Germans need to re-think whether Bundesbank President Jens Weidmann’s move to lodge a legal challenge against the European Central Bank’s bond-buying program was such a good idea. They don’t have a lot of time.
Germany’s constitutional court in Karlsruhe is scheduled to decide the case next month. If it says the ECB’s outright-monetary-transactions program is illegal, then markets will dump the euro, and bond markets in the euro area’s peripheral economies will swoon. The last thing Europe needs as it seeks to emerge from a recession is a return to last year’s unstable financial markets.
Chancellor Angela Merkel, no doubt, has a Plan B available for such an outcome, like going to parliament to amend the constitution, so the ECB program can resume. If she doesn’t, she should. Even so, the market volatility that would follow until the ECB was able to restore its bond-purchase guarantee would be devastating.
Most analysts believe the court will rule in favor of the ECB program, at least in a modified form. Even if that proves to be the case, however, the court hearings could easily develop a circus-like atmosphere that creates uncertainty and undermines confidence in the common currency. The hearings might also affect September’s federal elections in Germany, given that Merkel supported the ECB’s program from the outset.
And all this risk for what? So that the anti-euro lawyers and officials in top management at the Bundesbank can take their revenge on a currency union that they opposed from the very beginning. Germany’s central bank clearly went too far this time.
The Bundesbank doesn’t have veto power over the decisions of the ECB’s Governing Council, which has 23 members. Weidmann is trying to use Germany’s courts to get a veto, even though he was in a minority of one in opposing outright monetary transactions.
Weidmann might not look so foolish if the program hadn’t proved so successful. By merely threatening intervention in the bond markets, the ECB has been able to reduce sovereign interest rates in the periphery and keep them down, despite inconclusive elections in Italy and a bailout fiasco in Cyprus. The yield on Spain’s 10-year bonds, for example, reached a high of 7.6 percent before the ECB announced its bond-buying program. Today they are about 4.2 percent. That’s a difference between solvency and default for Spain, and quite an accomplishment to want to undo.
Moreover, none of this has cost Germany or the ECB a euro cent, because the pledge to intervene in bond markets alone has been enough to calm investors. Not a bond has had to be purchased yet.
Weidmann should stand up to the anti-euro elements within his house, not capitulate to them. The euro is Germany’s future, not the deutsche mark. By failing to accept this fact, the Bundesbank is putting German interests at risk. Weidmann will be a less effective advocate for German interests inside the ECB now that he has offended his colleagues by attempting to undermine the program they voted for.
Germany’s top central banker acknowledges that the ECB’s program brought stability to turbulent financial markets. But his response has been, in essence: so what? “It did not come as a surprise to me that the markets were calmed,” Weidmann said in an interview with the Wall Street Journal last month. “This doesn’t necessarily make the decision a good one from a policy perspective.” Pardon me, Mr. Weidmann, but saving the euro when it was under fierce speculative attack in the currency markets was the essence of good policy.
The head of the Bundesbank shouldn’t sound like a Christian Scientist, who prefers to see a loved one die rather than use needed medical interventions that are proscribed by his religion. German taxpayers have a lot to lose if the euro fails.
Germany has racked up impressive gains from lower interest rates on peripheral debt, since Weidmann was overruled and the ECB began its bond-purchase guarantee. The price of bonds from the peripheral economies increased substantially as a result, and the German government owns a lot of these investments.
The gains that followed would turn into steep losses if the Bundesbank’s lawyers were to prevail in court. In effect, Weidmann’s legal challenge has made the Bundesbank’s interests antithetical to those of German taxpayers.
This is hard to explain on policy grounds alone. Taking the ECB to court is further evidence that the Bundesbank is having a tough time coming to grips with its diminished role in European monetary affairs since Germany adopted the euro. Who can forget the almost-comic antics of ex-Bundesbank head Axel Weber, when he leaked information to the media before then ECB President Jean-Claude Trichet could get to a microphone? Trichet wasn’t amused. In retrospect, though, Weber’s behavior seems to reflect an institutional, rather than personal, animus.
Merkel and her finance minister, Wolfgang Schaeuble, have said on more than one occasion that going back to the deutsche mark would be insane. Weidmann should learn from his experience with the outright-monetary-transactions program. He allowed anti-euro hard-liners within his central bank to put a successful policy at risk and impose large potential costs on the German economy. The Bundesbank needs to accept that the euro is now Germany’s only viable currency and do whatever it takes to secure it.
(Melvyn Krauss is an emeritus economics professor at New York University and a senior fellow at the Hoover Institution at Stanford University. The opinions expressed are his own.)
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