It was the first time that an act of crisis resolution in the eurozone did not undershoot expectations. By agreeing an unlimited bond purchasing program, and by abandoning the privilege of senior creditor status, the European Central Bank has demonstrated that it is the only functional institution left in the EU. A rescue of the eurozone is inconceivable without the help of the ECB.
This achievement became possible because the majority on the ECB’s governing council outvoted the representative of the Bundesbank. With his 'No' vote, Jens Weidmann has isolated himself among his peers. We no longer have a conflict between the north and the south, but between Germany and the rest.
It should be no cause of glee, let alone joy, because German isolation is about the last thing the eurozone needs. The day after the ECB’s decision, the German media eulogised Weidmann for fighting against the infidels in the ECB. The consensus view among German commentators is that the ECB has lost its independence; that the German taxpayer will foot the bill; and that hyperinflation is around the corner. One commentator was appalled by the fact that Mario Draghi was ready to save the euro at any cost.
A poll published last week had 53 per cent of all Germans hoping that their Constitutional Court would block the European Stability Mechanism – and risk utter chaos. Even the parliamentary floor leader of the pro-European Green party is concerned about the huge fiscal transfers that lie ahead. Weidmann may have isolated himself in the governing council, but not in his country. When he says that bond purchases border on an illegal act of debt monetising, he is expressing a consensus view among German economists, lawyers and politicians.
When debates shift, one often observes that the losing side becomes pseudo-pragmatic. I am seeing more and more pro-European Germans effectively embracing the eurosceptic narrative. They say that eurobonds and joint deposit insurance are politically impractical in the current climate, and are instead searching for implausible second-best solutions. A good example has been the proposal by the Council of Economic Advisers of a jointly guaranteed debt redemption bond – a debt instrument that looks like a eurobond on the outside, but is an austerity tool deep down.
Perhaps the most depressing aspect of this situation is that Draghi’s success last week may end up producing a weaker macroeconomic policy response overall. Having isolated Weidmann over bond purchases, Draghi cannot afford to repeat this act when it comes to the general conduct of monetary policy. I suspect that the ECB may now be less inclined to cut interest rates further, and more inclined to raise them at the first false dawn of economic recovery. I only hope I am wrong on this because it would be a disaster. As I argued last week, I am also not optimistic on the other critical component of a crisis resolution strategy – a banking union that can act as an indirect economic transfer mechanism to insure against the risk of persistent internal imbalances.
The German revolt is thus deeply troubling. The problem is not Angela Merkel, who has taken a neutral position in the Draghi v Weidmann contest. The problem is a shift in public opinion. The German public has bought into the narrative that the crisis was caused by profligate southern European politicians and consumers, who had wasted the first decade of their membership of the eurozone indulging in a debt-financed housing and consumption boom. It is a false morality tale – mostly devoid of economic reasoning. But this has not stopped it from becoming the dominant narrative. Not enough politicians, certainly not enough journalists and commentators, are pushing against this narrative. Merkel’s single biggest error in her management of the crisis was her failure to get this narrative under control, or establish a narrative of her own. With her famous red lines on eurozone bonds and deposit insurance, she even ended up reinforcing the narrative.
The same narrative will almost certainly have influenced the German Constitutional Court, which is due to announce its ruling on the ESM on Wednesday. Weidmann also gave a very critical assessment of the ESM in his deposition to the court in July. I would caution readers not to take the court’s decision for granted. While I do not have the foggiest idea what the court will say, I am certain the ruling will not be based on, or even influenced by, fears of a negative market reaction, as so many commentators keep insisting it will be.
Weidmann is a pivotal figure in all these debates. He has become the effective leader of the opposition to the current European consensus on a policy response to the crisis. On Thursday, he lost a battle in the ECB’s governing council. But this was a battle he was never going to win. My sense is that he is winning the overall debate – a victory the eurozone is unlikely to survive in one piece.
Copyright The Financial Times Limited 2012.