Beware the Bundesbank

April 26, 2013

German newspaper Handelsblatt has got hold of a confidential Bundesbank report to Germany’s constitutional court, which sharply criticized the European Central Bank’s bond-buying plan. This could be very big or it could be nothing.

Bundesbank chief Jens Weidmann has made no secret of his opposition to the as yet unused programme and since the mere threat of massive ECB intervention has driven euro zone bond yields lower for months there is no urgency to put it into action. But the OMT, as it is known, is by far the single biggest reason that markets have become calmer about the euro zone, so anything that threatens it could be of huge importance.

The key point is not the Bundesbank’s stance but how the Constitutional Court responds. It is due to consider OMT in June. Through the three-year debt crisis, when Berlin has reluctantly crossed red lines it has had to get the court’s approval. So far, it has always been forthcoming, though sometimes with strings attached. But if it took the Bundesbank’s assertion that bond-buying could “compromise the independence of the central bank” at face value, it is almost certain to have a long hard look. We already know that the court is a potential stumbling block to banking union as it has ruled that any future euro mechanisms would only be in order if Germany’s maximum liability was clearly defined.

Angela Merkel is speaking again having surprised many yesterday by wading into monetary policy, saying if the ECB were setting interest rates for Germany alone, it would have to hike. Key ECB policymaker Joerg Asmussen is also appearing in public.

Spain will unveil a new slate of reforms today. The government is trying to get growth going while continuing to toe the austerity line so the likelihood is that none of this will be a game changer. Changes to the pension system, including a speeding up of an increase in the retirement age, are expected. So are a review of jobless benefits, measures to tackle a growing energy tariff deficit and Prime Minister Mariano Rajoy will have to renege on a previous promise by making permanent tax increases from the last two years which were labeled temporary.

Perhaps of most interest to the markets will be revised GDP and deficit forecasts which will doubtless show a deeper recession and the higher deficit that that entails. Figures out yesterday showed Spanish unemployment rose above six million for the first time.

It’s all more grist to the austerity versus growth row. Germany’s Wolfgang Schaeuble poured scorn on European Commission President Jose Manuel Barroso’s assessment that debt-cutting had reached the limits of public support. No change there. Reuters has an interview later with his French counterpart, Pierre Moscovici, who will doubtless have a different view. French unemployment also hit a record high yesterday.

Italy will sell 8 billion euros of six-month bills. Yields could fall to historic lows although the political clouds have not yet cleared. Prime minister-designate Enrico Letta said late yesterday that talks to form a government had made a positive start but that that significant differences with Silvio Berlusconi would take time to sort out. Letta has already said austerity’s time has come and gone.

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