An extremely important interview with ECB board member Joerg Asmussen was carried in the Frankfurter Rundschau recently. Below is a translation with key bits highlighted. Afterward I will interpret his remarks in light of ongoing speculation about ECB policy. The most important part is his explanation of redenomination risk premia and what the ECB is prepared to do to eliminate them.
ECB Director Joerg Asmussen campaigns for Greece’s remaining in the euro zone and defends bond purchases by the ECB against criticism from Bundesbank President Weidmann. A Greek exit from the currency union would be manageable, but expensive.
The fear of a euro breakup is growing. Later this week, German Chancellor Angela Merkel (CDU) confers with the French President and the Greek government head about the consequences. ECB Director Asmussen warns against underestimating the costs, Greece should have to bow out.
Mr. Asmussen, Finnish Foreign Minister has spoken clearly: the euro will break apart. Is he right?
Apparently, he has since corrected his statements. If he said it this way, he would not be right. The euro will remain a stable currency.
But the danger that Greece exits is growing.
First, my preference is clear. Greece should remain in the currency union. Second, Greece is the only one that can assure that this happens. Third, an exit by Greece would be manageable. But fourth, a withdrawal would not be as orderly as some imagine. It would be accompanied by lower growth and higher unemployment and would be very expensive – in Greece, in Europe and in Germany.
German politicians are demanding Europe make an example out of Greece. Southern Europeans should no longer be able to do well at the expense of others. How helpful are those demands?
I’m always amazed how easily some can speculate about an exit and about the disdain with which they can speak about fellow inhabitants of our common European home. This playing to national stereotypes on all sides, in Germany about Greece and vice versa, does not do justice to a complex situation.
If a withdrawal of Greece is manageable, this means that Spain and Italy are protected against contagion?
The risk of contagion is still there, even if we are better prepared than today than before with the EFSF and hopefully soon the ESM. However, one should not pretend that we know with certainty what will happens after a country leaves: Is it the first domino to fall? Or has a burden been lifted?
On 12 September the Constitutional Court decides on German law and the European bailout fund ESM. What would a No from Karlsruhe mean for the euro?
Then the ESM could not enter into force in its present form.
The federal government has warned of a massive setback for the euro rescue.
In fact, it would be good if the ESM could be in place as soon as possible. The ESM isa better tool to tackle the crisis than the EFSF.
Can you explain to the citizens of Germany, why they should be liable for deficit countries?
It is loans and guarantees that have been granted. Up to now, the rescues have not cost German taxpayers one euro, but of course there are risks. Germany is the biggest beneficiary of monetary union and the single market. Millions of jobs depend on exports to Europe. If our neighbor are in a bad way, it affects even Germany in the long run.
Why is the monetary union so unstable?
The monetary union has design flaws that must now be corrected. When the euro was introduced, it was said: Now we have new notes and coins. The bills look a bit more colorful. But otherwise not much has changed. One should have explained then that we had in fact become a member of a political union with the start of EMU. We now need to go back and do this over to complete the monetary union. The missing four building blocks are called: Financial Union, fiscal union, genuine economic union and a legitimate political union.
Would a joint liability for debts figure in at the end of this?
The four components are interdependent. A fiscal union is not possible without democratic control, accountability and control belong together. Euro Bonds are therefore only a logical element in a full fiscal union. They are not a crisis management tool. Nobody puts a credit card in someone else’s hands, without controlling his spending.
Since ECB President Mario Draghi’s inflammatory speech, the financial markets have regained confidence. How can the ECB keep its promise to do everything to make the euro survive?
The President has said that the ECB will do everything within its mandate to ensure the survival of the euro.
What did he mean?
The financial markets are still demanding high risk premiums on government bonds of some countries. These premiums reflect amongst other things concerns about the irreversibility of the euro, i.e. a redenomination risk, which in a monetary union should not theoretically exist. The result is that our monetary policy is only incompletely transmitted to some euro area economies. The measures we take try to repair this defect in the monetary policy transmission mechanism, as its called in central bank speak.
I am going to end the translation there for now. I may come back and do the rest but it is very time-consuming. The bottom line here is this: Joerg Asmussen, despite being a member of the SPD, is fully supported by Angela Merkel as the Reuters article I highlighted in yesterday’s links states. He is singing from the same hymn book that Mario Draghi is singing from. And Angela Merkel supports this.
What will they do then? Clearly what Asmussen is saying is that risk premie in the euro zone incorrectly reflect redenomination risk and this is hampering the ECB’s ability to make monetary policy effective. As such, the ECB will target those countries in which redenomination risk has made monetary policy transmission mechanisms “incomplete” with special emergency measures. Asmussen does not say what those measures are but he clearly states that the ECB will take special measures in specific countries.
My read of the situation is that the ECB will attempt to disaggregate risk premia in euro land by supporting countries willing to accede to Troika budgetary control. In this way, markets and the ECB both will know how much of the risk premium in these countries was do to default risk associated with poor fiscal conditions and how much was due to redenomination risk.
I see this as an extremely important interview and statement because it makes quite plain what the ECB intends to do and why. The ECB is about to explicitly backstop euro area debt – probably only at the short end. And they will use “incomplete” monetary transmission due to redenomination risk as the reason why. This, they will argue falls within the ECB mandate fully and completely.
Get ready because that’s what is coming.
Source: Frankfurter Rundschau (hat tip FT Alphaville)
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