Obama, at any rate, felt that they would have little value. Instead, he confronted the Germans in Cannes with a suggestion so radical that it alarmed both Merkel and Schäuble. To save the common currency, Obama proposed that the Europeans follow the example of the American Federal Reserve, which buys up almost unlimited amounts of US treasury bonds when necessary.
The Germans pointed out feebly that the ECB operates within a completely different tradition than the Fed, and that it also pursues a different mission. But it is becoming increasingly clear to Merkel and her finance minister that, in the end, only the ECB will be able to save the euro if the crisis continues to escalate. It is the only European fiscal policy institution capable of taking action, and it also comes equipped with unlimited firepower. It can never run out of money, because it can simply print new money when needed.
This is an approach Germany’s representatives in the ECB council have strongly resisted….But how long can the Germans resist the pressure from other members?
In doing so the Germans would revisit the Great Inflation following WWI. The idea of DM in wheelbarrows rightfully terrifies them. And Obama wants to ask the Germans to repeat history. Just as he wants us to do.
How long can they resist? Almost indefinitely. I have a dear friend in the Netherlands who for many years ran the world operations of a leading Dutch electronics company. He says that the Netherlands central bank have printed and stored enough Guilder to re-introduce that currency with less than a week’s notice. He doesn’t know about coins.
If the Dutch — one of the original “strong horses” of the Euro — have made preparations to re-introduce their domestic currency, you can pretty well guarantee the Germans, too, have done. Like most bankruptcies, things proceed slowly … and then all at once.
I you wish to short the Euro in the markets, probably the best ETF with which to do that trades under the ticker ‘EUO’.
Does anyone find it ironic that Geitner and Obama are giving Merkle financial advise; or I am I missing something?
David,
The irony is indeed delicious. Germans have a positive phobia of inflation. Twice in the last century they have seen their currency and therefor their life savings rendered worthless. There are quite a few people still alive who remember the post World War II era. I think Hell will freeze over before Germany signs off on any kind of really massive QE.
We on the other hand have no living memory of the effects of a catastrophic monetary crisis. When memory fades things get dangerous.