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Germany cracks the euro whip

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Saturday, Sept. 8, 2012, 5:05 p.m.

Mario Draghi, president of the European Central Bank, announced his euro rescue plan on Thursday.

It implied German agreement to a bold, apparently generous and ambitious plan to rescue the euro. The plan appeared to be tough on borrowers. However, it left little doubt that Germany was making huge political demands in return for its perceived generosity. The plan promised massive deflation in Europe and a huge opportunity for the extension of German political control. It appeared to anticipate the agreement of the German Constitutional Court to Germany funding other nations. European Union and United States stock markets rose strongly on Draghi's suggestion of financial salvation. Reassessment of the reality of the ECB's initiative may prove initial gains to have been transitory.

Draghi's plan was to have the ECB, with its Federal Reserve-like ability to create money from thin air, committed to buying limitless amounts of the short-term debt of troubled Eurozone member countries. This assurance of a strong secondary market buyer of last resort would allow Eurozone nations to borrow in international capital markets on terms more favorable than their individual credit would justify.

Further, the European Central Bank did not demand a privileged position in the event of default on Eurozone national bonds. This was designed to engender stronger support from non-government investors worldwide.

The central bank's offer to purchase national bonds in the secondary market circumvented the specific limitations in it's charter, which prohibits the ECB lending directly to Eurozone members.

Draghi's plan likely involved political arm twisting. This time-consuming exercise explains possibly his absence from the Federal Reserves's closely watched annual conference in Jackson Hole, Wyo., last weekend.

Draghi's much leaked and highly anticipated plan provide a much-longed-for boost for stock markets in the EU and U.S. shares of financials such as JPMorgan Chase, with huge loan and derivatives exposure to the Eurozone, rose strongly.

European bond markets echoed this enthusiasm, with the short- and medium-term bonds of Eurozone problem countries benefiting the most. The recovery in European bonds encouraged some investors even to switch into euro currency bonds by selling U.S. Treasuries, which suffered price erosion.

Draghi made clear that the ECB commitment would be strictly conditional. It would be made only following a member nation's formal and potentially politically embarrassing request accompanied by a firm commitment to adopt plans for economic restructuring along Germanic lines.

It is hard to see the ability to incur more debt on easier terms as a cure for excessive debt, particularly in the absence of plans for growth.

The European Union is in recession already and heading fast toward economic depression.

In the absence of growth, strong Germanic plans for restructuring likely will result in more poverty and political upheaval. In the future, this may provide the political justification for desperate politicians to submit more willingly to German political control in return for further rescue funds or debt forgiveness.

Even without an adverse finding by the German Constitutional Court on Sept. 16, any good effects of Draghi's plan may be short lived.

John Browne, a financial analyst and former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media.



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