In recent days world markets have rallied as the scale of ECB funding to Europe’s banks becomes clear. A torrent of euros has gushed into bank vaults all over the Old World: something like $700 billion dollars. The money comes at an attractively low interest rate: one percent. The ECB is providing essential and essentially unlimited liquidity in a moment of crisis. By bailing out the European banking system, the bank is indirectly bailing out the troubled Club Med governments.

There are lots of questions about what comes next, but one thing looks clear: the Germans backed down. They were using the threat of a European meltdown to force the Club Med countries to undergo painful reforms now and sign solemn treaties swearing that they would never, ever do anything fiscally bad. The treaties are unwritten and the reforms are still very partial, but the Germans have let the ECB turn the money spigots back on.

The Merkel government isn’t talking much about this, but it looks very much as if the Germans have bailed out the south with one of the greatest monetary expansions in history — while swearing that they would never do any such thing.  Via Meadia advice: follow the German discussion over the mass bailout carefully over the next week or two.  Have those industriously Teutonic ants decided to feed those lazy Latin grasshoppers once again?  Do Frau Merkel’s colleagues in the Bundestag understand what just happened, and if not, what will they say when the penny finally drops?

(Dr. Benny Peiser)