 10%.
Over 80% of the german work force today is employed in the service sector.
It is not all as we hear it in the news of the mass media.Not at all.
Surely you mean “existential” threat, not “existentialist” threat?
(It is amusing to contemplate what an “existentialist” threat might consist of. Possibly a heart-stopping seizure of Weltschmerz vertigo.)