Technocrats believe in “fairy tales”

From The Economist:

Indeed, Mr Weidmann’s strong opposition to ECB purchases of government bonds might even be helpful to Mr Draghi, who said at his first press conference that unlimited lending to governments would be outside the ECB’s remit. If the ECB gives the impression that it will do the minimum to abate the bond-market panic, it would increase the pressure on Italy’s politicians to support a reform-minded cabinet and to push through the right policies quickly. The markets may be panicking but Mr Draghi is said to be calm in a crisis. That calm will sit well with the Bundesbank’s view that panics blow themselves out, and that what matters most is long-term stability. The hope is that reform (and high yields) will tempt buyers back into Italian bonds and that markets will calm down.

Sadly, it seems that panic is not abating but is spreading to the heart of the euro zone and is no longer easily explained by deficits or public debts. Public finances in France are not nearly as bad as in Britain. But yields on French ten-year bonds are now far higher than for the equivalent British bonds (see chart). The growing gap between borrowing costs in Germany and those in other euro-zone countries suggests that investors now fear a break-up of the euro zone.

As much as reform in Italy and elsewhere is needed, it seems unlikely that promises to be austere will halt what looks like a run from all euro-zone bonds but German ones. The ECB, despite its misgivings, is the only institution with the power to reverse a self-fulfilling panic. If the pressures become so great that a break-up of the euro seemed likely, could even the Bundesbank really say no?

Unfortunately Mr Weidmann conveniently forgets that it was not the hyperinflation that brought the Nazis to Power, but French insistence that Germany had to “bleed through never ending austerity” in order to satisfy its reparations obligations.

4 thoughts on “Technocrats believe in “fairy tales”

  1. And the French insistence just went on and on, far longer than the hyperinflation. I could be wrong, but I question whether Germany is in the position of strength now that it believes it actually holds. It would be sacrificing a lot more than just France.

  2. From “An Open Letter to Dr. Jens Weidmann”
    “Hyperinflation was the consequence of continuing monetary financing of the budget deficit with no end in sight. Today we are talking about dealing with the existing stock of debts that cannot be refinanced on the market anymore.” What do you make of that quote?

  3. The stock-flow distinction that few consider. I think CW was very forceful in his open letter. Will he brake the German mindset? And the existing stock of debt was mostly not the result of “irresponsible profligacy”, but a sistemic consequence of the euro itself.

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