German power is about to prove decisive.
Here we are again, back at the Target 2 system that allows peripheral eurozone States to get a stealth bailout by having huge outstanding liquidity (loans really) from the ECB, while Germany has equally huge liquidity (deposits really) at the central bank. Target 2 was originally designed purely as a monetarist transmission system. But national ClubMed central banks have perverted this by simply drawing on it, up to but not including putting anything back.
Controversial (but very smart) German economist Hans-Werner Sinn continues to argue that “It is as though the ECB were acting as a purchasing agent of German savings, which it then services and distributes to the crisis countries at whatever conditions it deems appropriate”. Sinn represents Bankfurter concerns, and for years he has been rubbished by CDU spokespeople/Berlin bureaucrats who did the “Yes I know it looks like a turd Tsunami heading our way, but it’s really only accountancy of no significance”. Clearly Sinn was and is on the ball: and in the New Germany that has risen from the Bundesrepublik elections, he is now in fashion rather than out on the wacky moons of Saturn.
Germany and Nordeuropa have been outnumbered on the ECB board since May 2010. The ECB board’s actions since that time are pretty clearly at odds with article 125 of the EU treaty, by having created a giant volume of public credit and guarantees in favour of ClubMed and other strugglers. A Frenchman and then an Italian have, in the final analysis, fiddled the system to stuff the German Weidemann. Trichet and Draghi used the system to their advantage, but now Berlin and Schäuble are on Weidermann’s side….and on the ECB’s case.
Let us suppose that the inevitable does happen in southern Europe: Greece defaults in March, Italy stays as she is – a car in neutral, sinking into the quicksand – and Spain’s empty banks get themselves into trouble on one of seventeen perfectly predictable dimensions. The write-offs will, I would argue, be far more than the half a trillion euros of capital that underpin the ECB….and I haven’t even included the French 2cv heading for the wall at top speed.
Germany’s Target2 credit with the ECB was at one time around 800 billion euros, an increase of over 200% immediately after the eurocrisis began.
But what’s to stop Berlin simply taking its ball home? The truth is, it’s already happening: the stock of German banks’ claims on peripheral Europe has fallen to €300 billion.
And now look at what Germany has clearly laid down as the law on Greece. Rehn has said emphatically that Antonis Samaras the Greek PM will not get his promised Christmas debt relief. Nobody has a solution to this, so what happens?
The answer is “anything”, but this time it certainly isn’t going to be “nothing”: because Mario Draghi may have the ECB votes, but a strident Germany has far less cash at risk than before.
What we have here is a game of poker: Draghi is gambling that Berlin will do anything to keep Greece from defaulting. Schäuble and Weidemann are gambling that a threat to start taking German funds out of the Target2 would scare the crap out of Draghi.
There are even hawkish bankfurters who say “Get what money we can out of Target2, and let Draghi’s bank go under – then we take over”.
Go back to Germany’s banking union diktat: it makes a deliberate fist of smudging and blurring the Sovereignty of the EU even further. This to me is a further sign that Berlin will play hardball, saying simply, “We will take over the EU’s finances in Frankfurt…but not until the ClubMed dung-heap is cleared away”. From the start, Berlin has refused to get lumbered with the bill. The Germans are saying, “No taxation without domination”.
Whatever commentators may say at the moment, in the end those who invest in the eurozone would rather have solidly boring German money management than the slippery money-printing bondholder-subordinating Draghi. The German High Command knows this. So does Mario Draghi.
Yesterday, ECB executive board member Peter Praet told the media, ““The balance-sheet capacity of the central bank can also be used. This includes outright purchases that any central bank can do.”
My riposte to this would be, “Not without German cooperation you can’t, matey”.
The future’s tight. The future’s German.