Brinkmanship, reform pressure and the endgame

by Marco Annunziata

Vox
November 25, 2011

Germany’s central bank had to buy its government’s bond this week after a failed bond auction. This shows that i) the economic devastation from a meltdown would engulf every EZ member and ii) avoiding a meltdown will require central bank action. This column argues that German politicians and the ECB are engaging in brinkmanship to force reforms. Eventually, however, they will relent and embrace a solution involving ECB bond purchases, Eurobonds, Eurozone rule changes, and stronger reforms at the national level.

A sovereign bond auction failed in a Eurozone country, and the central bank took 40% of the offered bonds on its books (€2.4 billion). That country was Germany. The instinctive temptation is to shout ‘gotcha!’

• Aren’t these the guys who oppose using the ECB lender of last resort for government bonds?
• And now they rely on the Bundesbank, their own central bank, as a LOLR when it is their government bonds that go unsold?

Tempting as it is, it would be unfair. The Bundesbank buys and sells bonds to manage liquidity and interest rates. This time it ended up buying a lot more than usual, but it is neither committed nor obligated to buying unlimited amounts of government bonds.

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