ECB Director Assmussen Tells the German Government What to Do

by Dirk Ehnts, Econoblog101

In a new twist in 21st century German politics, it is now common that the German government criticizing the European Central Bank (ECB) is a taboo while the ECB is free to criticize the German government. The latest comes from Jorg Asmussen (SPD), who criticizes the coming German Grand Coalition according to the SPIEGEL:

Wer dann mehr Investitionen will, muss die staatlichen Konsumausgaben senken. Die Begrenzung von Gegenwartskonsum zugunsten von Zukunftsinvestitionen ist auch eine Frage der Generationengerechtigkeit.

So, who wants to have more (implied: government) investment must decrease government consumption. The limit of present consumption in favor of future investment is also a question of inter-generational justice. While this looks like a thing a very serious person is supposed to say, in economic terms this is completely wrong.

The German government faces historically low interest rates and can borrow without paying any additional interest if it finances by short-term bills and bonds. The German bund two year yield is 0.09%, according to Bloomberg. So, an additional investment by the German government of a significant €50 billion (about 2%) would cause interest rate payments of €4.5 million (yes, million!) given current interest rates. Why not borrow more?

The answer from Asmussen is that this harms future generations. However, we do not only pass on our debts to the next generation but also our assets. So, for every euro of future interest rate payments there is someone who will receive this payment in the future. Who is holding the sovereign bonds will receive that money. So, it is a distributional problem and not one of intergenerational justice. After all, the Weimar hyperinflation did not lead to our present generation having hyperdebts. So, if future distribution is the only problem that would come with more government spending, we always have the tax code to redistribute.

It seems to be the new normal that central bankers advise democratically elected governments what to do and what not to do. While the independence of central banks seems well established, the independence of governments apparently has been lost with the introduction of the euro.  The financial sector has a veto to the budget proposed by democratically elected governments, and the ECB’s rules on acceptable collateral can determine the fate of an economy (for instance, Cyprus). Let me point out once more what the European Union is supposed to achieve. Here is how the EU charter starts (my highlighting):

The peoples of Europe, in creating an ever closer union among them, are resolved to share a peaceful future based on common values.

Conscious of its spiritual and moral heritage, the Union is founded on the indivisible, universal values of human dignity, freedom, equality and solidarity; it is based on the principles of democracy and the rule of law. It places the individual at the heart of its activities, by establishing the citizenship of the Union and by creating an area of freedom, security and justice.

The current system, even if it was not meant to work that way, is deeply undemocratic. A nation with a parliament in which a majority passes a budget and cannot get the funds it needs seems to me is no longer sovereign. It needs to consult with the financial players (banks, ECB, etc.) before being able to act. This is a disturbing situation.