23 September 2012

Wolfgang Münchau: Draghi is the devil in Weidmann's eurozone drama

In his FT column, Münchau says that Draghi is sabotaging the euro through the most effective means he has at his disposal – by reinforcing people's innate fears about the common currency.

The German economic community and Mr Weidmann have never accepted the theories underlying the policies of modern central banks. This is one of the reasons the ECB ended up with an analytical approach that has “two pillars”: one that looks at economic dynamics and shocks, the other at “monetary trends”. The former pillar was designed to be relevant for policy; the latter to pretend the ECB stood in the tradition of the Bundesbank. I shudder to think how a debate on nominal income targeting would play in Germany.

It should be clear by now what game Mr Weidmann is playing. He is sabotaging the euro through the most effective means he has at his disposal – by reinforcing people’s innate fears about the common currency. He cannot outvote the governing council of the ECB. He is in a minority of one. He also knows that he cannot overturn the ECB’s policy through the legal route. Anybody who decided to drag Mario Draghi in front of the European Court of Justice would lose. Mr Weidmann no longer has any pull over Angela Merkel, the German chancellor he once advised.

But make no mistake: he is very effective in encouraging a creeping euroscepticism among Germans. In doing so, he may well succeed in undermining the chance of the euro’s survival because euroscepticism limits the German government’s political room for manoeuvre. The situation reminds me very much of the way the political debate in Britain turned anti-EU in the early to mid-1990s.

It was probably inevitable that this long-lingering clash of economic cultures has finally come out into the open. As Europe’s recession gets worse, the ECB will soon have to adopt similar measures to those used by the Fed. It may even end up adopting a nominal income target, explicitly or implicitly, for the simple reason that the crisis in the eurozone is ultimately insoluble without annual nominal growth of at least 5 per cent. And I cannot see the Bundesbank support for any of it.

Full article (FT subscription required)

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