So here it is, the Bundesbank is cracking! According to the Wall Street Journal, Germany’s central bank would accept a move by the ECB in June if the outlook on inflation warrants it. The Buba now is siding with the general assumption that we have to fight deflation risks by turning on the printing press. After having resisted for a long time, the Buba will not resist anymore before Mario Draghi, before all the southern countries and France, that are all claiming for a more laxist monetary policy.
There will be no sovereign bond buybacks, forbidden by the constitutional Treaty, but rather acquisitions of titled bank loans or, in other words, credit to businesses that is put in slices, packaged and resold, a little à la subprime, which was for real estate credit. One does not need to have a wild imagination to think that failing banks would take advantage of this to unload their toxic debt to the ECB... Banks in Spain, Portugal, Ireland, Greece and Italy must be impatiently waiting for this possibility to materialise, since it would represent for them a dream opportunity to lighten their balance sheets in exchange for some liquidity.
This change also means that the Bundesbank now accepts the general idea that there has to be (a little) more inflation in order to sustain economic activity. This is grotesque! It’s as if lower prices would break this little residual growth when, in reality, they are only one symptom of our congested economies. We would be better off asking about the level of taxation, the weight of public spending, the bureaucratic weight of the European Union and of the national administrations, and on the lack of competitivity of the european economies. But that would involve too much questioning for our leaders... so much simpler just to ask the ECB to run the printing press!
What’s worse is that this policy will have beneficial effects in the beginning : The stock markets are going to go up, the euro is going to go down, and everyone will be happy. This will just create more bubbles! We already have a substantial one with the lowering of interest rates on debt in Spain and Italy... so let’s have more! Once again, we’ll be told that this will jump-start growth. Sure, let’s just look at Japan and the United States, where there is no real recovery on the horizon.
That being said, the german economy is doing rather well (balanced budget, very low unemployment, strong exports), so why is the Buba abandoning its legendary rigor? Here’s my hypothesis : The european banking sector is in much worse shape than we think, with both LTROs (500 billion euros at 1% on 3 years, twice) of December 2011 and February 2012 coming due in this year’s December and February 2015, and spanish and italian banks cannot reimburse them. Also, banks from other european countries may be experiencing difficulties that are not known today as yet. Germany wants to have some time in order not to have to act hurriedly. So it will let the ECB use its printing press for a while, and it will give it time to assess the viabiity of the Eurozone in its actual form. Whatever the case may be, the first decisions by the ECB will have to be very closely monitored.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.