Dr Weber could hardly have done more to fuel the raging flames of euroscepticism in Germany, where 189 professors have warned of "fatal consequences" if the EU crosses the Rubicon to a `transfer union’ of shared debt liabilities. The three Bundestag blocs in Angela Merkel's coalition have issued a paper virtually ordering her to resist demands for yet more bail-out concessions at this month’s EU summit.
So yes, the ECB has a credibility problem in Germany. Yet to raise rates into an oil shock – as it did July 2008 when the global system was already buckling – is the central banking cousin of Flat Earth belief.
This is not a repeat of 2008, of course, yet something is still deeply wrong. The M3 money supply contracted in January and December. It has been negative since August (from €9.52 trillion to €9.48 trillion), and so has narrow M1. Private credit is growing at just 2pc.
This is the same bank that sat on its hands through the torrid autumn of 2005, keeping real rates negative as M3 growth rose at 8pc (double the ECB’s reference rate of 4.5pc), and as the Irish/Club Med property bubbles spiralled out of control.
Germany needed rates below the Euroland equilibrium at that moment. This is dirty secret that almost everybody in the German policy debate now chooses to forget, or never acknowledged. The ECB discriminated against Club Med. I should have thought Spain could sue the bank for misconduct at the European Court over that breach of its mandate.
Spain is now being whacked again. One-year Euribor rates jumped 14 basis points to 1.92pc within hours after ECB chief Jean-Claude Trichet uttered the code words “strong vigilance”. As the ECB knows, this is the rate used to price most Spanish mortgages.
Homeowners due for rescheduling in March will take the hit immediately. Fresh waves will follow each month, with knock-on effects for banks and Cajas already grappling with record defaults. Fitch Ratings said on Friday that the financial system will need €38bn in fresh capital to right the ship.
The Spanish might justly feel aggrieved, and judging by the comment threads of the Madrid press – "Put Trichet on trial", "Leave the EU immediately", "Create a currency for the South" – a vocal minority of Spaniards are going through their moment of EMU Epiphany.
Spain is doing what is required: slashing its twin deficits; biting the bullet on the Cajas (unlike Germany with the Landesbanken); and boosting exports faster than France or Italy. But Spain's chances of pulling through without a blow-up are contingent on EU authorities not committing another of their serial stupidities.
It was Mrs Merkel's call for creditor haircuts in October that pulled the rug from under the Irish, and set off EMU's Autumn contagion. Now the ECB is tossing its own hand-grenade into the peripheral debt markets, and doing so before there is any grand deal by EU leaders on a viable EU rescue machinery.
A month ago Mr Trichet sought to dampen prospects of a rate rise, insisting that inflation was "contained". Since then there has been a Mid-East revolution, the loss of 1m barrels of day (bpd) of Libyan oil, and a $15 premium on Brent crude to reflect the risk of Saudi revolt? This is dramatic, but not in itself inflationary.
Oil supply shocks depress the rest of the economy. They drain demand, acting as a tax siphoned off to Mid-East rentiers or the Kremlin. Headline inflation rises, but it signals the opposite of what is happening below the water line.
The ECB seems caught in a 1970s time-warp, wedded to the fallacy that the Yom Kippur oil shock caused the Great Inflation. The actual cause was rampant growth of the broad money supply, US spending on the Vietnam War and the Great Society, and a near ubiquitous picture of over-stimulus and over-heating across the West. It was a demand story, not a supply shock. Chalk and cheese.
The West is not over-heating today, except perhaps Germany, and that may not last as China slows. The eurozone grew just 0.3pc in the fourth quarter of 2010. The UK contracted. The US labour participation rate has continued falling over the last year to 64.2pc, the lowest since 1984.
Yes, China, India, and Brazil are overheating, pushing up global crude, metal, and grain prices. China alone is adding 850,000 bpd of oil demand each year, eating deep into global spare capacity. This is indeed a commodity demand story for the BRICs, but it has the characteristics of a supply shock for the West. There is nothing the ECB can usefully do about this, and it is suicidal to try. It is the task of the People's Bank to curb China’s credit bubble.
Trichet invoked the ECB's shibboleth of "second round” inflation effects. This is a sick joke as Spain and Portugal cut public wages by 5pc, Italy imposes a pay-freeze, and Ireland cuts the minimum wage by 11pc.
What he really meant is that settlements in Germany are creeping up. The car workers union IG Metall has secured a pay deal of 3pc to 3.5pc. Higher pay in Germany is exactly what is needed to help narrow the North-South gap in competitiveness without forcing wage deflation on Club Med, and it is exactly what the EMU-lords refuse to countenance. So the whole Euroland system must have a 1930s deflation bias.
It is twelve years since the launch of EMU. There has been no meaningful convergence of the disparate economies since then. The one-size-fits-all monetary policy continues to cause havoc. All that changes with the evolving economic cycle is a rotation in the locus of stress, and a change in its features.
Meanwhile, everything is tilted to meet the German imperative, but not enough to satisfy Germany. Nobody is satisfied.
Membership of monetary union as currently constructed is like walking with a sharp stone in your shoe, forever. You can put up with it, or take the stone out.
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