Yesterday we wrote about how Monday will prove to be an important day for the Eurozone crisis, as we will see if the ECB is going to intervene to suppress Italian yields, now that Berlusconi has quit.
Obviously the drumbeats are growing louder for the central bank to become a lender or at least yield-setter of last resort.
But this is the kind of thing that makes Germans sick to their stomach, as they hate the idea of money printing and inflation and rescuing governments that have been profligate.
So they’re pre-emptively revolting.
The FT has just posted an interview with Jens Wiedmann, the head of the Bundesbank (Germany’s central bank). The whole thing is a huge pushback against the idea that the ECB should do anything except ensure price stability.
Here’s a few key questions:
FT: In principle, the ECB could buy up a lot more bonds and keep the yields where it wanted …
JW: We have a mandate and we have to stick to our mandate. Fixing an interest rate for a country is certainly not compatible with our mandate. You would guarantee a certain refinancing cost for a government and you could not argue that this was not monetary financing.
The stated purpose of the SMP is to cope with dysfunctional markets and it’s not to ensure a specific spread for a specific country.
FT: Is the Italian bond market dysfunctional at the moment?
JW: What we see is a reaction to the political problems in Italy and the lack of implementation and I wouldn’t consider that as dysfunctional. You can argue whether there’s an overreaction or not, but the main reason is the political situation and the lack of implementation in Italy – and that we can’t fix.
FT: What, then, is the role of a central bank in a crisis like this?
JW: The role of the central bank is clearly defined. It is to ensure price stability and to support the competent authorities in ensuring financial stability. With this formulation, it is clear that the responsibility for financial stability lies with governments. The EFSF [the European financial stability facility] or the ESM [its successor, the European stability mechanism] are ways to buy time and, in that sense, are sensible instruments.
And it goes on. The Germans ultimately see this as just a problem of confidence and too much debt, and don’t see the ECB playing the role of a government funder. If the ECB does decide to intervene in a big way at some point, it’s going to be against the furious screams of the Germans