Berlin vs Boston in battle for survival of European currency
A German court ruling against the ECB's actions could reignite the euro crisis
WELL, how was I to know? But it stuck in my head, which suggests it bothered me.
What did? The rapid rise in broad money supply in the eurozone during the bubble, that's what. Before you turn the page, we are not getting into that. We are getting into – or trying to get into – what matters, and what doesn't.
It wasn't easy then, and it isn't easy now. The problem back then was that a lot of expert opinion held that money-supply figures did not matter. But that was an Anglo-American view. It was not the view of the European Central Bank.
Au contraire. Money supply was a specific target for the ECB, and was supposed to grow by no more than 4 per cent a year. But the ECB kept finding excuses why increases of 12 per cent were nothing to worry about.
I am still none the wiser about how much money supply (bank deposits, loans and a few other things) matters; but neither are the experts. We do know, however, that things were going badly wrong in the eurozone and that the ECB did nothing about it. Tightening up on money growth would have been the right thing to do, even if it had been for the wrong reasons.
The arguments are far more intense in the wake of the crash than they were in the 2000s. Last week, they were even being aired before the German supreme court.
The case concerns the promise by the ECB to buy government loans (bonds) from their owners at what it regards as reasonable prices. Purchasers of bonds can, therefore, assume that their losses will be limited in the event of another euro panic.
Various complainants have asked the German court to rule that this Outright Monetary Transmission (OMT) idea breaks the ECB's own rules, as well as the German legal ban on central banks lending money directly to governments.
Its importance can be gauged from the fact that witnesses included finance minister Wolfgang Schaeuble, Bundesbank president Jens Weidmann and German ECB director Joerg Asmussen. Mr Weidmann is against the scheme, while the other two are, broadly, in favour.
Any threat to OMT could reignite the euro crisis. Those in the know say the court is unlikely to ban it, but it may once again warn that there are limits to its tolerance of central bank actions, thereby making it more difficult for the ECB to act.
There are now two parallel universes when it comes to monetary policy. In the USA, markets have suddenly got jumpy about the scale of the Federal Reserve's creation of money.
The price of bonds that pay out according to the rate of inflation fell, on the belief that the Fed will soon slow or stop the printing presses.
The US economy is in full recovery mode – although not enough to make a rapid dent in unemployment – and some feel that is the right time to go easy in the stimulus.
Others disagree, and disagree vehemently. On this side of the Atlantic, the main protagonist for continued central bank stimulus is Financial Times columnist Martin Wolf. In last week's episode, his arguments were challenged by Peter Warburton, director of the UK's Economic Perspectives Ltd, who saw "an abundance of supply-side inflation and a real and present danger of fiscal inflation".
None of this will even enter the hallowed precincts of the courtroom in Karlsruhe. There, the "real and present danger" is that the ECB might do something similar to the Fed and Bank of England, and the question is how to stop it.
One does not have to take sides in the great inflation/austerity debate to worry that, in terms of monetary policy, the world's two biggest economic units see the world in two completely different ways.
Results to date certainly seem to support the American view. But it is worth remembering that the financial crises in the EU periphery are by far the worst in modern history (and Ireland's was the worst of all).
A federal government would have struggled to cope with such difficulties in its constituent states and the eurozone does not have a federal government. All it has is a central bank, and even that is now open to question.
In the absence of a real federation, eurozone issues become competing national interests. The ECB's mandate may forbid financing governments, but it allows the bank to put the interests of the euro area above those of governments – even governments of the largest countries.
This is what the ECB signally failed to do. It ducked that duty when Germany was struggling, the periphery bubbling and money supply exploding. Now it is being forced to make the opposite mistake and lacks the credibility to resist. That is bad for the central bank, but even worse for the currency as a credible project.