Germany's Sinn Blasts Draghi: "Deflation Is Just A Pretext To Bailout Southern Europe"

Germany could end up in a position where it would be constitutionally bound to leave the euro area, warns the IFO economic institute's Hans-Werner Sinn, which would force "somebody to give in and that would be the ECB." Sinn blasts the looming decision of ECB QE as an excuse to help weaker nations, exclaiming, as Bloomberg reports, "the risk of deflation is just a pretext for quantitative easing, for hammering out a bailout program for southern Europe."

 

As Bloomberg reports, European Central Bank policy makers are using the specter of deflation as an excuse to help the euro area’s weaker nations, said Hans-Werner Sinn, head of Germany’s Ifo economic institute.

The argument by central bankers that the ECB needs to act because inflation is below its goal of just under 2 percent isn’t covered by the treaty governing the currency union, Sinn said in a phone interview. Consumer prices in the euro area posted an annual decline in December for the first time in more than five years, though core inflation rose.

 

 

“The risk of deflation is just a pretext for quantitative easing, for hammering out a bailout program for southern Europe,” Sinn said. The decline in inflation is due to lower crude prices and “there’s no need for ECB action,” he said.

But Draghi's decision could have considerable consequences...

Quantitative easing “would give the ECB the function of lender of last resort toward individual states” in the euro area, said Sinn, who advocates an international conference to write down Greek debt.

 

While Bundesbank head Jens Weidmann, lawmakers in German Chancellor Angela Merkel’s coalition and economists such as Sinn criticize the ECB’s expanding role, Merkel hasn’t opposed Draghi publicly. The chancellor on Jan. 7 backed keeping Greece in the euro area as long as it fulfills its austerity commitments, saying she has “always” sought to keep the euro area from splintering.

 

The ECB’s Outright Monetary Transactions program, a bond-buying plan announced in 2012 after Draghi pledged to do “whatever it takes” to defend the currency, carries further risks for the euro area’s unity, Sinn said.

 

Europe would face “a big constitutional problem” if the European Union’s top tribunal declared the ECB’s plan legal in a non-binding opinion to be published Jan. 14, with a ruling four to six months later, he said.

 

Germany’s Constitutional Court ruled last year that OMT, which has never been used, probably overstepped the ECB’s mandate and asked the European Court of Justice to decide on its legality.

 

Germany could end up in a position where it would be constitutionally bound to leave the euro area, Sinn said. “Somebody would have to give in and that would be the ECB,” he said. “It would have to give up on OMT voluntarily.”

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