After taking a short breather in late January-early February, the markets now seem to be back in ‘happy mode’. Whether the news on the economic recovery is good or bad doesn’t really matter. The current convention is that growth acceleration is under way.
That emerging markets had become key drivers of global growth was yesterday’s story, today they don’t seem to matter anymore. Developed economies are back, so we are told. The U.S. is roaring ahead, the euro crisis is over. And, by the way, central banks have no intention to really stop the party any time soon – as inflation is so conveniently low. In fact, inflation is nonexistent since labor markets are not exactly red hot and wages essentially flat. So lucky for us, or at least some of us, that at least the markets want to go up no matter what.
Curiously, not even the long-awaited ruling by Germany’s constitutional court on the ECB’s “outright monetary transactions” (OMTs) or, rather, on Germany and the euro, could rock the boat. The court expressed doubts about the legality of the ECB’s supposedly all-powerful weapon meant to bolster the earlier ‘whatever it takes’ promise, the mere airing of which had ended the euro crisis and kick-started the brisk recovery now firmly under way. ‘So what?’, Mr. Market shrugged his shoulders.
The Financial Times’ Ralph Atkins reports of a banker who was even making fun of those ‘crimson-roped weirdos in Karlsruhe’. For apparently Karlsruhe does not matter anymore to the fate of the euro, only Frankfurt does, especially now that they have sent the case off to the European Court of Justice. The ECB is seemingly safe now to deploy its miraculous weaponry, or do anything it likes, it might even seem. Wondering whether the markets may be either deluded or wise and prescient in ignoring the ruling, Mr. Atkins seems to come down with the verdict that ‘Karlsruhe fallout highlights power of ECB’.
But just how powerful is the ECB, really? To begin with, while the markets may surely choose to do so at their peril, the German government and the Bundesbank can hardly ignore the country’s constitutional court; and quite regardless of what the European Court of Justice might have to say. The court’s move has created fresh uncertainty. The extent of backing of the ECB’s supposedly miraculous powers by Germany’s government and central bank was left in doubt. Markets are said to dislike uncertainty. Not this time though, it seems.
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But perhaps one might argue that all is not lost for the euro, even as Mr Draghi’s bluff looks ever more shaky, given that, at least in principle, Germany’s ‘grand coalition’ government has the necessary parliamentary majority to amend the country’s constitution and thereby put this whole matter to rest.
Why German Public Opinion Matters
But that overlooks the real hurdle in all this: German public opinion. Not only is the constitutional court one of the two holy institutions in Germany, the other being, of course, the Bundesbank. German public opinion is firmly imprisoned by the failure of Germany’s political leadership to explain to the German public that Germany itself has played a key role in causing the unresolved euro crisis. Germans firmly believe that their country is the ‘Musterknabe’ of the euro and that all would be well in the land of the euro if only everyone else became just like Germany – when nothing could be further from the truth.
Germany’s apparent success under the euro depended on others behaving differently. Forcing everyone to behave just like Germany is making matters worse today. Alas, this is not an appealing insight in a country of citizens sharing the belief that all countries of the world can become more competitive at the same time, with ‘competitiveness in stability’ being the German holy grail; just as having all countries simultaneously run persistent current account surpluses is held possible, according to German math and accounting rules.
Nor has anyone enlightened the German public about the catastrophic consequences for Germany itself in case of euro breakup. As a result, Germans may be easily fooled by the fantasy of a ‘Gexit without pain’ – which appears to be the promise held out by Germany’s growing anti-euro brotherhood.
For a start, then, try to educate the German public that quantitative easing is not a synonym for hyperinflation and euro bonds not a transfer union in disguise. The sad reality is that decades of Bundesbank indoctrination can hardly be undone by the stroke of a pen. As plenty of market excitement appears to be in the air already about the ECB’s allegedly coming “quantitative easing”. Whatever the ECB might wish to deploy, which may or may not be much, it will be a balancing act and formidable public relations challenge on the central bank’s German “home” ground. Perhaps Mrs. Merkel might wish to blink, again, and rather dance with Mr. Draghi if outright transfers were the only other option. But if the German public finds the ‘Gexit without pain’ option look seemingly prettier, the euro emperors might end up dancing naked in the end. And would that be such a pretty sight for the markets to get high on?
The fact that the markets are deluded about the ECB’s powers is no more reassuring than the fact that Germany’s political elite remains stuck in a state of denial and delusion. But, then, at least the markets have a magnificent track record in anticipating crises.
Jörg Bibow is Professor of Economics at Skidmore College and a Research Associate at the Levy Institute at Bard College. His research focuses on central banking and financial systems and the effects of monetary policy on economic performance, especially the monetary policies of the Bundesbank and the European Central Bank.