German “wise men” (classic oxymoron) warn ECB is risking credibility

German “wise men” warn ECB is risking credibility

By Alexandra Hudson

November 9 (Reuters) — Germany’s “wise men” panel of economic advisers warned the European Central Bank it risks losing credibility by buying the bonds of heavily-indebted euro zone states, and that monetary and fiscal policy are becoming worryingly blurred.

The group, which advises the German government, said in a report published on Wednesday: “The bond buying program dismantles market discipline without establishing any political discipline in its place.”

What about the Stability and Growth Pact? And what other choice do they offer?

In blurring monetary and fiscal policy, the report said, “the ECB is jeopardizing its credibility, because it is falling under the suspicion of monetizing sovereign indebtedness.”

Meaningless in the context of fiat currency and floating fx policy.

Germany strongly objects to the bond-buying strategy but the ECB’s new president Mario Draghi has signaled the bank is ready to carry on buying bonds of troubled euro zone governments.

The wise men said they expected the bank to make a further cut in the key euro zone interest rate to 1 percent by the end of 2011, and that rates would remain at this level throughout 2012.

The silver bullet!

In the report, the panel suggested a different method for increasing the euro zone’s capacity to prevent contagion from the debt crisis, should the 440 billion-euro European Financial Stability Facility (EFSF) not suffice.

In what the “wise men” said would be a departure from current models of securing debt with ever more borrowing, they advised setting up a “European Redemption Pact.”

This would involve countries with sovereign debt above 60 percent of GDP pooling their excess debt into a redemption fund with common liability. They would commit to reforms and see their debts repaid over 20-25 years.

Within a few years the redemption fund could have a volume of 2.3 trillion euros worth of bonds, the study said.

Back to standing in a bucket and picking yourself up by the handle.

Germany, the euro zone’s largest economy and growth engine of the last two years, is expected to see economic expansion stutter in coming quarters as the euro zone debt crisis saps business and consumer confidence and export markets shrink.

Including exports to the other euro members as their economies continue to slow as well.

The “wise men” forecast economic growth of 0.9 percent in 2012, slightly below the 1.0 percent forecast by the government, which last month almost halved its estimate from a previous 1.8 percent.

Growth this year was seen at a healthy 3 percent.

Thanks to ECB supported funding for Greece and the others used to buy German goods and services.

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25 Responses to German “wise men” (classic oxymoron) warn ECB is risking credibility

  1. Adam (ak) says:

    They Germans were openly and directly told what to do and they still haven’t complied.

    http://www.spiegel.de/international/europe/0,1518,796280-3,00.html

    “Obama, at any rate, felt that they would have little value. Instead, he confronted the Germans in Cannes with a suggestion so radical that it alarmed both Merkel and Schäuble. To save the common currency, Obama proposed that the Europeans follow the example of the American Federal Reserve, which buys up almost unlimited amounts of US treasury bonds when necessary.

    The Germans pointed out feebly that the ECB operates within a completely different tradition than the Fed, and that it also pursues a different mission. But it is becoming increasingly clear to Merkel and her finance minister that, in the end, only the ECB will be able to save the euro if the crisis continues to escalate. It is the only European fiscal policy institution capable of taking action, and it also comes equipped with unlimited firepower. It can never run out of money, because it can simply print new money when needed.

    This is an approach Germany’s representatives in the ECB council have strongly resisted. Former Bundesbank President Axel Weber and former ECB chief economist Jürgen Stark resigned from their posts in the dispute over ECB purchases of Greek and Portuguese bonds. Jens Weidmann, the new Bundesbank president, is likewise strictly opposed to funding government deficits by printing money. This position is understandable, given that the Germans have, twice in the last century, seen how this sort of monetary policy can end in hyperinflation and national bankruptcy. But how long can the Germans resist the pressure from other members?”

    Reply

    Matt Franko Reply:

    @Adam (ak), This is fascinating.

    Obama: ” the American Federal Reserve, which buys up almost unlimited amounts of US treasury bonds when necessary.”

    That has never been how the US Fed Chairman has described it. It’s like Obama thinks the QE2 was done to facilitate financing. What happened to “We’re out of money…”. This is getting stranger and stranger. resp,

    Reply

    beowulf Reply:

    @Matt Franko,
    The Germans pointed out feebly that the ECB operates within a completely different tradition than the Fed, and that it also pursues a different mission

    Wow, I didn’t think anything could make me think less of Barack Obama, but someone who knows the truth but pretends to be ignorant is a lot more contemptible than someone who is sincerely ignorant.
    I’m sorry, it irks me that our President is such a wimp. He should told the Germans, those are some big words considering the Father of their Country is named Dwight David Eisenhower.
    Either the Germans get with the program or the US would support any effort by Greece and Italy to invoke Article V (‘an attack on one is attack on all’) of the NATO Treaty.

    Curious that the first President in our history to order a US citizen assassinated is so prone to appeasement in face to face encounters.

    Reply

    beowulf Reply:

    @beowulf,
    And another thing…
    This position is understandable, given that the Germans have, twice in the last century, seen how this sort of monetary policy can end in hyperinflation and national bankruptcy.
    This a shockingly insensitive reading of history, bordering on Holocaust revisionism (as Col. Hogan would say, “Oh yes I did!”), the Germans went bankrupt twice in the last century for one simple reason, they pissed us off.

    They would have won both World Wars if they had stayed on America’s sunny side, but since they didn’t, we ground them into the dirt (to be be clear, our Western allies paid the lionshare of the butcher’s bill in WWI as did our Russian allies in WWII). Here’s the thing, we used the Federal Reserve to fund both World Wars at low interest and with no hyperinflation. The only tradition that’s different, really, is that we won.

    Matt Franko Reply:

    @beowulf, “Germans went bankrupt twice in the last century for one simple reason, they pissed us off.”: The truly ‘in paradigm’ interpretation of this history…

    Getting back to Obama: What if he is coming to this conclusion on his own? iow If he is getting briefings from Treasury about the FY deficit and simulatneously he is getting briefings from the Fed about the QE2 and he is making his own conclusion that the one negative number is exactly offsetting the other positive number. (QE2=FY deficit) So he then concludes on his own that in effect, the CB is buying the issued Govt securities… so he drops this on the Europeans while off the teleprompter.

    Again this looks like a significant departure from his statement at the 2009 MLB AllStar game that “We’re out of money..” Resp.

    ESM Reply:

    @beowulf,

    “…someone who knows the truth but pretends to be ignorant …”

    I have a different interpretation. I actually think this is evidence that Obama really doesn’t understand this stuff. Everybody knows that the Fed can print money if it decides to. The harder thing to understand is that the Treasury can, without the Fed doing anything special.

    If the ECB were to fund all European govt bonds at 0% haircut, with regulatory forbearance for the banks for any mark-to-market losses, it would solve the problem.

    “They would have won both World Wars if they had stayed on America’s sunny side,…”

    I think the Soviets were well on their way to defeating the Germans in WWII before we did anything of consequence in the European theater.

    WARREN MOSLER Reply:

    agreed. things today would have been a lot different if we’d stayed out of it.

    MamMoTh Reply:

    things would be a lot different for sure.

    who would have stopped the soviets?

    WARREN MOSLER Reply:

    Italy, and, if not, France for sure…

    beowulf Reply:

    @ESM,
    Soviet historians have typically denigrated the Allied efforts to supply the Soviet Union with war material as paltry in comparison with her own production and that it was not essential to the Soviet victory. In armored fighting vehicles this is somewhat true, in aircraft less true and in raw and semi-finished industrial materials this is a bold-faced lie… Based on Soviet data on war production and Lend-Lease records it is now possible to show just how critical Lend-Lease was to the Soviet war effort.. Lend-Lease allowed the Soviets to focus their own production almost solely on the production of weapons and ammunition.
    http://www.sturmvogel.orbat.com/SovLendLease.html

    Here’s a bit of trivia, Jean Monnet the man known as the “Father of the Europe” coined a term FDR made famous, “arsenal of democracy” while working in Washington during World War II.
    http://books.google.com/books?id=SqgQTJ9qtSIC&pg=PA67&lpg=PA67&dq#v

    Mario Reply:

    @beowulf,

    @Matt Franko

    very interesting indeed and really either way you look at it, Obama just spilled the beans FROM HIS PERSPECTIVE since he’s saying this so cavalier-like all the while the super committee is in full steam and social security is on the block. Even if he’s not got it right YET, he gets the essence of it and the logical conclusion remains the same…it’s not about insolvency for the US…we don’t NEED to do anything at this time.

    I fear Warren may need to change the title of 7 DIF slightly (and most unfortunately)!!!

    Gary Reply:

    @beowulf,
    It was not like US beat the Germans by itself.
    So you could say that Germans should have stayed on the sunny side of Stalin too.

    @WARREN MOSLER,
    “things today would have been a lot different if we’d stayed out of it.”

    indeed.
    However, US was a major player in the world and so many causes for the Hitler’s rise to power was related to America. So “staying out” should have began much earlier.

    Also, US leaders understood that in order to dominate the world and acquire guaranteed markets for its production they had to get involved and Germany and Japan had to lose.

    Gary Reply:

    @beowulf,

    perhaps Obama does not connect that to public policy – maybe he thinks that money could be “printed” only for the benefit of the banks and anything else would cause problems (inflation)

    Mario Reply:

    @beowulf,

    @Gary

    perhaps Obama does not connect that to public policy – maybe he thinks that money could be “printed” only for the benefit of the banks and anything else would cause problems (inflation)

    perhaps Gary but geez how much “benefit of the doubt” are we going to give these guys! At some point it becomes deductively obvious that these guys get it or at least get enough of it to prove that there is a serious divergence between political agendas and reality.

    Even if he doesn’t get the exact operational details of it, Obama obviously sees that liquidity is never a problem when there’s a CB in town. And he obviously is not concerned in the slightest about inflation from Fed activities at least. Listen, if he’s smart enough to understand THAT, then he knows we don’t need to cut SS and “get our house in order.” Remember Biden has advisers that are apparently in paradigm as this site has mentioned before. Obama has chosen out consciously. This may have been the greatest faux pas the elite has made to date.

    Gary Reply:

    @Mario,

    It is difficult to say how much they “get it”, or what version of understanding they subscribe to. However, what has been obvious for a long time – is that they will not use it for the good of all even if they “get it” (many examples in Warren’s book as well, where politicians say “they cannot go there”).
    I think they are afraid that if it was a common knowledge, then “the mob” would use it for its own benefit, and not for the benefit of the rulers.
    The money – after all – is the perfect tool of control.
    Why would the rulers give that tool up (or weaken it) voluntarily?
    There will be “blood in the streets” before they adjust their stance.

  2. Walid M says:

    Many Italians may admit Germans make the best cars but none will admit that Germans make the best drivers !
    Now we have an Italian driving a German made central bank …
    Anybody fancy a ride ?

    Reply

  3. Adam (ak) says:

    No this is about something else – building the new Carolingian Empire.

    “(Reuters) – German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say.”

    http://www.reuters.com/article/2011/11/09/us-eurozone-future-sarkozy-idUSTRE7A85VV20111109

    To build something new you fist need to destroy something old. Sometimes the process of destruction goes too far…

    Also: for how long did the Carolingian Empire last?

    Reply

    Ben Wolf Reply:

    @Adam (ak), How can creating a core euro zone not result in serious appreciation? I can’t see the Germans liking what that does to their trade balance.

    Reply

  4. Gary says:

    so it really comes down to which country or interest is able to exert more control over ECB.
    Countries that do not have much influence are being thrown under the train, while those that have – are doing the throwing.
    Germans do not want to use ECB to help others because they think they are immune to the problem.
    ECB only buys bonds secretly, and austerity is asked in exchange.
    Markets want assurances that ECB will continue buying bonds.

    If Germans will agree to let ECB do it only if they get more control over countries whose bonds ECB buys – in order to insure that austerity is imposed.

    It is really a question of control, and loans are the tool.

    Reply

  5. Walter says:

    Since the failure of the Oct 26 ‘plans’ Germans have become increasingly active to emphasize their opposition against ecb bond buying. We have seen now Weidmann, Wise men and Starck is also very loud last days.
    They know they need to go now to Sarkozy and try his variant. I get the impression that Merkel somehow knows how to make things politically feasible in Germany.
    How many hours, days, weeks we need to wait for that EFSF to become a bank?

    Reply

  6. PG says:

    … they advised setting up a “European Redemption Pact.” …

    The thing gains mythological super Christian overtones. Could go as an addition to the strategies for riding dead horses

    http://kenhomer.wordpress.com/2008/11/12/riding-a-dead-horse-the-wisdom-of-the-dakota-indians/

    as

    16. If there are several riders for the same dead horse, make the riders sign a pact to resuscitate the dead horse 25 years into the future from now.

    Reply

    Dan Kervick Reply:

    @PG, The thing gains mythological super Christian overtones.

    Yes, now these German wise men think they are Martin Luther all over again, saving Europe from the decadent Greek and Roman churches. They think ECB bond purchases are like indulgences, and are out to enforce an austere salvation through faith alone.

    Reply

  7. beowulf says:

    The Germans, with their Colonel Klink-like inability to see the obvious, are lashing the ECB to the mast of the “price stability mandate”, not comprehending that deflationary spirals are a particularly nasty form of price instability.

    Its time for the ECB to go full-on Marriner Eccles. After Pearl Harbor, the Fed capped short term Treasuries at 0.375% and long term Treasuries at 2.5%. Once a bond auction hit the caps, the Fed bought out the rest of the issuance. Considering what the War Department was using that money for, I suppose that counts as yet another example of unsound currency destroying the German economy. :o)
    http://lolebrity.net/wordpress/wp-content/uploads/2010/03/Colonel-Hogan-oh-yes-I-did.jpg

    Reply

    Dan Kervick Reply:

    @beowulf, Its time for the ECB to go full-on Marriner Eccles. After Pearl Harbor, the Fed capped short term Treasuries at 0.375% and long term Treasuries at 2.5%. Once a bond auction hit the caps, the Fed bought out the rest of the issuance.

    Yes, it drives me crazy to see all of those sovereign governments, and all of those citizens, forced to rely for their financing on the kindness of private bond markets, and forced to stand by and watch those bond dealers tear them to shreds.

    I understand why the Germans have a manic obsession with price stability. But it’s not as though crazy inflation is the only thing that can cause a slide into dangerous political chaos.

    Reply

    Mario Reply:

    @beowulf,

    COLONEL KLINK!!!!!!

    Reply

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