Fact checking Jens Wedmann – deflation and ELA edition
Update: the GDP price level of Greece deteriorated, according to the most recent estimates, with 8% (quarterly data), not 10%. Post adapted.
As the head of the Bundesbank Jens Weidmann has a large responsibility. His acts and remarks influence the lifes of millioins. But he’s not up to this task. He at least does not seem to know what he is talking about. In a recent interview in the German Handelsblatt he makes, as far as I’m concerned, two major mistakes.
1) He states that the weekly increases in ECB ‘ELA-money’ (Emergency Liquidity Assitance’), which keep the Greek banks afloat, are not to be accepted as the freshly printed money is used to ramp up lending to the Greek government, which means that these increases violate the ban on monetary financing of the government by the ECB. Probably, somebody told Weidmann that the net position of the Greek government vis-a-vis the Greek banks is deteriorating. Which is right. But balance sheets have two sides. And looking at both of these shows that this deterioration is not caused by an increase of bank lending to the government (to the contrary – bank loans to the government have diminished a little between December 2014 and March 2015).It is (looking at the liability side of the balance sheets of the banks and according to the statistics of the Bank of Greece) caused by a decrease of government lending to the banks. To pay its bills, the present Greek government uses its non-trivial amount of deposit money at Greek banks, i.e. it diminishes its lending to these banks. At the same time, the present Greek government does have quite some legacy loans from the banks which means that drawing down its deposits that causes its net position to deteriorate. But diminishing lending to the banks is not the same thing as increasing borrowing from the banks. The ELA money is clearly not used to provide loans to the Greek government. Somebody with the responsibilities of mister Weidmann should know this. But he doesn’t. And should the ECB really stop the ELA increases because the Greek government does not fund the Greek banks as much as it once did anymore? Is this why the Greek government has to cut pensions?
2) Weidmann also states that, at the moment, deflation is not a risk in the Euro Area. Ahem. The price level in Greece has already deteriorated with about 12%. Which means that deflation alone is already responsible for about 8%-point of the unbearable 180% Greek debt to GDP ratio. If the Greek price level had increased with 10% in the same period, the debt to GDP ratio would have been about 28% lower and might have become bearable. Deflation is not a ‘risk’ – it has already been with us for quite some years. And deflation already threatens the survival of the Euro Area. Somebody with the responsibilities of mister Weidmann should know this. But he doesn’t.