One of the first ever pieces of non academic work which I wrote was, shortly after leaving the central bank of Ireland in 1992, to suggest that we should consider ditching the then Irish punt and adopting the then Deutsche Mark. The arguments revolved around a (in retrospect astonishing naive) view that doing so would bind our political system to behave.
At the time, and for a long time thereafter, I was a great admirer of the Deutsche Bundesbank. Throughout decades they kept the flame of a stable German currency burning, soothing the population with folk memories of the hyperinflation et seq of the 1930s. Alas, it’s no longer possible to admire the Bundesbank, at least for me. one of the things we know from behavioural economics is that success rather than breeding success can breed overconfidence. Recent events and speeches from the BuBa make me wonder if their thought processes have ossified to the extent that what was then a sensible economic policy, strong stable money, has now ossified into theological rigidity.
The most recent bundesboobery comes from board member Andreas Dombret. Reported on Bloomberg he states “Putting too much weight on short-term, demand-side risks misjudges the root cause of the current crisis, namely a profound loss of confidence in markets,” and goes on to caution about the desire to loosen monetary policy and slack off austerity.
This is almost 100%wrong, and that such frank nonsense can be spouted from a senior policy maker makes one shudder. There are massive issues in the euro, and they are problems of imbalances. Peripheral counties are not regions of Germany, but independent democratic states. Faced with depression era indicators of unemployment, and in some cases economic collapse states are being urged to cut their way out of a debt hole. The market confidence or lack of same in Greece, Spain etc is not the problem. It is the symptom of national debt levels that are either unsustainable (Greece), at the brink of sustainability (Ireland) or unsustainable absent some massive growth spurt (Italy, Spain, Portugal). The solutions are bifold: debt reduction and growth stimulation. The firmer can come from write offs and restructuring (markets have a conniption, but get over it), inflation (the BuBa/ECB has a conniption), or growth. This comes from the reduction of state and private debt levels to a level that will allow consumer/business confidence and the diversion of monies from savings/debt repayment to investment and consumption and from structural reform.
To confuse rational market skepticism on the ability or willingness of the core (read, Germany) to allow inflation or write offs, combined with the slooow reforms in many peripheral countries coupled with broken banking systems (caused by core, read german, desires to see no bank fail) is to demonstrate myopia. To smugly suggest Spain with 24% unemployment or Ireland, drowning in zombie bank debt,mor the shattered remnants of the Greek economy must carry all the burden of adjustment is frankly nuts.

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