The financial war touches Frankfurt and Berlin

European Parliament. Monetary Dialogue with Mario Draghi, President of the European Central Bank (in the middle) – Adoption by Lithuania of the euro on 1 January 2015. (EP Audiovisual Services).

Early next year the world is going to watch the culmination of the battle between Mario Draghi the President of the European Central Bank in Frankfurt am Main and Wolfgang Schäuble, the powerful German Minister of Finance based in Berlin. In this affair Draghi represents the will of the advanced world financial markets, including the European megabanks but mainly involving the London and New York mammoth financial conglomerates. It’s for them that the major Western central banks have been catering during the last six years. This is the deeper and unspoken purpose of the quantitative easing policies the major central banks of the developed world have been pursuing.

So presently the idea going around the dealing rooms is that the ECB has to take the tally from the US central bank, the Fed, and keep feeding the financial markets, aka the banks, with what they want; that is free of charge and abundant money. On this side of the fence one also finds the money thirsty European governments of the South. This is the direct outcome of the unearthly relations between governments and banks.

The good cause

Allegedly, Draghi’s energies to hand more euro trillions to banks have only one purpose which is widely advertised by governments and lenders, and this is to beat high unemployment and stagnation with a bonanza of cheap money. Theoretically, the banks after receiving a free trillion from the ECB are expected to start financing again the real economy and thus real growth dawns. But not everybody believes all that is a good idea.

So let’s turn to the rival camp which includes only the governments of Germany, Finland, Holland and Austria. As a result, Schäuble doesn’t have equally outspread backing as Draghi. Nevertheless, this Minister of Finance is probably one, if not the one, most powerful man in the European political/economic circles. On many occasions he has overawed even Chancellor Angela Merkel. He is not only the most respected politician in his country, but he authentically represents the interests of the key German business circles. Not surprisingly why Jens Weidmann, the Governor of the German central bank, the Bundesbank, is fighting Schäuble’s war in the ECB against Draghi’s monetarist ideas.

The real issues

Let’s now come down to the details of the latest developments in the combat between the two sides. Last Thursday, during the customary Press conference after the monthly meeting of the ECB’s Governing Council, Draghi came very close to almost announcing, that early next year the euro area central bank could start printing money to purchase government bonds. This is an anathema for Schäuble’s camp. The German politician argues that real wealth and sustainable economic growth cannot stem from the printing machines of the central bank.

Schäuble also advances moral arguments. He insists that supporting the Eurozone governments, by financing very cheaply their fiscal deficits, poses a moral issue and creates strong disincentives obstructing the introduction of structural measures, aimed at increasing competitiveness. In the moral front, the idea is that the quantitative easing rewards also the governments-banks unnatural umbilical cord (the government bonds are to be purchased by the ECB in the secondary markets, of course from the banks).

In this way, this policy supports the wrong government practices of the past, which have led to sovereign over-borrowing in many Eurozone countries, especially in the South. To underline this view, Schäuble introduced in the German Parliament, the Bundestag, the 2015 government budget with zero deficits, for the first time since 1969. He did that despite the outcry in Europe, that Germany should abandon its austere policies and start helping, with more spending, its own and the rest of the Eurozone economies to grow. There are similar strong demands from the United States and the International Monetary Fund, but Germany repels them too.

A personal quarrel

This German intransigence vis-à-vis the criticism from Washington is also in the middle of the Draghi-Weidmann confrontation. The former longs for more quantitative easing up to one trillion euro, while the latter considers it at least extravagant. At this point it’s very interesting to follow their personal quarrel.

In September, Weidmann (minding also for the German lenders) along with every other ECB Governing Council member approved the increase of central bank’s balance sheet by one trillion euro. This means the central bank can purchase from the banks various types of paper ‘assets’. Of course the decision didn’t cover government bonds, but only the less risky ‘covered bonds’ and some Asset Backed Securities.

The Governor of Bundesbank though rushed to call it “an expectation not a target”. In view of that, Draghi last Thursday clarified that this, “It’s not simply an expectation; it’s an intention, but it’s not yet a target. So it’s something in between”. Draghi equally revealed that around this question, “There was a vast majority of the members of the Governing Council, but the decision was not unanimous”. He obviously meant that Weidmann voted ‘no’, yet the proposal was approved.

More money for banks

Last week Draghi went even closer to government bonds purchases, despite the German protests. In reference to the Governing Council of 4 December he said “We’ve discussed, amply, monetary policy measures and today we have discussed the possibility of doing QE (quantitative easing) where the central bank would buy government bonds as one option, but also other types of bonds and other types of assets. We in a sense had started getting more control on our balance sheet already with the ABS programme and the covered bonds programme purchases”.

In the Press conference on that same day when the direct question came from a journalist, if the ECB is ready to buy government bonds without a unanimous Council decision; Draghi was adamant. He said, “But if you look at past experience we’ve taken major monetary policy decisions in a situation where there was no unanimity. So this is what we have to keep in mind”.

Undoubtedly Draghi is determined to press ahead with government bond purchases, no matter what Germany says. But is Berlin quite determined to oppose the President of ECB all the way through? There are indications that the answer is possibly ‘no’. In any case last September the fact that the initial decision for ECB’s quantitative easing of up to one trillion euro was unanimous, means that Weidmann had voted ‘yes’. Now though he wants to restrain Draghi. But the latter seems unstoppable.

Super Mario flies high

Towards the end of last week’s Press conference Draghi was asked by a journalist, if the ECB could buy even Greek government debt. The exchange is very enlightening. Let’s follow it. “And the second question may be hypothetical, but after the Greek’s debt restructuring you said that the ECB would be a creditor like any other, would be pari passu (ranking equally) with other creditors. Can you confirm that it would be the case if the ECB was to buy government bonds of all eurozone countries next year?

Draghi: On the second question let me say let’s first design the QE and then we’ll be able to answer all these questions. Let me also add that we don’t want to cause unintended monetary policy tightening in choosing forms of seniority which would be counter-productive. You all see this point, I believe”.

They all are to get it

Draghi, by saying “we don’t want to cause unintended monetary policy tightening”, means that in the case of Greece or the other problematic member states, the ECB will proceed with utmost care not to exclude them from the QE policy. Obviously, ECB’s cash is mostly needed there. Of course he categorically rejected direct financing of Eurozone governments, as some political parties in Greece and Spain demand (SYRIZA, Podemos).

Understandably, Draghi doesn’t appear ready to print and distribute another full trillion euro, only to support the Eurozone governments to overcome their recession and unemployment problems. As things stand, the banks will be the first to benefit from ECB’s generosity. Clearly the ECB would start buying government bonds in the secondary market (from the banks), because, if it was to buy primary sovereign debt paper issues, this would have been direct government financing. But this is forbidden by the article 123 of the Treaty. Draghi stressed “I want to be absolutely clear on that – the ECB cannot go against the Treaty”.

The banks first to be ‘served’

In short the banks will unload to the ECB the risky government debt paper they keep in the balance sheets. And the difficult question is at what price? Whatever the answer, the truth remains that the ECB is to downpour to Eurozone one trillion euro possibly during 2015 and the direct recipients will be all the major lenders. Still, the amount doesn’t seem to have made the bankers quite happy. Last week, when Draghi let all that to be known, the European capital markets fell noticeably, obviously because they estimated that this trillion euro in 2015 is rather too little too late.

Unfortunately or rather fortunately, this is all Draghi can do for the banks, at least for the time being. Probably one trillion euro is not enough to also ‘help’ the American lenders. Germany will always be there to see that Eurozone won’t let its money to be used by the New York bankers, to extract real wealth from the rest of the world.