Mefo Bonds and the ECB

by: Tim Iacono

One can learn quite a bit about the European divide over bailing out profligate governments in this Der Spiegel story about German Central Bank Chief Axel Weber (who may or may not succeed Jean Claude Trichet as head of the European Central Bank). The part about Weber’s 86–year old predecessor at the Bundesbank, Helmut Schlesinger, is very enlightening.

Schlesinger had hoped that the European Central Bank would unwaveringly pursue the same policies as the Bundesbank. But he has had his doubts ever since the euro started to stagger under the pressure of the current crisis.

“It was right to introduce a bailout package for Greece and the euro zone,” he says, “but wrong for the European Central Bank to commit itself by showing a willingness to purchase government bonds.”

In Schlesinger’s opinion, this breaks a taboo commonly referred to in Germany as the Mefo bond. Mefo is an acronym for a shell corporation called the Metallurgische Forschungsgesellschaft (Metallurgical Research Company), which was founded by the Nazis. The company issued bonds which the central bank of the German Reich used in the 1930s to finance the country’s military buildup. In order to ease the burden on the government budget, the Nazis started up the printing presses.

Schlesinger warns that something similar is now threatening to happen in the euro zone. “Apparently, outside Germany they haven’t realized to what extent central bank financing of the (member) states erodes confidence in the value of the currency,” he says. “This creates a dangerous incentive to continue to increase government debt.”

As is the case for so many other aspects of German life, events that occurred four or more decades ago weigh heavily today, their aversion to wanton use of the printing press a response to the Weimar Republic in the 1920s and, now we learn, the Nazis in the 1930s.

Of course, things are completely opposite in the U.S. as the lack of money printing as the cause for so much suffering in the 1930s is indelibly etched into Ben Bernanke’s head.