ECB: Germany Wins, Europe Loses

Readers know that I had expected the Bundesbank to throw some bones to Draghi so that he could save face at today’s ECB board meeting. As far as I can tell, they gave him almost nothing. I had thought that he would be allowed to cut the overnight rate, offer a new low-cost bank loan program, and engage in bond-buying for “monetary reasons”.

What they allowed him to say was that, if and when countries conclude austerity agreements with the Troika, then the ECB would be willing to buy government bonds in the secondary market in order to bring yields down. This is almost nothing. What Europe must have now is (1) massive quantitative easing in order to create inflation and grow nominal GDP; and (2) unconditional purchases of Spanish and Italian bonds until their yields are driven down to affordable levels. No more conditions, no more austerity. (That can be addressed after the crisis has been defused.)

Clearly, the Bundesbank drafted the ECB’s press release. It prescribes a full-fledged examination by the Troika in classic IMF style, imposition of a Troika-designed austerity plan that would not only cut budgets and raise taxes, but also labor market and other structural reforms. As we have seen elsewhere, such programs are highly detailed and require a complete loss of sovereignty, something that both Spain and Italy have strongly resisted.

Instead of rescue by ECB printing press, Germany continues to offer rescue by draconian thrift, which the Italian and Spanish political systems are incapable of delivering. Neither country has any hope of being able to perform surgery on itself in the way that the Northern countries have done in the past. The German plan is based on the fallacy that after you have strangled the patient and destroyed his political system, he will be able to easily re-enter the debt markets at low yields. Markets just don’t work that way. These countries will be basket cases for years after the Troika is through with them.