Strategic Briefing | 11.18.2011 | The ECB’s Last Stand?

European Rift on Bank’s Role in Debt Relief
The New York Times | Nov 17
The financial stability of Europe has come down to one institution, the European Central Bank, which is now under heavy new pressure to rescue the euro — or possibly see it collapse…. “There is no solution to the crisis without the E.C.B.,” said Charles Wyplosz, a professor at the Graduate Institute in Geneva and co-author of a standard textbook on European integration. “The amounts we are talking about are too big for anybody but the E.C.B.”

Euro Rescue Plan Falling Short Renews Franco-German ECB Spat
Bloomberg | Nov 18
The failure of European leaders to end the debt crisis with their broadest effort yet has revived a Franco-German dispute over the European Central Bank’s role and fueled investor concerns over policy makers’ economic impotence. ECB chief Mario Draghi today slammed governments for failing to implement policy commitments as holders of Greek debt began talks in Athens on structuring a 50 percent writeoff that was the cornerstone of a deal pieced together last month at an all-night summit. Officials in Berlin and Paris yesterday swapped barbs and European borrowing costs outside of Germany rose to euro-era records.
European Central Bank may start printing money to tackle debt crisis
Economic Times | Nov 18
The European Central Bank could soon bow to pressure to print money to prevent a further escalation of the euro zone’s debt crisis, with respondents in a Reuters poll giving an even probability the ECB would adopt a policy of quantitative easing. The poll of 50 bond strategists across Europe and the United States conducted this week gave a median 48 percent probability that the ECB will be forced to conduct outright quantitative easing (QE).
Bundesbank chief Weidmann says don’t overstretch ECB
Reuters | Nov 18
Decisions taken by European leaders so far have not fully addressed the core of the European debt crisis but this does not justify stretching the role of the European Central Bank, ECB Governing Council member Jens Weidmann said on Friday…. “The lack of success in containing the crisis does not justify overstretching the mandate of the central bank and making it responsible for solving the crisis,” Weidmann, who also heads the German Bundesbank, said in a speech prepared for delivery at the European Banking Congress in Frankfurt.
Asian powers spurn German debt on EMU chaos
The Telegraph | Nov 17
Andrew Roberts, rates chief at Royal Bank of Scotland, said Asia’s exodus marks a dangerous inflexion point in the unfolding drama. “Japanese and Asian investors are for the first time looking at the euro project and saying `I don’t like what I see at all’ and fleeing the whole region. “The question on everybody’s mind in the debt markets is whether it is time to get out Germany. The European Central Bank has a €2 trillion balance sheet and if the eurozone slides into the abyss, Germany is going to be left holding the baby. We are very close to the point where markets take a close look at this, though we are there yet,” he said. Jean-Claude Juncker, Eurogroup chief, fueled the fire by warning that Germany is no longer a sound credit with debt of 82pc of GDP. “I think the level of German debt is worrying. Germany has higher debts than Spain,” he said.
Higher bond rates stoke fears of a spread of the eurozone debt crisis
Deutsche Welle | Nov 16
“Investors aren’t confident about the eurozone’s ability to solve its problems. So they are looking for the safest place to put their money. That means Germany – and so everyone else suffers,” Elwin de Groot, an analyst with the Rabobank in the Netherlands told the Reuters news agency. While Germany pays an interest rate of just 1.77 percent on 10-year bonds, France’s rate is currently double that – and the gap between the two continues to grow. “This can’t be maintained in the long term,” Verhofstadt told the European Parliament.
The Bundesbank’s chief and the ECB’s Italian president have much in common
The Economist | Nov 19
When Mario Draghi took over as president of the European Central Bank at the beginning of this month, it was felt that he had to prove his credentials in Germany. That task is made harder by calls on the ECB to act as backstop to troubled Italy, Mr Draghi’s home country, and to contain a sovereign-debt crisis that is raising borrowing costs for most euro-zone countries, while driving them down in Germany. This week Jens Weidmann, the head of the Bundesbank, Germany’s central bank, raised the bond-market pressure on Italy and on Mr Draghi by saying that central-bank support for government finances would be illegal. Mr Weidmann told the Financial Times that the ECB could not act as a lender of last resort for countries, because in doing so it would transgress EU treaties banning direct financing of states. It would be counter-productive as well, argued Mr Weidmann. The roots of the euro-zone crisis lay with governments, and providing them with cheap financing would only reduce pressure for reform.
The ECB’s internal contradictions
Worthwhile Canadian Initiative (Nick Rowe) | Nov 17
The Eurozone news is really depressing. I think things are going to be very bad very soon. I don’t have much to say that I haven’t already said in previous posts. But thought I would add this anyway, FWIW [for what it’s worth]. The ECB doesn’t like inflation uncertainty; it wants to keep inflation predictable and just below 2%. The ECB doesn’t like buying the bonds of Eurozone governments. The ECB, presumably, wants to preserve the Euro and preserve its own existence. Everything the ECB is currently doing seems almost designed to lead to the exact opposite of what it wants. The ECB is currently buying limited quantities of Eurozone government bonds. But it has made no public commitment, conditional or otherwise, to do so in future. It doesn’t want to buy more.
The ECB’s Battle against Central Banking
Project Syndicate (Brad DeLong) | Oct 31
Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition. Modern central banking got its start in the collapse of the British canal boom of the early 1820’s. During the financial crisis and recession of 1825-1826, a central bank – the Bank of England – intervened in the interest of financial stability as the irrational exuberance of the boom turned into the remorseful pessimism of the bust.