George Soros and the Bundesbank’s Patriotic Putsch
By Ambrose Evans-Pritchard Economics Last updated: April 19th, 2012
George Soros is taking on the Bundesbank
George Soros has launched all-out war against the Bundesbank.
In his latest Le Monde interview he said that if he were still an active investor, he would now "bet against the euro", at least until there is a change in European leadership or policy.
The euro threatens to destroy the European Union and, with the best of intentions, the leaders are leading Europe to its ruin by trying to impose inappropriate rules.
The introduction of the euro has led to divergence instead of bringing about convergence. The most fragile countries of the eurozone have discovered that they are in a Third World situation, as if they were indebted in a foreign currency, with a crucial effect that there is a real risk of default. Trying to make them respect rules that don’t work just makes matters worse. Sadly, the authorities don’t understand this.
Mario Draghi has launched extraordinary measures with his €1 trillion injection of liquidity through three-year loans. But the effect of this operation has been broken by the counter-attack of the Bundesbank.
Watching the growth of the ECB’s balance sheet, the Bundesbank has realised that it risks heavy loses if the euro blows up and is therefore opposed to the (LTRO) policy. Let us hope that this does not become a self-fulfilling prophesy.
It follows a Süddeutsche Zeitung interview last Friday in which he accused "Bundesbank bureaucrats" of standing ready to smash the euro, exceeding their constitutional and political authority.
Mr Soros has some expertise in this field. His cue for launching a speculative attack – with others – on Sterling and the Lira in September 1992 came after Bundesbank chief Helmut Schlesinger told Handelsblatt that the two currencies were overvalued within the ERM peg. There would have to be a realignment.
It was a clear signal that the Bundesbank did not intend to intervene in the markets to defend the ERM pegs – as it later did for France. Mr Soros already had a $1.5bn short position on sterling. He upped the ante massively the next morning. "Go for the jugular," he told his partner Stanley Druckenmiller.
The story is vividly retold in Sebastian Mallaby’s new book More Money Than God: Hedge Funds and the Making of a New Elite.
We can argue over the conduct of the Bundesbank in that episode. Technically, the bank failed to uphold its ERM obligations. But that is hardly the point. It was being asked to support an untenable arrangement.
The British government had locked the pound to the D-mark with a mixture of ineptitude and bad luck just as the economic cycles in the two countries diverged massively – with Germany going into overheating, and the UK facing a property slump after the Lawson boom. (It was not the exchange rate that was wrong: it was the interest rate – crucial distinction). Bundesbank actions were a liberation for Britain. Soros deserves a knighthood for his part. Dr Schlesinger should be given an honorary peerage.
The current situation is more ambiguous, and much more dangerous.
Jens Weidmann, the current Buba chief, gave an ultra-hawkish interview to Reuters on Wednesday that borders on caricature. He seems to suggest that the fast-escalating crisis in Spain and Italy is not his responsibility in any way, that it has nothing to do with the Bundesbank or the European Central Bank.
"We shouldn’t always proclaim the end of the world if a country’s long-term interest rates temporarily go above 6%," he said.
"That is also a spur for policy-makers in the countries concerned to do their homework and to win back (market) confidence through the pursuit of the reform path."
We have been here before. He made such comments last year as the Spanish and Italian bond markets blew up. On that occasion Mario Draghi managed to repair the damage, launching his LTRO blitz to prevent an imminent collapse of the Club Med banking systems – or a "very, very major credit crunch" as he put it – which gained four or five months of peace.
Mr Weidmann says now that ECB’s bond buying scheme has reached its "limits" and that it is not the job of the central bank to "ensure a particular interest rate level for a particular country."
Frankly, I think such ideological eyewash is well past its sell-by date, and so does the policy firmament across the world, from the IMF to the Fed to the Chinese authorities. Empty legalism and academic sophistry hardly address the issue at this late stage of a systemic crisis in which Germany is and always has been a central actor.
(Yes, there is a poker game going on: the tough talk is supposedly aimed at holding Spanish and Italian feet to the fire. But such a strategy presumes that Spain can possibly carry out the sort of fiscal shock therapy ordered by the EU – under the current policy settings – with unemployment already at 23.6pc and bad loans in the banking system at 8.2pc and rising fast)
It is not clear to me what Mr Weidmann is trying to achieve, unless the intention is to bring about a definitive and dramatic crisis as soon as possible.
The Bundesbank is now €616bn underwater on Target2 credits to the rest of the ECB system (basically transfers to Club Med and Irish central banks to offset capital flight). It has jumped €68bn in one month.
If EMU holds together, the credits are just an accounting detail. Any loses would be divided between the family of central banks, so even a Greek exit could be managed.
But if Germany leaves, those claims would be difficult to enforce, or even unenforceable. The German taxpayer would face very large losses. Ergo, the longer this goes on, the longer the Target2 imbalances build up, the harder it is for Germany to extract itself from the euro.
As one German banker told me, Target2 is the ring through Germany’s nose. It ropes the cash cow.
So, if the monetary hardliners at the Bundesbank do indeed wish to force an outcome, they have to act very soon or the door will shut will for ever.
No wonder Mr Soros follows Mr Weidmann’s utterings with close attention.
There are those who suspect that the Bundesbank is engaged in some sort of Putsch/patriotic resistance. I reserve judgment on this, but if so it is a very strange state of affairs.
Who is running Germany? Is the Federal Chancellor in charge of the country’s foreign policy and strategic destiny, answering to the Bundestag?
Or is the Bundesbank answering to what it believes to be a higher master – the German constitution and the Basic Law – invoking the rulings of the Verfassungsgericht against the encroachments of EU treaty law (which ultimately has a lower juridical status – indeed – no juridical status at all since it is merely treaty agreement)?
Who here is the legitimate defender of the German sovereign nation, built on the Grundgesetz?
It is a remarkable spectacle. You can certainly argue that Mr Weidmann is acting as the final defender of the German nation state, that he is in effect upholding
the post-war dispensation that has been the anchor of German freedom and democracy for half a century. He is entirely right to fear that the mechanisms of EMU are subverting Germany’s system of government.
Yet, it is also clear that his attitude threatens to detonate a nuclear bomb. Can Chancellor Merkel let the Bundesbank do this to monetary union? Or is she the one overstepping constitutional bounds, betraying Germany democracy?
Tough call. German readers are better qualified to answer.
I suspect that the realities of the eurozone have reached a point where only two options exist:
1) The folding together of the eurozone states, with a debt pool, shared budgets, joint taxation, and fiscal union.
In other words, the nation states must abolish themselves (leaving only the shell), and Germany must cease to exist in any meaningful form. This was always the inherent logic of EMU. We are coming close to the moment when it must be decided.
2) The system blows apart. From a German point of view, Target2 means if the deed were done "twere better it were done quickly". Perhaps very quickly.
All else is Quatsch and wishful thinking. Whatever the cloak of foggy rhetoric, Mr Weidmann seems to understand that elemental point perfectly. Should we cheer him on, or should we tremble?