I say "unexpected" because most people can't figure out why Merkel would target the central bank as the cause of Germany's economic problems. But in fact I wrote about this very thing back in January,
Germany has a general election later on this year. I fully expect that at some point, the issue of Germany's ties with the rest of Europe will become front and centre. The euro cannot survive without Germany's support.
Merkel is going after the ECB as a conduit to the European Union as a whole. She senses the populist anger that is rising against European integration. She sees the imminent collapse of Eastern Europe as an endless source of headaches and does not want to deal with them during an election campaign. Knowing how the German population would react to German funds flowing to the ECB and then off to places like Latvia, Merkel has decided to preemptively avert what could be a political disaster.
From the article:
Unconventional monetary policies being pursued by the world’s main central banks could aggravate rather than ease the economic crisis, Angela Merkel, Germany’s chancellor, suggested on Tuesday.
Her surprisingly strong attack on the US Federal Reserve, the Bank of England and the European Central Bank was remarkable coming from a leader who had so far scrupulously adhered to her country’s tradition of never commenting on monetary policy.
Angela Merkel, the German chancellor, has criticised the world’s main central banks in surprisingly strong terms, suggesting that their unconventional monetary policies could fuel rather than defuse the economic crisis
“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,” she told a conference in Berlin.
“Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds.”
She added: “We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”
Ms Merkel’s decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting on monetary policy out of respect for central bank independence – suggested Berlin is far more concerned about the ECB’s approach than has so far been apparent.
Meanwhile, Berlin is anxious that central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and fears the long-term inflationary potential of hyper-loose monetary policies.
It should be clear that no further bailout money will be flowing from Germany this summer. Anyone want to bet that the French and others will continue along without them? Or will they interpret this as a snub and revert to what Europe has been historically good at: protectionism and infighting?
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