The thing(s) to watch this week
No, not the qualification matches for the Soccer World Cup 2014. I mean the start of the hearings over the legality of the ECB’s OMT program in the context of the German constitutional law. It will be a battle of economists – Jens Weidmann (Bundesbank) against Jörg Asmussen (ECB).
This wil be exciting enough, but it is also exciting (and potentially worrying) to see what the markets are going to do regarding the allaged quantitative limit on OMT operations. Any confirmation that the ECB’s bazooka may in fact, a smaller gun than presumed, may trigger again increases in bond spreads, which will be very painful, also for the Dutch banks in particular. Furthermore, it will once more show that this muddling through doesn’ work.
Rules are for…breaking? Stability and Growth Pact and beyond
This link by Delusional Economics again shows how hard-headed German politics is. And not only politics, but also the Bundesbank. To recap: the Bundesbank is very much against the ECB’s OMT program, and challenges this before the German constitutional court. Outcome is unsure but it is possible that there will be such restrictions on the use of OMT that it will become useless. Furthermore, Berlin and the Bundesbank still believe in austerity. This is misguided, because other European countries cannot replicate the enormous trade surplus that Germany has. Not inside Europe, not with the rest of the world – the demand isn’t there and it is impossible in terms of accounting identities for Germany AND other countries to have such big surpluses – the trade deficits of the remaining countries would have to be so much bigger as well.
So, regarding the comment about agreed rules and to apply them: as the chart shows, Germany has broken those same rules many times over, in particular to come out of the slump in the early 2000s. The only countries that have some credibility here are Finland, Estonia and Luxemburg. Yup, really small countries – in terms of inhabitants and economic clout (although the Luxemburgian banking sector is a story on its own).
Next, this bit:
France needs more time to get its budget deficit under control. That much was made clear last Friday when the European Commission announced it was granting Paris until 2015 to bring its budget deficit below the maximum 3 percent of gross domestic product allowed by European Union rules ensuring the stability of the euro.
Later on it is stated that France will be in recession this year. Given the existence of a welfare state and rising unemployment, how on earth does Germany think France will get its deficit below 3% of GDP in two years? With a deepening downturn going on, this is just postponing the reckoning: France will not be able to do this, and France is really too big and too important to put it under ‘Troika stewardship.’
Delusional Economics says that this German politics is related to the German elections, but I have no confidence (ha ha) that after the elections German policymakers will soften up. They are (from my point of view) in a very dangerous case of group-think. It is even possible, given the rhetoric, that if the SPD wins, the policies will even turn harsher.
Meanwhile, millions of Europeans suffer, because of policy mistakes. What about solidarity, eh?