10 May 2010

The EU’s big brother lends credibility to its southern cousins

An extraordinary night of torrid negotiations just about squeaked out a Eurozone rescue package from an emergency meeting of finance ministers in the early hours of this morning.

On top of the decision to make around half a trillion euros available in loans and loan guarantees for Europe’s Mediterranean fiscal defences, probably the biggest factor was the Frankfurt based European Central Bank’s decision to buy eurozone government debt.

This is the so called nuclear option I mentioned on last week’s show. It will be an anathema to many in inflation-averse Germany. But what the ECB is doing is importantly different to the quantitative easing or “printing money” pursued aggressively in the UK and America.

The ECB has I understand been in the markets buying up Greek government bonds and this helping reduced the credit card rates of interest paid by that government.

But it has also been “sterilising” or balancing that off by selling German government bonds, leading to a small rise in the interest paid on German government debt.

This is the EU’s big brother, lending its credibility to help its profligate southern cousins fund themselves more cheaply.

Likewise the remarkable deal that went into the early hours. It was a UK compromise that saw the power over 440bn euros of loans and loan guarantees awarded not to the European Commission (which it seems was engaged in something of a power grab) but to a Special Purpose Vehicle which I envisage will be controlled, understandably, by the Germans.

More on the UK position to come.