Draghi does the dirty job while Germany attacks

There is concern about Italy, with two quarters in a row of negative growth. Spain is not that bad, whereas France causes a deep concern.

Nevertheless, French Prime Minister Manuel Valls decided to continue with his ambitious reforms, which are in line with the austerity recipe prescribed by Berlin. The arrival of Emmanuel Macron, the new Minister of Economy, to Mr Hollande’s and Valls’ team has brought a change towards the German position. Both Mr Macron (who is Mr Hollande’s right brain and has designed the controversial economic policy) and Michel Sapin (who is in charge of the Ministry of Finance) are in favour of the orthodox budgetary rigour demanded from Brussels.

Mr Hollande wanted a government that supported his agenda. But at what price? We will see. For now, Manuel Valls is committed to make reforms, without forgetting the reminder for Brussels and Berlin to do their part and invest in growth and employment.

“Because, as former chancellor Helmut Schmidt said in 2011, Germany cannot forget its European responsibility.”

And it doesn’t forget… although it attacks because the financial strategists say that there are no alternatives to the headlong flight undertaken by Mr Draghi and his ECB. From the point of view of the German specialised press, the situation is getting better, but not so much as to explain the fall in the interest rates of the Eurozone’s public debt.

Analyst at Süddeutsche Zeitung Marcus Zydra reminds us the metaphor used by the chief at Citigroup in 2007, shortly before the crash:

“While the music sounds we must stand up and dance. For now we keep on dancing.” The question is… for how long?

The ECB has increased the quantity of the money in circulation by 121% since early 1999, whereas the production of goods only has grown by 19%.

“The inflationary boom might lead to a economic crash by deflation (bust),” responsible for gold trade at Degussa Thorsten Polleti warns.

According to Polleti -who is also professor at the School of Finance & Management in Frankfurt, the ghost of deflation is being consciously stirred so as to legitimise an economic policy of cheap money and credits that have led to misery so far. “If ECB Council continued betting on an increase of the money supply (quantitative easing), a fall of the euro could be expected. A situation similar to that of the Weimar Republic.”

But there are other interpretations.

“Mr Draghi does the dirty work,” commentator at Handelsblatt Jan Mallien says. The option of buying assets and lowering even more the rates next September is risky. “However, a deflationist spiral with plummeting prices, salaries and investments is even riskier.”

Another interpretation is that the ECB does what it can because the policy doesn’t act. “With the promise of doing whatever it takes to save the euro, Mr Draghi filled a political vacuum –nolens volens- when faced with the European crisis,” Ulrich Schäfer points from Süddeutsche Zeitung.

The central bank intervened because the European politicians were unable to act. That’s why Mr Schäfer demands that the European Commission must act as a political counterweight to the ECB and must take charge of the major issues in Europe’s economic policy.

“A policy to encourage growth, which balances the public budgets without constraining growth.”

The German press also paid attention to Mr Draghi’s speech at Jackson Hole banking forum. His reference to the significant drop in the inflation since last August and his intention to “try to increase the Eurozone’s inflation by all means” was taken in Berlin as a warning to the ECB Council to grab the bull by the horns.

According to monetary expert at Commerzbank Michael Schubert, Mr Draghi’s intervention was a “highlight,” in line with the markets’ expectations.

Berlin is really worried about all this. That’s why Germany accepts the suggestion that Europe must invest more, and that is what experts at the German Economic Institute DIW say. They propose a European fund to boost investments, similar to the European Financial Stability Facility (EFSF), but focused on the real economy.

“The Eurozone saves over €300 billion per year –i.e. 2.5% of its GDP, so it has the necessary financial resources so as to mobilise the private investment in the Eurozone,” the DIW explains.

Martin Bessing, head of the Commerzbank, retrieved the idea of the Eurobonds during a meeting in Frankfurt on September. However, Germany’s government spokesman Steffen Seibert immediately declared that “the Eurobonds would not be debated.” Ms Merkel considers that these bonds would make countries such as Germany co-fund the southern countries by means of common bonds.

For Mr Blessing, the ECB policy is leading to a lack of interest of reforming and lowering the debt in the south of Europe. On the contrary, markets would exert pressure on the indebted countries thanks to the Eurobonds proposed by him, and the States would pay a part of their income by VAT.

Be that as it may, Germany is paying close attention to what goes on in the public debt market of the Eurozone. According to Markus Zydra, it is not good that investors are willing to provide money at so low prices for peripheral countries in financial difficulties –such as Italy, Spain, Greece, Ireland, Portugal and Cyprus. “It doesn’t make any sense, especially if we take into account that the economy is slowing down in the Eurozone and that inflation may result in deflation.” But Europe has Draghi. And Draghi has no alternative.