It was widely reported last week that the Bundestag had “ruled out” or set a “red line” against any further ECB intervention in the market for government bonds. This is nonsense, and based on the common practice of not reading German. The vote, which for a start was a vote taken after debating a statement from Angela Merkel and not anything more concrete, expressed the Bundestag’s agreement with a text containing three statements. The first of these is under the heading “Sachverhalt” (Factual Background) and summarises the current state of play with regard to the EFSF.
The second is headed “Vor diesem Hintergrund stellt der Deutschen Bundestag fest:” (In the light of these facts, the Bundestag understands/recognises/realises) and contains the statements that the Bundestag (I’ll use the abbreviation, Bt. from here on) knows that the EFSF must be used more efficiently, and that it is aware that leveraging it carries a risk, that the existing instruments will be used and that the EFSF shall only be used under the terms of the treaty creating it, and finally, that “with the entry into force of the EFSF, the continuation of the ECB Secondary Market Program is no longer necessary”.
Note that, well, the opinion of the Bt. is a jolly one to have. It explicitly doesn’t say that “The ECB SMP shall not be continued”, and of course the ECB is banned by its charter from accepting any instructions from politicians. Also, this clause – which is the one that was doing the work – is in the first section of the resolution, which merely takes note of its content as facts.
The second section begins very differently: “Der Deutsche Bundestag fordert die Bundesregierung auf:” (The Bt. calls on the Federal Government to…). You will note that we have moved from merely taking note of the facts and expressing an opinion, to a demand from the legislature, which is the supreme power in the German constitution, that the executive do something. There is no reference to the SMP in this section of the document. The only reference to the ECB in it refers to the fact that it is forbidden to buy government bonds direct from government, rather than buying them in the open market or accepting them as collateral on the discount window. This neither rules out continued ECB intervention, nor does it even rule out the EFSF buying bonds from governments and then selling them to the ECB (or, if it gets its bank licence, posting them for rediscount).
On Friday, of course, the rate on Italian paper hit 6% and, as has repeatedly happened before, the ECB presses rolled into action. In fact, it seems that the ECB is operating an implicit decision-rule that it will buy whenever the rate on Italian debt hits 6%. There’s a nice discussion here of the semantics of Merkel’s use of the words “firewall” and “Schutzwall” – the most common meaning of the first is something which selectively permits access to a network, and the second manages to combine both Nazi and East German connotations in one sweeping infelicity.
But it seems to me that the ECB is operating something more like an electric fence. Cows will try to push through the electric fence a few times, unwisely prodding it with their sensitive noses and getting zapped. But then they will leave well alone. The question is how often you need to zap a bond trader before they get the point.
UK shadow chancellor, Ed Balls, for one, got the point faster than either the cows or the bond trader:
I think the most important thing in the markets today is that the European Central Bank has actually intervened and bought Spanish and Italian debt and that shows that the ECB is doing its job. But fundamentally will there be the scale of financial backing for sovereign countries like Italy? We don’t know. What will the actual details of this plan be? We don’t really know. What is going to be the bank recapitalisation? We don’t know. Will the European economy grow next year? That’s really in doubt…I don’t think it’s sensible for Britain to make bilateral contributions to a euro bailout fund. The ECB should be doing this job.
Meanwhile, perhaps we should all worry more about the fact that the European Council communiquÃ© promised “very specific measures” to boost competitiveness and growth, without naming any very specific measures. It’s reminiscent of the famous company launched during the South Sea Bubble to “carry on an enterprise of great advantage, but no-one to know what it is”. But this is the opposite – the South Sea Anti-Bubble, even if the original South Sea Company was in fact a device to inflate away government debt.