Draghi vs. Weidmann: Our Futures are at Stake
By Shlomo Maital
Jens Weidmann
A fierce behind-the–scenes battle is underway in Europe. The future of all of us is at stake.
The head of the European Central Bank, Mario Draghi, an Italian economist, and the Prime Minister of Italy, Mario Monti, both want to implement more radical policy solutions for the euro. Their idea? Use the bailout fund, the ESM (European Stability Mechanism). Give the ESM a license to act as a bank. Let it borrow low-interest money from the European Central Bank (ECB). Then the ESM could directly buy sovereign bonds of Spain, Italy, Portugal and Greece, lowering their borrowing costs. It could even issue its own bonds, using the money to support distressed euro-area governments whose borrowing costs are now excessively high.
Basically, Draghi wants to allow the ECB to act like the Fed and the Bank of England, injecting liquidity into a deflationary system that desperately needs it, using the ESM. Had the Fed and the Bank of England not acted thus, using QE (quantitative easing), both the US and UK would be in serious trouble. The Fed may soon engage in a third round of QE, unless Romney wins in November and replaces Bernanke, as he has promised.
The truth? It’s the only solution for Europe’s fiscal woes. But here’s the problem. The head of Germany’s central bank, Jens Weidmann, is fiercely opposed. And Weidmann, before he ran the Bundesbank, was German Chancellor Angela Merkel’s chief economic advisor for five years.
Where does Merkel stand? Firmly in between. She is very smart and realizes much more must be done than is now being done. But as a politician, she seeks re-election, sees her party’s support declining, and realizes German voters hate the idea of giving more money to the bums in Greece, Spain and Italy.
The 27 nations that make up the European Single Market comprise, together, the world’s largest economy.
A German research institute, Ifo, conducts a regular survey of world economic conditions. They then pinpoint the global economy in 2-dimension space, with the x-axis representing “current situation” and the y-axis representing “improving or worsening”. Here are the results for the past few years:
You can see that the world economy has done a loop-the-loop, getting worse, much worse, improving, strengthening…and then, back into another downward loop, as of 2010. The second downward loop in large part reflects the European inability to deal with its euro troubles.
The solution is there. But will Angela Merkel have the wisdom and strength to rein in her Central Bankers, Jens Weidmann, and do the right thing, even though she may lose at the ballot box? Stay tuned. As the Luxembourg Prime Minister once said, we politicians know what we have to do. But we don’t know how to do it and get re-elected.
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August 30, 2012 at 11:09 am
Eelker van Hagen
“We politicians know what we have to do. But we don’t know how to do it and get re-elected.” What a magnificent statement. What the prime minister tells us between the lines, is that he knows what to do, but is incapable in explaining to the people he represents why he has to do it. Now politicians have one thing in common, the actions they have to take need to reflect the needs of all voters, whilst the explanation they have to give needs to reflect the needs of only the voters that have or are going to vote for that specific politician. The widening gap between the 2 target audiences provide a strong reason for the impossibility to explain what you need to do. Bridging the gap between these 2 completely different target audiences, might be a solution that brings action and justification closer together. In Europe however this gap is widening quite rapidly. The actions need to consider European citizens, whereas the explanation needs to consider the voters “back home”. The voters “back home” start to show a rapidly diminishing trust in the validity of a “European citizen”, whilst the actions on the other hand show an alarming need to consider the “European citizen”. As long as we fail to “create” a European citizen, we all will consider the needs of our fellow country men more in line with our own then in line with the citizens of other European countries. In calculus however, we should all consider the fact that there are more voters abroad that share our way of thinking then there are “back home”. How come that we never had the chance to unite strength with our “fellow men” abroad. If we were able to do just that, we would have created the need for politicians to target an audience that is spread across national boundaries, thus closing the gap between the 2 target audiences. At this very moment, we only have our fellow country men to unite with and guess what? We all believe to be part of a very small minority that has to fear the intentions of a majority abroad. Isn’t that the logical outcome of how national politicians want us to view the world?
August 30, 2012 at 6:13 pm
Ross MacMillan
Printing money to fund unsustainable fiscal deficits is the only solution?? Not sure I agree Shlomo. It will be like opening up Pandora’s box…I believe Weidman referred to it as an addictive drug. The US is heading on to QE3 (and 5 years since the crisis) with no recovery in the real economy in sight. When will it end? In a few years will we be talking about QE10? QE20? At best it buys some time until growth somehow magically resumes. At worst it removes the market enforced incentive (interest rates are high for a reason) to enact reforms and also sows the seeds for the next crisis, which will likely be worst. Yes reforms will be painful but they are the only path to real recovery. Your last quote about politicians seems to contradict yourself; Weidman is the one who doesn’t face re-election…it is the politicians who need to be reigned in.