A pact with the devil—that’s now the official metaphor for the “unlimited” bond purchases that the European Central Bank has promised in order to bail out the holders of decomposing Eurozone debt. Bundesbank President Jens Weidmann himself referred on Tuesday to Goethe’s Faust, a play based on the ancient tale of a scholar who sells his soul in exchange for knowledge and pleasure. Part Two of that play—and it ends tragically—sketched “the core problem of today’s paper money-based monetary policy,” Weidmann said, and the “potentially dangerous correlation of paper money creation, state financing, and inflation.”
But it’s too late. Germany has cracked in two—and part of it has eagerly embraced that pact with the devil. The ZEW Indicator, which measures investor sentiment, jumped by 7.3 points, the first increase after four months of sharp declines. And the ECB’s promise? It “contributed to the improvement,” said the press release. Even German investors love all that money sloshing through the system—look at the stock market!
Yet there is the other side: Germans in the real economy. They’re losing faith in the euro, the bailouts, and the ECB: 65% now feel that they’re worse off under the euro than they would have been under the Deutsche mark. A trend that isn’t expected to turn around anytime soon.
And both sides clashed. Over the weekend, Finance Minister Wolfgang Schäuble, who supported the ECB plan, raked Weidmann over the coals for “semi-publically” debating his opposition to it. Until that moment, Weidmann appeared to have the government’s lukewarm backing. But that has evaporated. Chancellor Angela Merkel then had an opportunity to back Weidmann but ostentatiously didn’t. She allowed merely that his comments would be welcome—reducing him from an important advisor in the government’s financial decisions, the traditional role of the Bundesbank, to a pesky commentator.
And comment he did—at Tuesday’s Goethe Symposium in Frankfurt. “Today’s money isn’t covered by any tangible assets. Banknotes are printed paper; mavens among you know that in the case of the euro, it’s actually cotton.” Central banks “had been created in the past to give regents free access to seemingly unlimited financial means,” he said. With catastrophic consequences. Fly in the ointment: he failed to point out that it’s now banks, not “regents,” that luxuriate in “free access to seemingly unlimited financial means.” Nevertheless, the independence of central banks is important “to prevent state appropriation of monetary policy.”
And the best protection against the temptations of monkeying with monetary policy? “An enlightened and stability-oriented society.” Hence it’s crucial that “central bankers, who manage a public good—stable money—justify themselves publicly,” he said—a vigorous stab at Schäuble for his efforts to gag him.
But Weidmann, isolated at the ECB and now in Berlin, enjoys broad and vocal backing from other directions. One of them is his predecessor Axel Weber, who’d resigned from the ECB and the Bundesbank last year in protest over the bond purchases going on at the time—and has since become chairman of the board of UBS. From Basel, Switzerland, he said that he was afraid that the low interest rate policies and the expansion of the central bank balance sheets would lead to “new turmoil in the financial markets.”
Not since World War II had central banks interfered so massively in the economic cycles, he said—with an eye not only on the ECB, but also on the Fed, the Bank of Japan, and other central banks that are printing money hand over fist. While he conceded that the ECB’s measures brought some calm, “monetary policy cannot solve the fundamental weaknesses in the structure of the monetary union.” But “the difficult solutions, the structural solutions, are at this time not on the political agenda.”
Merkel, who is desperately trying to hang on to power and become one of the very few leaders to survive the debt crisis, has been playing it both ways. On one hand, she’s supporting the ECB’s bond purchases, hoping to benefit electorally from the miracles they can perform short-term for the financial markets. On the other hand, she’s trying to hang on to voters who are giving up on the euro; hence her emphasis on “strict” conditions for the ECB’s bond purchases and bailouts. The election is next year, and so far, voters appear to go along with her.