As the markets are settling into the holiday mood of eggnog and the decorating of Tannenbaums, Germany’s EU partners were castigating Berlin for its continued emphasis on fiscal austerity. The ECB’s chief-economist and executive board member Peter Praet was maintaining that ECB policy would be accommodative for a very long time. This was a shot fired at Bundesbank President Jens Weidmann. Make no mistake about it, Mr. Praet was speaking on behalf of President Draghi who didn’t enjoy being “bested” by Weidmann at the December 3 meeting. The German “block” had raised its concern about more QE and prevented Draghi from delivering what he had previously promised.
In an interview with the Financial Times, Italian Prime Minister Matteo Renzi openly criticized the German establishment for pressing fiscal austerity on so many states within the EU. Renzi maintains that it is the rules on austerity that is causing so much election uncertainty throughout Europe. (Most recently, of course, is the rise of the National Front in France and Podemos in Spain.) In the FT article Renzi claims that Italy has earned the right to attack Germany and the EU because Italy has played by the rules laid out by Brussels. “Whether Mr. Renzi ‘s call for new EU economic policies–and an end to German hegemony–will be heeded remains to be seen.”
The combination of Praet’s efforts to undermine Bundesbank President Weidmann and Italian PM Renzi’s very public criticism of the German establishment provides an early look to the great divisions within Europe. The pushback from the German citizens to Chancellor Merkel’s policy on refugees is providing an opening for alternative political voices within the German Republic. The ECB of financially repressing the Bavarian Burghers will provide additional angst for anti-Merkel political action. In 2016, the entire EU project is going to be tested as is the ECB and Draghi. Those who see calm and stability also believe in Santa Claus.
***Also, the IMF is back in the news. Greek Prime Minister Alexis Tsipras has called for the IMF to stay OUT OF THE THIRD GREEK BAILOUT. The Greeks think it is easier to deal with the EU COMMISSION rather than with the intransigence of IMF negotiators. The Germans want the IMF to remain involved so they can carry the burden of being the BAD COP. IMF officials are demanding more pension cuts, which Tsipras is loath to undertake for domestic political reasons. As the FT article says, “Mr. Tsipras’s assertion is likely to anger the German government, which has always insisted that the IMF stay on board. Berlin values the fund’s technical expertise as much as it doubts the European Commission’s resolve.”
The other news involving the IMF, the U.S. Congress finally approved the changes to the voting restructure of the IMF by giving rising emerging market powers a larger quota and say in the IMF’s affairs. Money was also allocated to provide the IMF with more financial firepower. The changing of the weighted vote is a positive but the greater funding is a HUGE MISTAKE. The IMF has enough financial strength if it would find a way to utilize its GOLD HOARD. If the IMF would leverage its GOLD into a type of bond derivative the FUND would vastly increase its financial might. It’s amazing that a Keynesian institution clings to its GOLD like Charlton Heston to his rifle. Christine Lagarde, monetize the gold by changing the IMF rules. In the age of derivatives it is amazing that the IMF and others are back to 1944.