"It's [the Bundesbank] like cream, the more you whip it the harder it gets." Willem Duisenberg 1996
The Bundesbank has been eerily quiet over the last few months despite the growing popular discontent in Germany with European monetary policy.
Five years ago the Bundesbank showed itself to be a vociferous opponent to any monetary easing and two Bundesbank members resigned their seats on the ECB's Governing Council in apparent protest over the ECB plans to buy government bonds. In March, the ECB significantly expanded its QE programme, lifting monthly purchases from €60bn to €80bn per month and at the same time agreeing to include bonds issued by corporations. There are rumours that the Germans did vote against this package but there has scarcely been a squeak of disquiet in public. Could Buba finally be turning soft?
Over the last few weeks I have raised the matter with several top economists at Goldman Sachs and Schroders as well as an ex-ECB economist now employed at Fulcrum. The current Buba President, Jens Weidmann, is more of a pragmatist than his predecessors, however, Buba still harbours concerns that QE is instrumental in building asset price bubbles. Continued ECB support to the EZ governments does introduce elements of moral hazard and diminish pressure for reform. Time and time again in Europe, we have seen desire for reform evaporate at the first signs of any economic sunshine. Some members of the ECB's Governing Council wish to keep the market's foot close to the governments' throats, as this seems the only way to ensure that reforms are rammed through. This could turn out to be a dangerous game to play.
Interestingly, the political attacks on the ECB from Germany and elsewhere in Northern Europe has reawakened Buba's, and by extension the ECB's, desire to be seen as independent. Buba has a long history of resisting political pressure, hence Wim Duisenberg's quip about cream. Curiously, Buba seems to revel in the association and the Duisenberg quote can even be found on its own website
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