While Saudi Arabia lamented the passing of King Abdullah
yesterday, Germany was busy burying its last illusions about the European Central Bank.
After a long and valiant struggle, German hopes were finally extinguished that the ECB would change its monetary mind and come back to the Bundesbank way of thinking.
The majority decision by the ECB governing council to buy €1.14 trillion in sovereign bonds has been a a slap in the face for the German establishment.
Lead by the Bundesbank, Germany’s political, media and business leaders had insisted they saw no looming deflationary threat to justify bond-buying. When the ECB proceeded anyway, they dismissed it as “Draghi doping” of weak euro economies.
Realisation
As the quantitative easing (QE) dust begins to settle, another effect of the ECB’s announcement is clear: the realisation that the ECB has finally shrugged off the Bundesbank as its monetary policy prototype and, in German eyes, irrevocably and unforgivably gone rogue.
Bundesbank president Jens Weidmann wasted no time going on the war path, warning in Bild tabloid that bond buy-ups carry a risk "not like any other in the currency union".
“With this new programme the central banks in the ECB system are going to become among the biggest creditors in the euro zone. The political pressure could increase on us to keep down the interest burdens on the finance ministers for a long time.”
Bigger challenge
Behind the scenes at the Bundesbank officials say the ECB has, for short-term QE benefits, effectively pawned its political independence and made itself even more beholden to governments. They are circumspect about losing Thursday’s battle, and warn that an even bigger challenge lies in picking the right point to exit the QE programme.
For German monetary hawks the QE programme is the third and final strike against the ECB, and German notions of independent central banking. The first was 2010’s security markets programme (SMP), the second was 2012’s outright monetary transactions (OMT), still before German and European courts.
German opposition to these measures was visceral but the QE announcement saw German attacks on the ECB turn feral. The Frankfurter Allgemeine daily, house journal of Germany's conservative and finance-market elite, effectively ran a front-page obituary for the euro yesterday, saying the ECB's QE decision had "buried" monetary union.
