Tensions are rising between Germany and the European Central Bank and, this time, concerns are raised openly through an intervention by Germany’s finance minister Wolfgang Schäuble before the German parliament, the Bundestag. Angela Merkel’s strong man has been in charge of this key ministry since 2009, so one should take what he has to say very seriously.
Wolfgang Schäuble started by stating his reluctance at the ECB’s intention, as recently announced by Mario Draghi, of buying securitized loans and bank bonds or, in other words, continuing to bring liquidity to the banks and inflating the ECB’s balance sheet. And then he pointed to a real problem, one that we’ve talked about in the past, i.e. the conflict of interest in which the ECB will find itself. Because, starting in November, it will be in charge of supervising 120 of the main banks in the European Union. It will have deep access to the banks’ records and will be able to assess their financial stability and have a look at all of their assets. And, at the same time, it will be able to buy those same assets that it will know more about than anybody else in the market. The ECB will be judge and jury and will not have to report to any higher authority; it will decide on its own which bank to save or not to save. If we are to rely on Mario Draghi’s penchant for lax policies, we can predict he will have a tendency to pour liquidity ad infinitum into banks that would need re-structuring, which would result in degrading the ECB’s balance sheet even more...
Wolfgang Schäuble is thus pushing for the separation of monetary policy and missions of banking supervision... which is great, but someone should have thought about this beforehand and give this mandate to another structure! But, seriously, if Mario Draghi concedes to such a separation, what value would it have? Large banks have been selling us this ‘Great Wall of China’ between their credit department (privy to insider information on some companies) and their merger-and-acquisitions department, but experience has shown us that we cannot put too much value in that assertion.
Adding to the warnings of Germany’s finance minister, other sources of conflict exist. The Constitutional Court of Karlsruhe could very well block an eventual QE plan to come to the aid of a struggling country (the OMT plan announced by Draghi in September 2012). And, from a different angle, electoral gains for the new AfD party, Alternative fur Deutschland (anti-euro), making inways on Angela Merkel’s CDU electorate, could push Berlin to harden its position against the ECB.
When the euro was created, it was sold to the markets as a ‘super deutschmark’. And now successive crises in Greece, Cyprus, and in sovereign debt in 2011 (rates burning up in Italy and Spain) have already taken a large toll on the European Central Bank, much more than Germany would have wished for. And the fact that this lax and opaque policy is continuing at the time the Fed is tapering its own QE and is even talking about raising interest rates just makes divergences more profound. The euro has already lost 10% to the dollar in four months... such a plunge would not have occurred with deutschmarks! This whole thing cannot please the Germans... It is difficult to predict how a clash could materialise, but we’re quickly getting there.