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Monetary Schizophrenia in Germany

A pact with the devil—that’s now the official metaphor for the “unlimited” bond purchases that the European Central Bank has promised in order to bail out the holders of decomposing Eurozone debt. Bundesbank President Jens Weidmann himself referred on Tuesday to Goethe’s Faust, a play based on the ancient tale of a scholar who sells his soul in exchange for knowledge and pleasure. Part Two of that play—and it ends tragically—sketched “the core problem of today’s paper money-based monetary policy,” Weidmann said, and the “potentially dangerous correlation of paper money creation, state financing, and inflation.”

But it’s too late. Germany has cracked in two—and part of it has eagerly embraced that pact with the devil. The ZEW Indicator, which measures investor sentiment, jumped by 7.3 points, the first increase after four months of sharp declines. And the ECB’s promise? It “contributed to the improvement,” said the press release. Even German investors love all that money sloshing through the system—look at the stock market!

Yet there is the other side: Germans in the real economy. They’re losing faith in the euro, the bailouts, and the ECB: 65% now feel that they’re worse off under the euro than they would have been under the Deutsche mark. A trend that isn’t expected to turn around anytime soon.

And both sides clashed. Over the weekend, Finance Minister Wolfgang Schäuble, who supported the ECB plan, raked Weidmann over the coals for “semi-publically” debating his opposition to it. Until that moment, Weidmann appeared to have the government’s lukewarm backing. But that has evaporated. Chancellor Angela Merkel then had an opportunity to back Weidmann but ostentatiously didn’t. She allowed merely that his comments would be welcome—reducing him from an important advisor in the government’s financial decisions, the traditional role of the Bundesbank, to a pesky commentator.

And comment he did—at Tuesday’s Goethe Symposium in Frankfurt. “Today’s money isn’t covered by any tangible assets. Banknotes are printed paper; mavens among you know that in the case of the euro, it’s actually cotton.” Central banks “had been created in the past to give regents free access to seemingly unlimited financial means,” he said. With catastrophic consequences. Fly in the ointment: he failed to point out that it’s now banks, not “regents,” that luxuriate in “free access to seemingly unlimited financial means.” Nevertheless, the independence of central banks is important “to prevent state appropriation of monetary policy.”

And the best protection against the temptations of monkeying with monetary policy? “An enlightened and stability-oriented society.” Hence it’s crucial that “central bankers, who manage a public good—stable money—justify themselves publicly,” he said—a vigorous stab at Schäuble for his efforts to gag him.

But Weidmann, isolated at the ECB and now in Berlin, enjoys broad and vocal backing from other directions. One of them is his predecessor Axel Weber, who’d resigned from the ECB and the Bundesbank last year in protest over the bond purchases going on at the time—and has since become chairman of the board of UBS. From Basel, Switzerland, he said that he was afraid that the low interest rate policies and the expansion of the central bank balance sheets would lead to “new turmoil in the financial markets.”

Not since World War II had central banks interfered so massively in the economic cycles, he said—with an eye not only on the ECB, but also on the Fed, the Bank of Japan, and other central banks that are printing money hand over fist. While he conceded that the ECB’s measures brought some calm, “monetary policy cannot solve the fundamental weaknesses in the structure of the monetary union.” But “the difficult solutions, the structural solutions, are at this time not on the political agenda.”

Merkel, who is desperately trying to hang on to power and become one of the very few leaders to survive the debt crisis, has been playing it both ways. On one hand, she’s supporting the ECB’s bond purchases, hoping to benefit electorally from the miracles they can perform short-term for the financial markets. On the other hand, she’s trying to hang on to voters who are giving up on the euro; hence her emphasis on “strict” conditions for the ECB’s bond purchases and bailouts. The election is next year, and so far, voters appear to go along with her.

When the German Constitutional Court nodded with a stern smile on the ESM bailout fund and the Fiscal Union treaty, politicians breathed a sigh of relief. The German revolt was over. But steam is billowing once again from the decrepit pipes of the Eurozone, this time in France, where the Fiscal Union treaty has been silenced to death.  Read.... A French Rebellion Against Unelected Bureaucrats: “European Coup D’Etat And Rape Of Democracy”

And here is the hilarious but brutally truthful video, now practically a classic, from down-under comedians Clarke & Dawe that in 2.5 minutes summarizes better than anything else the entire Eurozone debt crisis.

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Reader Comments (4)

I am a man born in basque country. I disgust what is going on in ECB closed doors. Having said that, those greedy german , who 12 years ago built their run down economy at zero rate interests, seem to have forgotten all that time. I know that many basque factories survive as german factories supplyers. Despite that I would enjoy a Europe Community of regions where so harmful politicians had no option but to work in private sector. These financial terrorists are selling out all Europe to bankstera at a very low price with the help of the FED and american banks.

Thank you.
September 20, 2012 | Unregistered Commenterjuankar.
After reading this article a few things sprang to mind, firstly please understand the condition of schizophrenia before you compare it to a split mind, and to make the glaringly obvious comparison between pacts with the devil and mental illness shows a shallow understanding of many things, including mental illness, the devil and God. You cannot mention the devil without mentioning God. Everyone has a boss, someone they are ultimately accountable to, even if they are unemployed.

The euro has many problems that can be rectified, of course the 100 ton dead elephant in the locked room is not the euro area, regardless of German monetary policy, it is in fact the United Kingdom and America. Euro debt problems are like a flea , UK and American debt problems are like a planet orbiting a dead star containing many diverse creatures that sometimes have fleas! And if you want to right an article about pacts with the evil one, how about you do so about the United satanic Kingdom and the United States of satan. No satan you don't get a capitol S.

Debt is debt, when you cannot pay back the debt there are problems. A quick further two points to add, blessed be Jesus who's blood has paid all debts, and has removed the need for human sacrifice forever, even though they kill innocent children in the name of their god, what's done is done, his blood was split and he loves you. I know that because he loves me, and trust me if you knew me you would think it was impossible.

Last point, I once worked in a hugely successful company who had an Italian HR manager, at one point during one working day a work college, an equally attractive arabian girl, was collecting flowers and in a bit of a rush, as she ran past the Italian HR manager, that beautiful manager looked her in the eye and said
"run florist run"

I found that funny.
September 20, 2012 | Unregistered Commenteropinon
Opinion - thanks for your comment. I assume you understand that Bundesbank Prez Jens Weidmann made the comparison to Faust, and his pact with the devil, not me. If I made that comparison, it would be no big deal, and people would dismiss it. The fact that he made that comparison is significant. And it shows where he stands.

I'm not sure how long he can survive in his job. He is very popular in Germany, and if he resigned, under whatever circumstances, I think it would be a negative for Merkel.
September 20, 2012 | Registered CommenterWolf Richter
Sigh. Frau Merkel is indeed trying to have it both ways. Reminds me of the passage in Revelations: "Because you are neither hot nor cold, I will spew you out of my mouth." The taste of this pandering woman is bad, indeed.
September 21, 2012 | Unregistered CommenterGavrikon

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