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Monday, June 25, 2012

Is a rift developing between the Bundesbank and the ECB?


I’m sure that there is some source for information about ECB politics, but I haven’t encountered it yet (maybe it’s in German). So I only know what I read in the papers about what’s going on there; I don’t have any backroom gossip. The latest ECB news is that it has once again lowered its collateral standards to allow PIIGS banks (i.e., Spain) to continue to have access to credit. It used to be that the ECB accepted only blue-chip assets; today there isn’t much that it won’t take.

The interesting development is that not only did the Bundesbank dissent from this decision, but that it did so publicly. What does this mean? It suggests that, to some degree, the Bundesbank may be losing influence at the ECB.

The ECB is controlled by a 23-member Governing Council which consists of the six members of the Executive Board, plus the 17 governors of the eurozone’s central banks. There are two Germans on the Governing Council, versus 21 others, including seven members from the PIIGS.  Voting on the Council does not reflect the financial resources or credit ratings of the member countries. The PIIGS plus France have nine votes (if you include Draghi) to Germany’s two.

I have to assume that Draghi, the ECB president, acts as the leader and consensus builder on the Council. Under pressure from France and the PIIGS, he evidently decided that maintaining the liquidity of the Spanish banks (downgraded today) was more important than collateral quality or keeping the Bundesbank happy. Presumably, the Bundesbank knew that it would be outvoted, so that it could take its principled stand without triggering the collapse of the Spanish banking system.

So far so good. But on the horizon is the possibility of a major break between the Bundesbank and the ECB.

The Bundesbank has emphasized its view that the ECB has no mandate beyond price stability. The Germans believe that there is no legal basis for the ECB to bail out banks or governments. And further, the president of the Bundesbank has said that the ECB has no mandate to purchase jointly-guaranteed eurobonds, since this would represent a backdoor government bailout.

This would seem to set up a conflict between the AAA-rated Northern Europeans (5 votes) and the PIIGS plus France (9 votes). In the deciding middle would be Belgium, Estonia, Malta, Austria, Slovenia and Slovakia.

Should Draghi decide to throw his hand in with the PIIGS and push the Council toward an ECB-funded bailout, this would put the North into quite a pickle. Would Germany allow the ECB to grab its credit card and use it to bail out the PIIGS? Not willingly. But what could they do? They are treaty-bound to uphold the decisions of the ECB; they have no veto.

I see such a conflict looming. I don’t know how it could be resolved, other than by German capitulation. Watch this space.




5 comments:

Anonymous said...

Would they not be expected to act in the same "heroic" way the Fed did in 2008? The alternative is unbearable to the Euro majority, the Germans notwithstanding.

Chris Mahoney said...

By "they" do you mean the Bundesbank or the ECB? The question is, if the ECB wants to be heroic and the Bundesbank doesn't, what happens then?

James Ross said...

Belgium, Estonia, Malta, Austria, Slovenia and Slovakia will go with Germany.

Chris Mahoney said...

You mean, will vote against using the ECB to rescue the PIIGS?

Anonymous said...

Chris,
If you are correct, and I think you are, whose side would you want to be on when the euro project blows up? PIIGS - Germany.