17 Nov 2011

Europe’s central bankers spurn Cameron’s debt advice

When David Cameron travels to Berlin to meet Chancellor Merkel, top of the agenda will be coaxing the European Central Bank in Frankfurt to act as last resort lender to the Eurozone’s troubled nations.

Today those nations include Spain, which was forced to borrow money in the markets at a fraction under 7%. That is, it actually paid 7% today, despite the likely arrival in government on Sunday of a conservative government with a thumping majority. Tough times which reflect concern that Frankfurt is falling short.

The Prime minister, a self-described “monetary activist” will no doubt be advising Frau Merkel of just how sensible it is to have a central bank that buys government debt by the bucket load. The policy would lower the unsustainable government borrowing rates of Italy and Spain at a stroke. For Washington and London it is the silver bullet, the bazooka, the easy answer to killing off this euro crisis.

But he will not just be fighting the tide of 20th Century German history which sees printing money as a dangerous precursor to hyperinflation, social collapse and political disaster.

In Germany they still cling to the idea that the ECB is totally independent of government interference, let alone that from a euro-outsider like the UK. There is an increasingly vocal backlash at the top of the European monetary system at unwanted monetary policy advice, particularly from Britain.

I was present at a recent talk by the Governor of the Banque de France, Christian Noyer, who sits on the Governing council of the European Central Bank. “We are paying the price for our virtue and our refusal to liquefy our debt through massive monetisation of our fiscal deficits,” said Governor Noyer in a clear reference to Britain, and to a lesser extent the US.

Elsewhere in his talk Noyer singled out the Bank of England’s £275 billion purchase of UK government bonds which have contributed to the UK’s record low funding costs. He compared Britain’s record unfavourably with that of the ECB. “Those purchases amount to 51% of the total debt issued since 2009 in the UK, 21% in the US and 7.6% in the euro area,” he said. A version of the same speech was given in Tokyo last month, and can be read in English here.

The Bank of England denies that it has engaged in a “massive monetisation” of Britain’s debt pile, specifically because it has promised to resell this debt back into the market at some point in the future. Many in the markets share Governor Noyer’s doubts that this will actually ever happen.

When I recently mentioned to Mr Noyer that it was great to interview a central bank Governor, because in the UK we only seem to get an interview when they are printing money, he burst out laughing with a rather knowing look. My joke was not that funny.

Other senior European Monetary officials speaking privately, struggle to hide their irritation at Britain.

They point to the fact that the balance sheets of both the Bank of England and the Federal Reserve have more than doubled during the crisis. They point to the fact that ECB’s purchase of sovereign debt amount to 1.6% of eurozone GDP. For Britain it is 16%. An amazing statistic.

Markus Kerber, the German economist who has led the constitutional charge against the ECB’s existing Italian and Spanish bond purchases, puts it clearly.

“German sovereignty is not compatible with any piece of advice by the US president or the British PM, who have already printed a lot of money. They should know that Germany will resist this piece of advice, [because] mega-inflation is the nightmare consequence, the unavoidable consequence of printing money,” he said.

British inflation is by far the highest of the major European economies, and the Bank of England acknowledges that its quantitative easing policy has contributed.

I put some of these points to Sir Mervyn King yesterday. He backed up both the ECB and the Bundesbank. He rightly suggested that trying to transfer German taxpayers money to the PIIGS through the backdoor of the ECB was just a means of avoiding a political question. “The euro area has the resources to deal [with the crisis] itself… it is why the ECB thinks it is not the job of a Central Bank to do the job of government”.
So perhaps, after Mr Cameron namechecked the ECB repeatedly last week, Number 10 will be reined in by Threadneedle Street.

For now, Europe has begun to notice Britain’s monetary record. But as an example to avoid, rather than to follow.