Draghi needs to make his case to the German people for buying the sovereign bonds of the failing governments in the Eurozone. It is very important that he persuade the German people, before all others, to allow this action not because Germany is the paymaster of the Eurozone but because of the history of Germany.
In the United States, Americans are haunted by the Depression. My two grandfathers were both conservative Catholics, but they voted for Democrats until the day they died. Why? Because in their minds, the Republican President Hoover caused the Great Depression. So for decades, they continued voting against the party with which they shared more in common.
Germany has a similar dynamic with its depression in the 20’s, otherwise known as hyperinflation. When people lose trust in the currency of the nation, the nation’s politcal system dies. What replaces it in its wake is anyone’s guess, but it will be reactionary, populist and angry.
During the 1920’s, Germany had huge war debts and reparations to pay. The Allied powers stripped Germany of its industrial machines, occupied its industrial Ruhr valley heartland and took a most of its coal from the Saarland. Germany did similar things in Belgium and Northern France during the war. Allied retribution may have been deserved, but it was foolhardy. Germany had all of these debts and no way to pay them.
What can a broke government do? With all of its overhanging debts, Germany was cut off from international bond markets. So it did what the ECB wants to do now; it had the Reichsbank, the Bundesbank predecessor, print money to purchase German government bonds. The money printing started a vicious circle. The currency would drop in value causing the government to need more money to maintain the budget. Then, the Reichsbank would print more currency driving its value down further creating the necessity to print more currency.
Eventually, the Germans returned to a tight money policy, which simultaneously stopped the hyperinflation but caused a deep depression that led to Hitler taking power. The Germans learned their lesson. To the German public, a stable currency is the bedrock of a strong government that resists political extremism. That’s why they still hold their former currency, the mark, in such high esteem. The mark helped the Germans establish a stable political system and powerful economy in the wake of World War II. They need to be persuaded that the euro will be what the mark was.
Now you can see why the Germans are so viscerally opposed to money printing to purchase sovereign debt. To them, debasing the currency will lead to a hyperinflation-caused destruction of the social fabric of the nation that allows political extremism to fester.
Enter the ECB’s bond buying plan. This plan is merely the embodiment of the what the cult of Europe wants: a United States of Europe encompassing a full political and economic union. The European public has already voted down additional incursions of Europe into the sovereignty of their nations, but the politicians press on.
Draghi and Merkel are members of the cult of Europe. To them, bond buying is a way to wring additional political concessions from the distressed nations. These concessions primarily revolve around these countries relinquishing sovereign control over their banks and budgets in exchange for money, which Draghi will graciously print. When Draghi says that ECB is non-political, he is lying, for it is the most political of institutions. Politics runs on money, and the ECB has a printing press.
Driving Europe to a closer political union is not necessarily a bad idea. It is just that such a union needs to be debated and ultimately either approved or rejected by the voters. What Merkel and Draghi are attempting to do is achieve this closer union by bribing the distressed for their support in exchange for money to support their governments. This is why Draghi is writing Op-Ed pieces to the German public with Merkel’s tacit support.
Bundesbank President Jan Weidmann knows what the game is and also knows the ramifications of the bond buying program. This is why he is speaking out against the plan. Note that Merkel will not oppose Weidmann publicly. The Bundesbank is like social security to Americans. In both cases, the people believe that each political program protects them from the horrible effects of the Great Depression. American politicians do not speak of eliminating social security, because they will quickly lose credibility with their constituents.
The Bundesbank holds the same sway with the German public. To them, it stands between them and the politicians who wish to print money and cause another hyperinflation. You rarely find a German politician opposing the Bundesbank. Because of its no-nonsense, tight-money approach since its creation, it maintains the utmost level of credibility with Germans.
Draghi needs to persuade the German public that bond buying and bailouts are in the best interests of the Germans. He points out correctly that Germany derives economic strength from its euro membership, and that they cannot let the euro die. Therefore, they must allow him to bailout sovereigns to prevent a euro collapse.
Bond buying does not cure a distressed sovereign. It can only serve as a temporary measure to keep the sovereign afloat while necessary economic reforms are implemented. The issue here is that bond buying alleviates reform pressures in the country so that they never undertake the necessary reforms. Greece has been being bailed out for years now and has made very little progress in fixing its economy. What starts as a temporary measure quickly become permanent.
The endgame here is not good for Germany whichever way you look at it. The ECB will either print money devaluing the currency and causing inflation, or nations like Spain and Italy will revert back to their national currencies creating a de facto default by devaluation. In each case, the costs to Germany are enormous.
The politicians in Germany need to be honest with the public about the costs and consequences of these policies, or the eventual backlash will get them all kicked out of office, or worse.