Monday, 19 January 2015

Germany accepts QE but takes away its bite

Rumours have it that whilst the two German members on the ECB governing council will be voting against QE at next Thursday ECB Council meeting, the rest will vote for it provided the bite of proper QE is removed by insisting that the national central banks will remain responsible for buying their sovereign government debt.  There will be no risk sharing whatsoever.

It would also appear that Chancellor Merkel has given her nod to such QE without bite as it addresses her concern that German taxpayers would become responsible through risk sharing for defaults on sovereign debt by other Euro countries.

In the circumstances a defective QE may be better than no QE but it is a pity that national interest is over-riding the risk of collective deflation.

The moral of the story is that surplus countries are quite willing to share the benefits of the Euro but not the risks.    There is complete asymmetry which is unsustainable.

If benefits and risks are not
symmetrically shared
the roof can fall on
everybody's head
The benefits that surplus countries are getting from their Euro membership were brought to the fore last week when the Swiss National Bank had to abandon their peg to the Euro and had to let their currency float upwards by some 20%.

This implies  that Germany and other surplus countries are enjoying a 20% boost to their competitiveness through the Euro.

There can be no benefits without costs.  If surplus countries keep insisting on enjoying the benefits without sharing the risks, they can bring the roof down on everybody's head.

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