Could Berlin’s embracement of bond-buying by the ECB signal that European policymakers are preparing not for a conflagration but for a controlled burn?
G erman Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have both recently backed ECB President Mario Draghi publicly. This suggests that Berlin is in favor of more ECB action, despite Bundesbank President’s opposition.
Note that German policymakers have also made rigid statements throughout July regarding Greece and a number of hurdles remain for Athens in September. By then, the ECB bond-buying mechanism could be ready and the German Federal Constitutional Court will likely proclaim the ESM constitutional.
Our Geopolitical Strategy service speculates that for Berlin and the IMF, that may be the best time to ‘pull the plug’ on Greece. IF financial contagion can be contained by a coordinated ECB/ESM intervention, a Greek exit also makes sense for Merkel politically: It would convince Merkel’s constituency that their taxes are not being cast into a black hole and convince peripheral countries that missing targets carries severe consequences.
The bottom line is with the ECB suggesting that it is ready to intervene, Europe’s policymakers may feel more confident that they can be aggressive with Greece. Still, a lot can go wrong and we do not advise taking on risk in European markets.