To the euro system central bankers are what cardinals are for the Vatican: indispensible for the system. They talk in mysterious and coded language. Reports of the Governing Council of the European Central Bank (ECB) are not published, unlike reports of the American Fed and the Bank of Japan. To grasp the policies and motives of the ECB one has to resort to the skills of Vatican Watchers or retired Kremlinologists. Conflicts between cardinals are fought with venom and intrigue, as between central bankers.
There is a cold war raging between the German central bank, the Bundesbank, and the ECB. The core of the conflict is the euro crisis in which, according to the Bundesbank, the ECB is operating outside its legal mandate: price stability. Instead, the ECB gets increasingly involved in operations to save the euro. On July 26, Mario Draghi, President of the ECB, said in London that he will do 'whatever it takes' to save the euro. At the Bundesbank in Frankfurt all alarm bells went off. Jens Weidmann, President of the German central bank, gave a shot across the bow on the website of his bank: 'We are not just one of the 17 central banks. We are the biggest and most important.'
Whatever it takes requires, according to Draghi, massive ECB intervention on the state bond market. In the past the ECB purchased state bonds on the primary market, directly from countries like Greece, Italy and Spain to keep their borrowing costs down. That policy met the wrath of the Bundesbank. This time around, under fierce German pressure, Draghi had to backtrack. On August 2, following the Governing Council of the ECB, Draghi announced that the ECB will intervene on the secondary market of state bonds, only after a member state in trouble has invoked the support of one of the EU rescue funds: the European Financial Stability Mechanism (EFSF) or the European Stability Mechanism (ESM).