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Last week the European Central Bank (ECB)
announced what many around the world had hoped it would: A plan that would
allow the Bank to “do all it takes” to support the euro. Not
surprisingly, stock markets in the EU and US rose strongly based on the
feeling that the ECB has now joined the Fed in a massive drive to reflate
their respective economies by means of money creation. Many mainline
observers and commentators heralded the new ECB position as a fundamental
defeat for the Bundesbank, Germany’s central
bank and a strong believer in sound money. Reality, however, appears to be a
little different.
The deal actually contains many concessions to
the German point of view. Perhaps the most important of these was the
dropping of the ECB’s previous aim to “cap” the bond yields
of euro-zone members. Instead, the previously open-ended “buyer of last
resort” commitment, to keep bond yields low of troubled euroz-one member nations, was replaced by greater
selectivity and far stricter conditions – German style. There were
other major concessions as well.
First, any euro-zone member nation that seeks ECB
support for its bonds in the secondary market will have to make a formal
application. Naturally, such a public application will likely come with
political costs, embarrassment and even stigma. Given that asset prices, for
stocks and bonds for instance, are so influenced by perception, these
pressures will dissuade many member states from going down this road.
Second, any applicant country will have to agree
to Germanic-style deficit reduction and economic restructuring programs,
which likely come with huge political costs and short term economic pain.
Third, ECB secondary market support will be
granted only if the somewhat underfunded European Financial Stability
Facility (EFSF) and European Stability Mechanism (ESM) commit their funds in
parallel. The Bundesbank has long held that the ECB
should not be permitted to abuse its power to create synthetic money without
spreading the cost to the rest of Europe and internationally, via the IMF.
Fourth, the ECB’s support is limited to
bonds with a maximum of three-year maturities. Eurozone members in trouble
will never overcome their excessive debt problems by solely borrowing
short-term.
Finally, all ECB bond purchases will be executed
exclusively in the secondary market, thereby achieving the German aim to
preserve the ECB that forbids direct financing of any euro-zone member by
other members.
While many have surmised that Germany has yielded
to the easy money Keynesian demands of its fellow members, it appears that she
has been singularly successful at imposing its financial will on the rest of
the euro zone.
The significant concessions Germany received have
gone largely unreported in the mainline media. Far from offering an instant
reprieve to the debtor countries of the euro zone, the new package will make
German-inspired austerity more likely. This would therefore make continued
recession for Europe as a whole more likely, at least in the short term.
This, in turn, will make central banks both in Europe and the America’s
more likely to continue to flood their economies with synthetic money. This
should be good news for precious metal investors.
Economic weakness that persists in Europe may in
turn encourage European politicians and even voting populations to accept ever
greater German political control in return for what will be seen increasingly
as direct “survival” funding from Germany. The main short-term
implication of Germany’s success is likely continued recession as
austerity takes its toll. The long term results of greater German control of
the Continent are much harder to predict.
Any investor trying to understand the political,
economic and financial machinations of the euro zone and the European Union
would be well advised to focus on German actions, often hidden under
pronouncements by the ECB. Most often the positions and actions that really
matter are overlooked completely in the mainline media.
John Browne is a Senior Economic Consultant to Euro Pacific Capital.
Opinions expressed are those of the writer, and may or may not reflect those
held by Euro Pacific Capital, or its CEO, Peter Schiff.
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