ECB and Germany: The Struggle Ahead with the Euro zone

Thanks to Peter Schrank for cartoon

As the European Summit draws closer in Brussels with the ECB meeting on Thursday and the EU Summit on Friday, expectations are growing that the outcome will lead to an interest rate cut and increased bond buying levels by the German based European Central Bank (ECB).

Over the past several months, international calls have grown louder for the ECB to intervene more aggressively by purchasing bonds from indebted countries such as Italy and Greece to avoid  debt contagion that is capable of engulfing the entire Euro zone.
As the strongest economy in the European Union with the greatest leverage over the ECB, Germany holds the key power cards within the Euro zone. Germany has the economic clout to set the tone and the pace for how the ECB responds to mounting sovereign debts in Europe and the rescue plan.
Germany has shown past reluctance to buy more government debt-bonds through the ECB, citing the risk of inflation which many analysts have down played  or dismissed. However, there are some looming risks ahead for Germany if they decide to aggressively buy more government bonds from indebted Euro zone nations.
Brendan Brown, chief economist from  Mitsubishi UFJ Securities International, met with David Tweed and Linzie Janis on Bloomberg’s First Look and spoke about whether the ECB under newly elected ECB President Mario Draghi may go ahead and more aggressively buy bonds from indebted European nations. When asked if the ECB were to go down the route and buy more government bonds, how much would it play and effect the solution to the euro crisis ? Brown answered the question by making two points:
1) ” If I were a holder of Italian bonds, and the ECB moved in and began buying government debt through Italian bonds, it would not make me want to  place a higher price on the bonds. In fact, it would want me to place a lower price on them at the end of the day because the ECB would be a preferred creditor and you may get squeezed more and it may not even be more effective. “
2) ” If the ECB rarely goes down that route the ECB President Mario Draghi and Tim Geithner wants it to do and aggressively buys government bonds,  there is a long term danger that ECP President Draghi and the ECB may become the most hated man and hated institution in Germany and you will get such a strong reaction in the German political system that it could be a dangerous development for them and all of us.
John Markman from Market Watch recently wrote a new article, “End Time for the Euro Zone” and cited several reasons that the Euro zone is facing increased pressure because of their growing sovereign debts.
Markman used some research from Stayajit Das, an Australian analyst who analyzed some of the raw data that is weighing on Europe’s solvency.
Here is the European breakdown:
1) European government and banks need 1.9 trillion euros to refinance maturing debt in 2012
2) Italy needs 113 billion euros in the 1st quarter and 300 billion over the year
3) Euro banks need 500 billion in the 1st half of 2012 and 275 billion in the second half.
* This means that they need to raise 230 billion euros per quarter in 2012 versus 132 billion per quarter in 2011.
* Yet since July 2011 Euro banks have only been able to raise 17 billion euros compared to 120 billion in 2010.
European banks are already facing considerable pressure due to debt write downs in Greece and liquidity issues with capitalization limits and renewed fears of credit downgrades.
As Europe’s leaders meet together in Brussels, Germany will soon be called upon to play a crucial role towards providing a “firewall” around Europe’s rising debts.
Angela Merkel and Nicholas Sarkozy have already called for stricter fiscal governance for all of the 17 member of the European Union. But it is true that passing new austerity measures and developing a budget is best accomplished in the parliaments of the other member nations rather than a one day EU Summit in Brussels.
One of the key issues that will  impact the passage of new stricter austerity measures in the future is the issue of sovereignty and a country’s right to determine their own future and operating budget in the confines of European Union.
Since the implications of one wealthy country assuming the debts of other neighboring nations has never been examined or researched, it remains to be seen whether the Germans are willing to aggressively move forward and make a strong and concerted effort to reduce the debts of weaker Euro zone countries through an ECB’s bond buying program. 
In the next few days, Germany will signal what type of risk appetite that have for buying European debt and restoring the financial health of Europe.
About Johnathan Schweitzer 1565 Articles

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