H.W. Sinn Chides Ms. Merkel
A friend pointed a recent editorial by German economist Hans-Werner Sinn in the FT out to us, in which Mr. Sinn – one of the staunchest opponents of stealth bailouts via central bank policy in Europe – takes Germany’s chancellor Angela Merkel to task for not doing anything to stop the latest schemes instituted by the ECB.
Specifically, Sinn points to the many ways in which the ECB has already skirted its statutory limitations, and how this trend continues and is actually getting worse with the most recent monetary policy announcements. An excerpt:
“Despite the Bundesbank’s protests, the European Central Bank is giving Europe’s banks a leg-up. To make them fit enough for the proposed banking union, the ECB proposes to relieve them of some of the potentially toxic loans they have extended to the private sector, which will be bundled into asset-backed securities and taken on to the central bank’s balance sheet. The ECB’s preference is to purchase the better tranches of these securities and leave the junk for the European Investment Bank. But since politicians are not playing along, the ECB will have to hold its nose – and complete its conversion into a bailout agency.
The ECB began as a central bank that carried out monetary policy, providing liquidity for domestic uses. But when the financial crisis hit in 2008, banks in Ireland and southern Europe faced a dearth of foreign loans, on which they had come to depend. The ECB allowed national central banks in these countries to end the drought by lending even more money against ever-weaker collateral. This exercise in money creation went beyond what was needed to ensure domestic liquidity; €1tn in central bank credit was created out of thin air to settle foreign bills. The citizens of the six countries that were indulged in this way used the money to pay off their foreign debts and to purchase foreign goods.
The ECB went on to instruct national central banks to grant crisis-afflicted states credit totaling €223bn under the so-called Securities Markets Program. Mario Draghi, the ECB president, moreover offered unlimited protection for their government bonds, formalizing his vow to do “whatever it takes†to save the euro under the rubric of “outright monetary transactionsâ€. This lowered the interest rates at which overstretched euro zone members could obtain credit and reversed the losses of their foreign creditors, triggering another borrowing binge.â€
Sinn then goes on to explain that what is being considered now, is going well beyond even these past interventions. He then chides Ms. Merkel for failing to look after the interests of German citizens as instructed by the rulings of Germany’s constitutional court over recent years, which tended to be of the “yes, but†kind: they allowed all sorts of bailout schemes to go forward, but with certain strings attached.
