Monday, April 29, 2013

Does the Bundesbank want to get rid of the euro?

Yanis Varoufakis in Instransigent Budnesbank: Mr Jens Weidmann's surreptitious campaign to bring back the (greater) Deutsch Mark 04/27/2013 discusses the implications of deposition by Germany's national central bank, the Bundesbank headed by Jens Weidmann, on a court case before the German Constitutional Court. (The German document itself is available online, Stullungnahme gegenüber dem Bundesverfassungsgericht ... etc.)

The case itself is about the "outright monetary transactions" (OMT) program, the commitment made by the head of the European Central Bank (ECB), Mario Draghi, in mid-2012 to buy up government bonds from any eurozone member under attack by bond speculators to prevent such speculative attacks.

Draghi's commitment was successful in calming the markets for eurozone countries' bonds, Paul Krugman writes in The Italian Miracle (a title I believe is meant to be ironic) 04/29/2013:

I think that we’re seeing strong evidence for the De Grauwe view that soaring rates in the European periphery had relatively little to do with solvency concerns, and were instead a case of market panic made possible by the fact that countries that joined the euro no longer had a lender of last resort, and were subject to potential liquidity crises.

What’s happened now is that the ECB sounds increasingly willing to act as the necessary lender, and that in general the softening of austerity rhetoric makes it seem less likely that Italy will be forced into default by sheer shortage of cash. Hence, falling yields and much-reduced pressure.
This doesn't mean that the euro's problems are over or that the euro's continued existence is secured. And Varoufakis reads Weidmann's letter as trying to insure that the euro doesn't survive.

German Chancellor Angela "Frau Fritz" Merkel has pursued a negotiating strategy over eurozone issues that in terms of style is almost the opposite of President Obama's. Where Obama starts with a pre-compromised proposals and proceeds to compromise it even more as negotiations continue, Frau Fritz takes a hard line until she decides she has to do something. Because being in the eurozone is very advantageous to export-oriented Germany, she has tried to keep the eurozone together even as she undermines the public support for it by her insistence on brutally destructive austerity measures for Cyprus, Greece, Ireland, Italy, Portugal and Spain.

Weidmann has been a close ally of Frau Fritz in the past, though there seems to have been differences between them over the last year or so. Varoufakis sees three major points in the Bundesbank's deposition that seem aimed at ending Germany's participation in the eurozone:

Three statemets [sic] 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.
And he concludes:

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.
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