Monday, August 27, 2012

My letter to the Financial Times, London re: Stick to the Law!

Subject: Stick to the Law!
Date: Mon, 27 Aug 2012 09:54:34 -0400

Re: The ECB must still do its bit to help solve the crisis by Wolfgang Munchau

The European Stability Mechanism cannot indemnify the ECB for any losses. I would suspect that ECB legal constraints will ultimately outweigh the credibility of an informal pari passu pledge. There is a law against monetary financing of sovereign debt. There is, however, no law against lying. Of the constraints, the first is political. If you push this too far, you may simply replace a southern European debt crisis with a northern European political crisis. The German establishment is already howling. The second constraint is legal. A legal dispute, especially in Germany, could endanger the credibility of the operation. It is one thing for the Bundesbank to disagree with an ECB policy. It is quite another for it to say publicly that Mr Draghi is breaking the law.On Sunday, Jens Weidmann, the Bundesbank president, issued the sternest warning yet that he opposed large-scale bond purchases. He said they came close to outright debt monetisation.

The above quote from Munchau's column illustrates the enormous pressure upon the ECB to violate its charter that prohibits it from monetizing sovereign debt. Manchau obviously chafes at this restriction as much as Draghi, because he calls for the ECB to purchase corporate bonds, apparently favoring any borderline legal method that will pump more fiat euros into the money supply. Pardon my naivete, but wasn't the purpose of the European Monetary Union to instill Bundesbank-like discipline on all of Europe? It seems to me that, apart from the theoretical advantages of sound money, the history of post war Europe's economic recovery would validate the Bundesbank's relative hard money policy as the better system for the long run.

Patrick Barron

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