The Bundesbank’s proposals possess both rhyme and reason!

I refuse to believe that the Bundesbank is staffed by idiot-savants. So, how should we interpret its quaint proposal that Eurozone member-states facing default some time in the future should resort to a one-off (wealth and income) tax?

One interpretation is of the idiot-savants variety. For example, Karl Whelan tweeted: “Bundesbank one-off wealth tax proposal an excellent idea for those who feel no fiscal crisis is really complete without a good bank run.”

My interpretation, based on a radical reluctance to believe that Germany’s Central Bank is populated by fools, is quite different. Their proposals possess both rhyme and reason. Alas, one has to dig deep to discover them.

Last April I was stunned to read Mr Jens Weidemann’s deposition at the German Constitutional Court (December 2013). In that document the head of the Bundesbank aimed his slings and arrows at the ECB’s ‘presumptuous’ attempts to save the euro (Draghi’s “we will do whatever it takes” June 2012 pronouncement, as well as the OMT announcement that followed a couple of months later). Given that Mr Draghi was facing, in the summer of 2012, the starkest of choices (intervene to save the euro, in the fairly minimalist manner that he did, or let the currency of which his organisation is the sole custodian collapse), what was Mr Weidemann up to when disputing, at the lofty setting of his nation’s Constitutional Court, Mr Draghi’s, and the ECB’s, basic right (and obligation) to try to save the Eurozone?

My answer (in this post) was:

“A close reading of the Bundesbank’s constitutional court deposition leaves us with only two possible interpretations. One is that Mr Weidmann does not ‘get it’; that he cannot see that a Greek exit in 2012, or an Italian exit in 2014, would spell the end of the Eurozone; that he cannot see that Mr Draghi’s OMT announcement played a crucial role in stopping the disintegration of the common currency last year; that he has no appreciation of the catastrophe facing good, solid Spanish and Italian enterprises due to the broken down interest rate transmission mechanism. The other is my interpretation: Mr Weidman can see only too well that the above hold unequivocally but is tabling this deposition at the constitutional course knowingly and as part of a strategy that leads the euro to a death by a thousand, almost silent, cuts.”

The most recent Bundesbank proposal would, if adopted, (and as Karl Whelan succinctly implied in his tweet) create conditions of a slow-burning capital flight from the Periphery that, at moments of heightened fiscal stress, would quickly turn into an exodus. I have no doubt that the Bundesbank’s higher echelons understand this. But this is precisely why they are proposing the one-off tax: because the Bundesbank’s long term aim has always been a smaller Eurozone, preferably unshackled by any member-state west of the Rhine and south of the Alps. 

 

36 thoughts on “The Bundesbank’s proposals possess both rhyme and reason!

  1. It’s been clear since the summer of 2012 that Germany lost the option of exiting the Euro (or threatening to do so at every bargaining opportunity). It was made clear to them by China, that any move by Germany that will jeopardise China’s investment in Euro (Grexit) will automatically mean they will lose access to the Chinese market. That single fact was the most important deciding factor that convinced Germany to allow Greece to remain in the Euro.

    Up until then, the issue was open, despite pressures from some European countries and the US that were mostly founded on Geopolitical interests and historic ties etc. They were willing to take the risk of Grexit since they saw no real threat to Germany. They only saw possible gains and maybe the end of the poker game in the best possible way for them.
    It was China that gave them a clear and quite comprehensible reason/threat of why Greece should remain in the Eurozone, for Germany’s sake.
    It was a big decision for Germany, because it was a defeat! It meant they had to commit to the Eurozone and furthermore everyone would know it.
    For the time being Germany is in a tricky situation in which they have to weigh their moves very carefully.

    Of course the should be furious with Draghi’s intervention. He cost them an excellent opportunity to end with the Eurozone in a clean way without Germany getting the blame for it. Now it’s much more difficult to do so.

    For know I think they will try to find their bargaining position again in Europe (how many months was Europe on hold because of the German elections? It’s really hilarious. Do you think it was for no reason?). They will most probably try to pretend nothing is changed but I think the reality is that Germany lost quite a lot of freedom in the choices they make regarding the Eurozone.
    At least for now…

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  3. I don’t share your conspiracy theories but have to admit that you are rather ingenious in creating more and more absurd ones.
    At least as long as Germany is the target.

    I have one for Greece: as everybody knows, she is the totally innocent victim of sinister Germans who ordered her to live for many years far beyond her means on borrowed money.

    • So you opt for the alternative explanation: the BBC is run by idiots. Your pick (for there is no third explanation)

    • Actually, there is.

      Chomsky among others has offered the argument that the US often poses as an irrational terrorist state running amok in order to maintain its geopolitical supremacy with minimum cost.

      BB’s (and the German government’s) behaviour and rhetoric in the past few years has often been consistent with such a stance.

      So, it may be that BB might actually try to keep the EZ as is; no change in membership, no change in the rules. For this to happen longer, they must establish supremacy (with terror among other methods) so that they remain in control of the debate for change, which they have no intention of concluding (again, re Chomsky, much like the US has controlled the Middle East peace process, fully indending never to bring change).

      Who knows these things? …

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  5. Greece leaving on its own could be construed as a reason to chuck Greece out of the European Union, as all countries that signed up to the Maastricht Treaty agreed to eventually join the common currency, so leaving it could mean Greece is in violation of the treaty and out of the EU too. Given that Greece recieves like 3.5 billion € more back than it pays into the EU coffers, cutting that off would ensure that Greece would go down in flames after leaving, so would be the bad case to contrast with Ireland, while the EU members had 3.5 billion € annual to distribute to more “worthy” members or associates like Ukraine maybe?

  6. When Ireland finally woke up and wanted to burn unsecured and unguaranteed bondholders, they were told not to. Furthermore, that, if they tried, their ELA would be cut off and that they faced the prospect of their banking system collapsing.

    Last year another episode of the eurozone financial crisis blew up, this time it was Cyprus. What was Cyprus ordered to do? I was ordered to “bail in” bondholders and “bail in” depositors. Leaving aside the fact that a lot of these were perceived to be Russians and an element of naked opportunism was involved. The approach demanded was the direct opposite to what Ireland was ordered to do by the same ECB an ECB which displays a distinctly bipolar approach.

    Fact is, investors are watching the solvency of banks and countries like hawks. As soon as Ireland starts to run down it’s debt pile, 24bn of pre borrowed money, the solvency of the state is going to be exposed yet again and depositors and bondholders are going to be “bailed in”. Therefore, the timelines of “slow burning capital flight” has already been fixed. The only thing on investors minds is to avoid being “Cyprussed”.

    • Quite right. But let me add an angle. What was the main difference between Ireland and Cyprus which explains why the first was forced to be’bailed’ out whereas the second was ‘bailed in’? In Ireland’s case the senior bondholders where not Irish or Russian but German and French.

    • The main difference was of course that the powers that are had some 3 years to analyse the results of their ‘help’ in Ireland. Plus the shifted feelings of the paymasters (the taxpayers) towards support for the finance industry. But pls. go on with your conspiracy theories, don’t let facts distract you from your quest.

  7. Typical Germany. Bernanke saved the day for the Eurozone and bubbled things up again allowing Germany to take
    advantage of the relative calm in the debt markets to further squash Greece. There would not be any Greek politicians left
    if any such measure is enacted after the previous haircuts.

  8. Professor,I think it would be logical to agree with your interpretation. Cynical but true. It raises a few questions though about your well known position on hard ball negotiations with Germany. Are you really so sure that Mrs. “M” would not “chuck U out against the treaties” or use ECB to force U to leave (through ELA)? Do you think she would accept your rational Modest Proposal rather than side with her bankers and implement their plan B for a smaller Eurozone? And if Germany is ready to implement this plan {which i’m sure they have ready down to the last detail) would it not be wiser for GR to leave on its’ own? With their own terms and conditions? Don’t you think it’s time for you to AT LEAST have a credible plan for exiting the Euro so that Germany can start to take future Greek negotiators (possibly yourself) seriously?

    • >Are you really so sure that Mrs. “M” would not “chuck U out against the treaties” or use ECB to force U to leave (through ELA)? Are you really so sure that Mrs. “M” would not “chuck U out against the treaties” or use ECB to force U to leave (through ELA)?

      No, I am not. But then again, if they could/can chuck Greece out, without disintegrating the current Eurozone, they would/will do so anyway. It is better for Greece to bring things to a head; to push Berlin into deciding what it wants.

      >And if Germany is ready to implement this plan {which i’m sure they have ready down to the last detail) would it not be wiser for GR to leave on its’ own?

      No. Greece must never give Berlin the excuse to argue that Greece wanted out. That way, they will blame Greece for the breakup. No, let Berlin violate the spirit and the letter of the Treaties by unlawfully pushing a member-state out. Especially if Greece’s proposals are rational and pro-European (e.g. the Modest Proposal), Berlin will think twice before behaving like a villain in public. Where I agree with you is that Greece must lose no more time. It must provoke this confrontation ASAP. So that either the Eurozone is fixed speedily or it is disbanded speedily – by Germany’s hand.

      >Don’t you think it’s time for you to AT LEAST have a credible plan for exiting the Euro so that Germany can start to take future Greek negotiators (possibly yourself) seriously?

      Permit me a diplomatic answer: Every responsible government in the Eurozone must have a back-up plan ready for what it will do if it is cut-off from the ECB and the ELA. Greece too!

    • I wholeheartedly agree with our host’s rationale (despite my recent criticisms)!

      The struggle of ideas for a sane Europe is very much an ethical fight. Greece (or any PIGS/France/whoever) should not take an “unconditional want-out” stance, it is not practical and it is not moral. Greece’s stance should be a conditional “want-out”, premised on (a) the villainy of the current scheme of orchestrated deflation for the EZ and (b) preference for the hard choice of an uncertain future under democracy and social fairness, over a certain future of economic stagnation and social dislocation.

      But, dear Yannis, a “diplomatic answer” (your term) is best left to the diplomats. Societies choose to fight for “freedom or death” only when “freedom” has a glimmer of hope. It is imperative that the Greek (or any) society be convinced that fighting for a better Europe is not a kamikaze mission. People in Greece, Italy, Spain, Cyprus, Portugal … etc have to hear an answer to the question “what if the Powers That Be (German bankers or whoever) say NO” that goes beyond “they won’t”. That answer has to be along the lines of “then, we will go ahead anyways, on our separate ways”.

      This message is not easy for major political parties (in any country) to utter, especially during pre-election times. It is the responsibility of intellectuals to say as much.

    • “Greece must never give Berlin the excuse to argue that Greece wanted out. That way, they will blame Greece for the breakup. No, let Berlin violate the spirit and the letter of the Treaties by unlawfully pushing a member-state out. Especially if Greece’s proposals are rational and pro-European (e.g. the Modest Proposal), Berlin will think twice before behaving like a villain in public. Where I agree with you is that Greece must lose no more time. It must provoke this confrontation ASAP. So that either the Eurozone is fixed speedily or it is disbanded speedily – by Germany’s hand.”

      Prof. Varoufakis Reply above, sets the argument correctly. The modest proposal is unrealistic to assume that it can be accepted, however it serves as a tactic to exit the Eurozone as soon as possible before its disintegration and any uncontrollable social unrest in Greece.

  9. Sure the Bundesbank’s proposal and mr Weidmann’s aims make perfect sense in this context. But what about the IMF report that said the exact same thing, what could be the agenda behind that?

    • Interesting question. Yanis seems -so far- not to be inclined to answer it…

    • The IMF is simply intent never again to put money up for countries like Greece in order to help Europe ‘extend’ a bankruptcy into the future and ‘pretend’ to have averted it. They will agree with anything that takes them out of the spot. Moreover, I know of many IMF folks who would love to see the euro collapse. They would pop open the proverbial champagne bottle if this happened.

    • So it seems that some very powerfull entites are in favor of dismantling the euro one way or another. A 10% or more bail-in capital tax would do it that’s for sure.

    • I am not an IMF guy, but I would open a bottle of champagne as well if this desaster of a common currency got dismantled.

    • Maybe we are reading too much into the Buba’s words. They give a choice, bail in or a government default. I feel the Buba thinks government defaults are preferable to governments sending the populations into poverty through assets seizures and tax increases for debt servicing. Or the Buba could just be playing the bad cop…..

  10. Note that Turkey just recently devalued making them more competitive, whereas that just wiped away whatever questionable progress they have made under the TROIKA. At least the Turks were bilateral with IMF without Germans torturing them and they have still got an independent country that has much better growth than Greece. Smart Turkish leadership compared to the Greek political elite, who are only good at enriching themselves and have driven their country to bankruptcy and failure.

    • The Turkish leaders are also very good at enriching themselves. Corruption runs deep and includes the PM. They are also very good at provocation and bullying, they are the provocation and bullying grand masters/

      Granted they have the currency which Greece has given up, and they have a semi-dictatorship that allows them to easily rule in the name of religion.

    • It truly takes an optimistic disposition to imagine that Greece is, still, more democratic than Turkey. It used to be. Ten or fifteen years ago. No longer.

    • No way, not the last election. That is what they want you to think.

    • The Greek government does not need to physically manipulate the election count. Their propaganda apparatus is excellent.

  11. Makes perfect sense! To the contrary, why are Greeks so obtuse and foolish to stick to a German currency, accept the Germans putting poles up their asses and calling this some kind of emancipation. Where is the national pride and desire to be independent???

    • Would you jump of the cliff if someone tells you it will be better for you in the long term?
      This is a complicated problem and Germany is as much at fault as is Greece.

    • The question why is irrelevant. Greece is not a sovereign country. It has been discussed many times and Greek people are realizing it. The new struggle for independence has started.

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