Tag Archives: government bonds

Who is the New Greece?

New clouds are gathering over the eurozone.

Ireland has turned to the European Commission to seek support for its revised budget-cutting plan. Olli Rehn, the European commissioner for economic and monetary affairs, is going to Dublin to discuss the new Irish budget cuts, amounting to 3.6 percent of GDP. The move aims at convincing the bond investors that are currently reluctant to buy Irish bonds. The word “bailout” hangs in the air.

Portugal plans a 5 percent cut of public sector wages and an increase in value-added tax (VAT) by 2 percentage points to 23 percent. Greece’s austerity plan is not working as planned, as budget revenue has grown below expectations.

On top of this the US has, with its second wave of quantitative easing (QE2), practically cornered the eurozone. QE2 should bring new upward pressure on the euro, further undercutting the competitiveness of eurozone exports.

All this tell us that the eurozone is still in serious trouble. Even if governments in the periphery manage to escape the bailout scenario for now, in the medium turn their position remains quite unsecure. That is why it’s worth reading the somewhat disruptive analysis of Samuel Brittan (free FT subscription required) on the imminent death of the euro. Mr. Brittan says that the current battle to save the euro resembles the unsuccessful struggle from 1961 to 1967 to stave off sterling devaluation. A cycle of rescues and new crises ultimately ends with acceptance of the inevitable.

Now, I have discussed the possible breakup of the euro before. This is a plausible scenario, but luckily not the only scenario. A breakup of the eurozone will deal a huge blow to the integration dynamic, and should be avoided. Hopefully all Member States understand that, but it remains to be seen whether key eurozone Member States act on this understanding.

Axel Weber Attacks ECB Decision to Buy Bonds

For the first time a governor of a central bank of a Member State has criticized the policy of the European Central Bank. It was no other than Axel Weber, the president of the German Bundesbank. He said that he was critical of the new direction of the ECB monetary policy given the underlying risks. Weber criticized in particular the purchase of government bonds by the ECB, and advocated for quick exit from this purchase. Italian central bank governor Mario Draghi also called for an end of such purchases as quickly as possible, but without openly criticizing ECB policy.

The thing is, both Mr. Weber and Mr. Draghi are candidates for the post of President of the ECB. So the criticism of Mr. Weber can be explained by his differing vision for the future policy of the ECB. However, monetary policy of the eurozone is not decided unilaterally by the President of the ECB, and Mr. Weber is actually criticizing all his fellow governors that have collectively taken the decision to purchase those bonds. Even if we set aside the concerns expressed by Jean Quatremer about the breach of confidentiality, it is apparent that Mr. Weber is frustrated with his colleagues and attempts to shift the debate to the public arena. This is dangerous. The ECB must at all cost remain independent in its deliberations in order to guarantee that professional, and not political considerations, guide its decision-making.