After taking a short breather in late January-early February, the markets now seem to be back in “happy mode.” Whether the news on the economic recovery is good or bad doesn\u2019t really matter. The current convention is that growth acceleration is under way.<\/p>\n
That emerging markets had become key drivers of global growth was yesterday\u2019s story, today they don\u2019t seem to matter anymore. Developed economies are back, so we are told. The U.S. is roaring ahead, the euro crisis is over. And, by the way, central banks have no intention to really stop the party any time soon \u2013 as inflation is so conveniently low. In fact, inflation is nonexistent since labor markets are not exactly red hot and wages essentially flat. So lucky for us, or at least some of us, that at least the markets want to go up no matter what.<\/p>\n
Curiously, not even the long-awaited ruling by Germany\u2019s constitutional court on the ECB\u2019s \u201coutright monetary transactions\u201d (OMTs) or, rather, on Germany and the euro, could rock the boat. The court expressed doubts about the legality of the ECB\u2019s supposedly all-powerful weapon meant to bolster the earlier “whatever it takes” promise, the mere airing of which had ended the euro crisis and kick-started the brisk recovery now firmly under way. “So what?”, Mr. Market shrugged his shoulders.<\/p>\n
The Financial Times<\/em>\u2019 Ralph Atkins reports of a banker who was even making fun of those “crimson-roped weirdos in Karlsruhe.” For apparently Karlsruhe does not matter anymore to the fate of the euro, only Frankfurt does, especially now that they have sent the case off to the European Court of Justice. The ECB is seemingly safe now to deploy its miraculous weaponry, or do anything it likes, it might even seem. Wondering whether the markets may be either deluded or wise and prescient in ignoring the ruling, Mr. Atkins seems to come down with the verdict<\/a> that “Karlsruhe fallout highlights power of ECB.”<\/p>\n But just how powerful is the ECB, really? To begin with, while the markets may surely choose to do so at their peril, the German government and the Bundesbank can hardly ignore the country\u2019s constitutional court; and quite regardless of what the European Court of Justice might have to say. The court\u2019s move has created fresh uncertainty. The extent of backing of the ECB\u2019s supposedly miraculous powers by Germany\u2019s government and central bank was left in doubt. Markets are said to dislike uncertainty. Not this time though, it seems.<\/p>\n But perhaps one might argue that all is not lost for the euro, even as Mr Draghi\u2019s bluff looks ever more shaky, given that, at least in principle, Germany\u2019s “grand coalition” government has the necessary parliamentary majority to amend the country\u2019s constitution and thereby put this whole matter to rest.<\/p>\n Why German Public Opinion Matters<\/strong><\/p>\n But that overlooks the real hurdle in all this: German public opinion. Not only is the constitutional court one of the two holy institutions in Germany, the other being, of course, the Bundesbank. German public opinion is firmly imprisoned by the failure of Germany\u2019s political leadership to explain to the German public that Germany itself has played a key role in causing the unresolved euro crisis. Germans firmly believe that their country is the \u2018Musterknabe<\/em>\u2019 of the euro and that all would be well in the land of the euro if only everyone else became just like Germany \u2013 when nothing could be further from the truth.<\/p>\n Germany\u2019s apparent success under the euro depended on others behaving differently. Forcing everyone to behave just like Germany is making matters worse today. Alas, this is not an appealing insight in a country of citizens sharing the belief that all countries of the world can become more competitive at the same time, with “competitiveness in stability” being the German holy grail; just as having all countries simultaneously run persistent current account surpluses is held possible, according to German math and accounting rules.<\/p>\n Nor has anyone enlightened the German public about the catastrophic consequences for Germany itself in case of euro breakup. As a result, Germans may be easily fooled by the fantasy of a “Gexit without pain” \u2013 which appears to be the promise held out by Germany\u2019s growing anti-euro brotherhood.<\/p>\n For a start, then, try to educate the German public that quantitative easing is not a synonym for hyperinflation and euro bonds not a transfer union in disguise. The sad reality is that decades of Bundesbank indoctrination can hardly be undone by the stroke of a pen. As plenty of market excitement appears to be in the air already about the ECB\u2019s allegedly coming \u201cquantitative easing.\u201d Whatever the ECB might wish to deploy, which may or may not be much, it will be a balancing act and formidable public relations challenge on the central bank\u2019s German \u201chome\u201d ground. Perhaps Mrs. Merkel might wish to blink, again, and rather dance with Mr. Draghi if outright transfers were the only other option. But if the German public finds the “Gexit without pain” option look seemingly prettier, the euro emperors might end up dancing naked in the end. And would that be such a pretty sight for the markets to get high on?<\/p>\n The fact that the markets are deluded about the ECB\u2019s powers is no more reassuring than the fact that Germany\u2019s political elite remains stuck in a state of denial and delusion. But, then, at least the markets have a magnificent track record in anticipating crises.<\/p>\n