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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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  • Is The ECB About To Be Hijacked? 0 comments
    Aug 4, 2012 3:24 PM

    Draghi yesterday announced the ECB is working on a plan to re-enter bond markets and took the unusual step of naming Weidmann as the only policy maker to object to the proposal. While the move would ratchet up the ECB's response to Europe's debt crisis, it risks isolating the German central bank, potentially undermining the effectiveness of the new measures.

    "That's why investors are disappointed," said Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf. "The ECB can't just take random measures against the Bundesbank's will. The country with the largest economy needs to be part of any package."

    While Draghi's comments suggest Weidmann has lost the support of traditional allies on the council such as the Netherlands, Luxembourg and Finland, the Bundesbank president may have German public opinion behind him.

    While Weidmann only has one vote on the ECB's 23-member council, "the Bundesbank veto matters a lot in this," said Julian Callow, chief European economist at Barclays Plc in London. "We need to know exactly how the Bundesbank is appraising things."

    "We are the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks in the Eurosystem," Weidmann said in an interview published by the Bundesbank on Aug. 1. The ECB's independence "requires it to respect and not overstep its own mandate," he said.
    --Bloomberg, Aug. 2nd, 2012

    Clearly, the ongoing ECB power struggle is of great importance to those of us who prefer not to forage for their food. But there's ethnic humor in it as well. Here you have Germany, founding member of the EU and the eurozone, drafter of the ECB's statutes, stickler for rules, laws and treaties, airily announcing that the treaty establishing the ECB's governance is "only a scrap of paper," to borrow a rather unhappy phrase from German diplomatic history*.

    While each central bank has one vote on the ECB's governing council, Germany believes that it has all the votes. You could spend a lot of time poring through Maastricht, Lisbon and the other governing treaties, but you won't find that anywhere. What Germany says is incorrect, unless there is a secret codicil that says "Please don't argue with the Germans".

    So Germany has now revised the ECB treaties to give the Bundesbank a veto over policy because "the ECB can't just take random measures against the Bundesbank's will". I fully understand Germany's frustration, but they signed the treaties. You can't defend your position by reference to the same treaty that you have just denounced. Germany has no legal remedy within the eurozone to prevent the governing council from outvoting her. She stands alone against the entire council, without a veto. Germany can exit the eurozone, but she can't kidnap Mr. Draghi and make him broadcast Bundesbank propaganda from Berlin.

    What's interesting about the ECB vote from a kremlinological perspective is that apparently no one voted with Weidmann including even his compatriot Joerg Asmussen. Not Finland, Netherlands, nor France. One can only conclude that the Bundesbank is indeed isolated, and one might even think that this is just the beginning of its isolation (especially given Asmussen's apparent vote). We used to think of a "Northern League" of Germany, France, Finland, Estonia, Belgium, Luxembourg and Holland. They have all, with the exception of the Bundesbank, deserted and voted with the impecunious Catholics in the south.

    Now, to be fair, it looks like the Bundesbank still has a lot of influence, in the sense that what Draghi was able to get passed was a lot less than he had promised. I guess the council members are still hoping to work out a deal with the Bundesbank that allows them to rescue Spain and Italy.
    Nonetheless, Germany's increasing isolation could be very good news for the perpetuation of our global debt-financed Ponzi scheme. If the needy and the generous can hijack the ECB and make it print money, the eurozone crisis can be speedily resolved (and I will get creamed on my GLD and TLT).

    Aside from the economic importance of this drama in Frankfurt, the theatrics will be fun to watch if you are into this kind of thing.
    * Statement by German Chancellor von Bethmann-Hollweg to British Ambassador Sir Edward Goschen, Aug. 4th, 1914, referring to the multipower treaty guaranteeing Belgian neutrality.

    Disclosure: I am long GLD, TLT.

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