The ECB and German Resistance

The numbers I provided in yesterday's blog are interesting for many reasons. One of the most striking facts concerns the changes in interest charges that have followed the ECB's injection of over €1 trillion for the banks in december 2011 and february 2012.  One argument for injecting these massive quantities of freshly printed ECB money was that it would allow banks to lend much needed money to eurozone governments.

However, the figures show that flooding the markets with cheap ECB money has been a disaster. The last column of the table compares the amount of interest paid on government debt in 2011, and the amount that will need to be paid per year in the future, based on the current rates imposed by the markets. As you can see, the 17 eurozone countries will be paying 30% more than they did before.  But some countries are being totally crippled. Greece will be paying 440% more,  Portugal 263% more, Ireland 122% more.
One country has done really well. That country is Germany. In 2011, Germany paid €67.7 billion in interest charges on its €2.1 trillion debt. But, following the ECB's decision to flood the financial sector with super cheap Euros at a rate of 1%, Germany's borrowing costs have dropped to 1.83% and as a consequence, they will only need to pay around €38 billion in interest - a saving of 43%. Only one country does even better than Germany. That country is the UK, which currently can borrow at only 1.54%.

Obviously, the current arrangement of only allowing the ECB to lend to banks and not to governments is fine for Germany. Under such conditions, it is no surprise that they have no incentive to force Mario Draghi to change his strategy.

Frankly, I find the German position quite indefensible. They complain that there should be no direct help from the ECB for countries that are being crippled by the markets. And yet Germany is the country that is the most in debt. They have overspent the 60% limit too. Indeed, their government debt is now 83% of GDP. There is nothing to be proud of there.

The fact that the markets give Germany and the UK such favorable rates could be seen as a way of rewarding them for blocking any possibility of allowing Central Banks to lend directly to governments. It's a very cynical way of seeing things, but it's not impossible.

I hope that François Hollande and the other European leaders will be able to stand up against Germany's refusal to allow the ECB to play the role that it must play if Europe is to have a future.