ECB Divided over Efforts to Save Euro

(…..) Draghi’s maneuvering is starting to annoy many central bankers. “You never know where he stands”, often complain representatives of creditor and borrower countries alike. Even more critical is the fact that, with his most recent plan to rescue euro, he is jeopardizing the fragile equilibrium between north and south in the ECB Governing Council. According to plans were circulating among Europe’s monetary watchdogs last Friday, ECB might buy bonds of the threatened Spanish government again as a supplement to the purchases by the EFSF. Plan envisions having Luxembourg-based temporary bailout fund buy bonds directly from governments because ECB is not allowed to make such purchases on so-called primary market. However, under Draghi’s plan, the monetary watchdogs will buy securities of banks or investment funds in the so-called secondary market so as to drive down yields. This would double the firepower of the euro zone’s crisis weapons while simultaneously preventing Spain itself from having to resort to bailout fund and accept stricter constraints on its reform programs. But it is already clear the plan will encounter resistance. Many monetary watchdogs, including Weidmann and, most of all, central bankers from Netherlands, Belgium and Finland, have already been very outspoken in recent months about their opposition to new bond purchases. Many members of ECB Governing Council view the purchase program that quietly expired at the end of last year as expensive, risky and generally counterproductive. Fewer and fewer central bankers are willing to do the work of the politicians and add more risks to the ECB’s balance sheet. Moreover, the purchases made to date have not proven very successful. When the ECB bought a large number of Spanish government bonds last August, yields declined by more than a percentage point at first. But, soon thereafter, when ECB cut back on its purchasing program, yields promptly shot back up. In fact, by mid-November, Spanish government already had to offer investors higher bond yields than before the ECB’s emergency measure had begun. In the case of Greece, the effect has completely evaporated. When situation escalated there in early May 2010, the monetary watchdogs intervened and, within a few weeks, bought Greek sovereign debt worth dozens of billions of euros. Yields were cut in half after that, declining from more than 14 to about 7% for five-year bonds. But then they shot back up above 10% within the next month and a half. And when the ECB terminated its purchasing program, the yields on Greek government debt reached new record highs. Today, situation in Greece is more hopeless than ever. Unintended Consequences. There is another reason why ECB cannot bring lasting calm to the market by buying sovereign debt: Central bank is merely fighting symptoms of the crisis rather than its causes. But the financial markets regain confidence in a country’s government bonds if its government decisively implements reforms and things start changing for better. Not surprisingly, Draghi’s recent plan is being viewed critically in Germany, by monetary watchdogs and politicians alike. Carsten Schneider, parliamentary budget expert for the center-left Social Democratic Party (SPD), calls the plan “unconditioned and unauthorized intervention.” Critics are also speaking out within governing coalition, made up of Merkel’s Christian Democratic Union (CDU), its Bavarian sister party, Christian Social Union (CSU), business-friendly Free Democratic Party (FDP). Norbert Barthle, CDU’s chief budgetary expert, says that it is “not the central bank’s job to buy up government debt.” And his colleague with CSU, Hans Michelbach, is “speechless Draghi is catering to comprehensive-coverage mentality of the southern countries.” For this reason, says Michelbach, the euphoria in the markets could “quickly turn into depression once again.” That’s the tragic aspect of Mario Draghi’s rescue idea: What is intended to keep the monetary union together could actually drive it even further apart.



Acerca de ignaciocovelo
Consultor Internacional

One Response to ECB Divided over Efforts to Save Euro

  1. Over the weekend, the newspaper Bild released the results of a new poll on German sentiment on the Euro. It found that 51% thought Germany would do better by leaving the Eurozone with 29% saying Germany would fare worse. In addition, 71% of the respondents said Greece should be expelled from the Eurozone if it could not live up to its austerity commitments. These results aren’t particularly novel; a large cohort of Germans have been vocally opposed to Eurorescues for some time. What is new about this poll is how low the percentage is that sees being in the Euro as good for Germany. And some respondents don’t seem to understand that expelling Greece is probably fatal to the Euro project. While Greece by itself is almost certainly enough to impair the Eurozone, a Greek exit is likely to escalate the crisis in Spain and Italy.

    Remember, Spain just quietly asked for €300 billion Euros and was rebuffed. And no wonder. The EFSF has less than €250 billion remaining, and the ESM has yet to be launched.

    Reuters reports that a separate Bild-sponsored poll found support for Merkel’s handling of the crisis to be cratering: Only one third of Germans still believe Angela Merkel is making the right decisions over the euro zone debt crisis, according to a survey published on Sunday, pointing to a steep erosion in domestic support for the chancellor over the last weeks. The survey by YouGov, due to be printed in Monday’s edition of Bild newspaper, found 33 percent in favor of her stance but 48 percent against, a setback for the chancellor who is to seek a third term in a 2013 federal election, which she has vowed to make a vote on Europe. Asked in the survey whether they feared for their savings, 44 percent of Germans said that they did. In mid-July, a poll by ZDF-Politbarometer showed 63 percent of Germans backed Merkel’s handling of the crisis, although a majority thought she should explain her policies better. Another poll at the start of July by Infratest-ARD put support for Merkel’s crisis policies at 58 percent, although 85 percent of those polled also expected the crisis to get worse. On the one hand, the usual response to crises is for the populace to turn more conservative and parochial. Grand ideals seem besides the point if you are under financial stress. On the other, the increasing hostility of Germans to the Eurozone is a massive failure of leadership and communication. As numerous commentators and economists have pointed out, Germany is the big beneficiary of the Eurozone. Its large, sustained trade surpluses are to its benefit and are also what is breaking the monetary union. But the problem, as Josh Rosner indicated in a recent paper, the “Germany” that is benefiting is not ordinary citizens, but its corporations.

    And they prospered by squeezing wages, using the fact that Germany entered the EMU at an overvalued exchange rate as the pretext for labor “reforms”: (…..)


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