ECB ready to print, Germany ready to scream

The doves are seizing control of the European Central Bank. They are already laying the ground work for a blitz of Anglo-Saxon QE, whatever the Germans, Dutch, Austrians, and Finns (?) have to say about such wicked Latin conduct.

Welcome to the next fascinating phase of the EMU opera buffa, opera tragica.

The ECB’s Peter Praet – the board member in charge of setting economic policy debates – has given an astonishing interview to Brian Blackstone at The Wall Street Journal, opening the floodgates for bond purchases.

It is clear that the slide towards deflation and Euroland’s fizzling recovery have caused a revolt at long last. The ECB’s Latin (plus) majority simply refuses to accept Bundesbank orders any more.

“If our mandate is at risk we are going to take all the measures that we think we should take to fulfil that mandate. That’s a very clear signal,” said Mr Praet.

“The balance sheet capacity of the central bank can also be used. This includes outright purchases that any central bank can do. The rules do not exclude that you intervene in the markets outright.”

“For some decisions it’s easier than others [to gain consensus]. One thing is clear: the Governing Council has been able to decide. That’s really the message.”

So there you have it. This had to happen since deflation in southern Europe is causing debt dynamics to go berserk, defeating any of the alleged gains from the rest of EMU policy. Nations have to protect themselves.

“That is a radical change of position for the ECB and a very welcome one in our view,” said Ken Wattret from BNP Paribas.

“This is the most explicit signal yet from an ECB official that balance sheet expansion via asset purchases is on the radar.”

“The patience of the majority of Council members towards the ‘blocking minority’, which has led to a worryingly slow policy response to persistent below-objective inflation to date, has been exhausted. The plunge in inflation in October has been the trigger.”

Quite so. But that is not the end of the story, of course. Today we havean FT oped piece by IFO grizzly bear Hans Werner Sinn castigating the ECB for cutting rates at all last week.

We have Bild Zeitung firing off tabloid anathemas over the destruction of German savings by an Italian-controlled ECB.

We had the Bundesbank’s Andreas Dombret saying this morning that the ECB’s near zero rates are posing “risks for financial stability” in Germany.

The North-South crisis goes on. It merely changes shape. German political consent for the EMU Project will be tested further.

The nub of the matter is that any policy set at this stage for Club Med needs is destructive for Germany, and any policy set for German needs is destructive for Club Med. You cannot set a workable policy. The intra-EMU gap is already too wide.

I happen to think the levels of destruction are asymmetric. A bout of deflation for Italy is far more serious (for everybody in the end), than a bout of inflation in Germany. But that is a macroeconomic analysis. This drama will be decided by politics.

The German people have their own firmly-held view. As an amateur anthropologist, I respect the idiosyncratic cultures of Europe’s historic nations, so I don’t wish to join Romano Prodi in denouncing the Germans for being as obsessed with inflation as teenagers are obsessed with sex. Mr Prodi should have thought about that a little harder when he took Italy into a currency union with Germany in the first place.

Europe’s peoples are what they are. That is precisely why we Euro-sceptics have always argued that forcing the pace of EU integration is a very dangerous thing to do.

As for the looming civil war within EMU over monetary policy, there is an easy solution. Germany can politely withdraw from the euro, and the South can politely agree that this would on balance be an understandable action. Everybody could be on best behaviour, seeking to demonstrate to the world that matters are under control.

Just takes a little statesmanship. Not that difficult.

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