I don’t have much to say about the politics of the new ECB proposal that I haven’t said at greater length already. Matt Yglesias is right to see this as a power shift, but it’s one that’s been in the making for quite a while. The policy of ‘comply with our demands for austerity or we’ll pull the plug’ was executed through confidential letters rather than public announcements up to recently, but it was still the same policy. And I’m not sure that it’s a power grab as such – I don’t think the ECB has planned this, so much as been pulled into a vacuum created by the corrosive cross-national politics of conditionality and implicit or explicit transfers.
Which brings us to the Bundesbank’s public opposition to the deal – it describes the purchases as “tantamount to financing governments by printing banknotes.” There’s a relevant quote in Harold James’ excellent forthcoming history of European Monetary Union, which I don’t want to talk too much about, since I’ll be reviewing it elsewhere. One of the very interesting discoveries he has made is a non-public speech that Helmut Schmidt, then the German Chancellor, made to the Bundesbank at a somewhat similar juncture in the 1970s. Germany was being pushed to support the then-European Monetary System (a complicated class of a dirty float that was supposed to lead, somehow, someday, to proper monetary union), but the Bundesbank wanted a stipulation that Germany could opt out of unlimited intervention, if this threatened domestic price stability. Schmidt secretly agreed (the precondition was discovered later), albeit with some hesitation. From the speech (which James quotes in extenso – there is plenty more juicy stuff that I’m leaving out):
What interests me here is a part of the third point of your letter. I must say to you openly that I have quite severe misgivings about a written specification of this sort, a written specification of the possibility of an at least temporary release from the intervention. Let us first of all assume that it appeared tomorrow in a French or Italian newspaper. What accusations would the newspapers then make in editorials against their own Government who got them mixed up with such a dodgy promise with the Germans … In the matter itself I agree with you, gentlemen, but I deem it out of the question to write that down … there has been a beautiful saying in the world for two thousand years: ultra posse nemo obligatur. And where the ultra posse lies one decides for oneself. My suspicion is that, if it came to a real crisis, … the debtor countries clear out first and not the creditor countries. But it could perfectly well be the case that the creditor Federal Republic might one day have to clear out; it is all thinkable, only one cannot write such a thing down.
The Bundesbank’s ostentatious dissent from the ECB program is plausibly both a genuine statement of disagreement, and an implied statement that there are stark limits to what Germany will bear – that if the program does turn into unlimited support for weaker states, Germany will exercise its ultra posse and pull out of its obligations. This threat doesn’t have to be explicit to be understood. This in turn highlights the complexity of the expectations that the EU has to manage at the moment. On the one hand, the EU wants to convince financial markets that this is all going to work – that the ECB will do whatever is needed to keep EU going, in the hope that this calms down expectations, so that it doesn’t actually have to use the big bazooka. On the other, the EU (and in particular Germany) wants to convince countries such as Spain that ECB support is conditional on politically ruinous austerity measures. The Bundesbank’s public disavowal of ECB policy arguably makes the latter argument a little more credible, by signalling that this is the best deal that Spain is likely to get. However, by hinting at the limits of German support, it also suggests that the ECB’s ‘unlimited support’ may in practice be more limited than it sounds, generating the risk of market uncertainty.
Gene Wolfe writes in the Book of the New Sun of an executioner:
a certain Master Werenfrid of our guild who in olden times, being in grave need, accepted remuneration from the enemies of the condemned and from his friends as well; and who by stationing one party on the right of the block and the other on the left, by his great skill made it appear to each that the result was entirely satisfactory.
The EU will have to do its damnedest to emulate Master Werenfrid if it wants to pull this off.