Jens Weidmann’s metamorphosis on quantitative easing?!

There is a fair bit of drama going on between German court and ECB.

The court has questioned Bundesbank’s participation in the ECB’s QE program. This court ruling has opened a can of worms in the already messy EMU. If Bundesbank is made to withdraw from ECB’s QE, it would imply that Bundesbank cannot provide liquidity to the banks and will question the purpose of the union at the first place. Germany is the largest member of the Union and its participation is crucial to its functioning.

Another twist to the story is that Bundesbank officials have mostly dissented against ECB’s QE. However, so far ECB policy has prevailed. Mario Draghi is credited for convincing all the other central bank members that QE is largely for benefit of the members.

Now another twist is in the tale. Ironically, Bundesbank head Jens Weidmann who has dissented against QE has to speak in its support. David Marsh writes in OMFIF:

Jens Weidmann will metamorphose into an improbable defender of government bond purchases when the Bundesbank president addresses a Berlin parliamentary committee on 17 June to help resolve the constitutional wrangle over Europe’s quantitative easing.

Weidmann’s non-public video conversation with the Bundestag’s European Union committee forms part of delicately choreographed plans to meet German constitutional court criticism of failed oversight over European Central Bank bond-buying.

Underlining the surreality of the political and financial wrangle, Weidmann will support a central bank policy he has never advocated to protect the ECB from the depredations of a court it does not recognise.

The process, accompanied by intense diplomatic manoeuvring among the French, Italian and German governments as well as the Bundesbank and ECB, is likely to result in greater German parliamentary scrutiny of future ECB activities.

The Karlsruhe court last month threatened to ban the Bundesbank from participation in the five-year-old public sector purchase programme unless the ECB provides a ‘proportionality assessment’ on costs and benefits of its €2.2tn of bond purchases.

What times. Meanwhile, European Mon Union keeps getting messier.

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