When European Central Bank president Mario Draghi took office, he stated that he had the utmost respect for the fine traditions of the Bundesbank. As his tenure has progressed, it has become apparent that he might also have a closet penchant for the fine traditions of the Banca d’Italia. Furthermore, he displays well honed eurocrat type skills of using technical arguments to bypass the spirit of an agreement.

There appears to be every willingness to drown the passengers in order to save the ship- Martin Webster

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’’ Draghi’s bold statement was followed up by the announcement of the Outright Monetary Transactions (OMT) programme. This essentially entails buying bonds of countries with artificially (in the ECB’s view) high yields. In order for the ECB to accede to purchasing a country’s bonds, that country must accept certain conditions (as yet undefined, but we can safely surmise they will entail austerity measures).

The OMT rationale is that as the ECB purchases bonds a virtuous circle is formed: breakup risk is reduced, interest rates decline, the debt becomes more sustainable, credit risk is reduced, and interest rates decline further.

The success of the programme is however dependent on debt levels being sustainable – which they will not be if growth is absent. Will the attached conditions be effective in promoting growth or lead to a death spiral? One assumes the conditions will include IMF type medicine of tax rises and/or spending cuts. That medicine is likely to kill off the patient, currently on life support, and lead to the targets not being met and rising yields – a vicious, not virtuous, circle.

Note for example that in July Spain’s bad bank loans climbed again. Nearly 10 per cent of all households and companies are behind on their payments – the highest level since records began in 1962. Unemployment is running at 25 per cent – the highest in the industrialised world. In the face of such pain, is a strategy to retain the euro and force through yet more pain truly the best option? And if it is deemed to be so, how confident can we be that the ECB will be allowed to keep purchasing Spanish bonds even if growth does not (somehow, despite the odds against) materialise and there is no end in sight to the dependency? George Soros has said: “My real concern is that the euro is now endangering the EU.’’ The truth in that statement can manifest itself in more ways than one, yet there appears to be every willingness to drown the passengers in order to save the ship.

At first glance OMT looks suspiciously like funding countries via the back door – which is outside the ECB’s mandate. Draghi argues however that tackling high yields are within the mandate when they reflect convertibility risk – i.e. the risk of a break-up of the eurozone. However, ascribing the premium to convertibility risk is merely a statement of opinion not of fact.

If convertibility risk is the problem, why attach conditions? The ECB is using the breakdown in the transmission of its monetary policy as justification for its actions, yet demanding fiscal conditions on its subjects. There is no notion of actually attempting to quantify the convertibility risk – that would bring an unwelcome spotlight on the remainder premium. Are we to accept at face value that Spain would be solvent were it not for the premium demanded for convertibility risk? Citing convertibility risk is a convenient excuse to justify the ECB’s fire fighting actions, albeit a clever one.

Notably, Bundesbank president Jens Weidmann voted against the ECB OMT decision. ‘’Such a policy is for me close to state financing via the printing press. In democracies, it is parliaments and not central banks that should decide on such a comprehensive pooling of risks.’’ Contrast this stance with that of German Chancellor Angela Merkel, who says it is not up to politicians to determine the ceiling for the ECB’s bond buying programme.

This is an interesting twist on the sacred independence of the Bundesbank, an independence ironically rendered impotent in the context of safeguarding Germany’s interests – by deeming the ECB itself independent of political interference, even as it crosses the rubicon of risk pooling.

However, the Bundesbank is surely not finished off yet and we can expect attitudes to harden as the potential liability increases. Alexander Dobrindt, a senior figure within the German Christian Social Union (Bavarian sister party to Merkel’s CDU), said Draghi risked a legacy as the “currency forger of Europe”. Draghi deserves credit for forming as broad a consensus as he has – but the real challenge was to get the Bundesbank on board. In that he has failed.

The problem the Germans have is that they now appear subject to an unelected body, which is taking decisions which are not necessarily in their interest, and which they are powerless to change. This alarming course of events must have the European imperialists rubbing their hands with glee. Soros has said that Germany must lead or leave the euro. The OMT possibly inadvertently increases the chances of the latter.

This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.

Mr Webster is head of equity research at Curmi and Partners Ltd.