This week has seen two important developments in the evolution of the Euro. Senior European lawyers have given guidance which many see as indicating the ECB does have the power to create new money to buy up government bonds in the zone, despite heavy German opposition. The Swiss franc, which was linked to the Euro in a desperate effort to stop people fleeing the Euro to buy the Swiss franc has given up the struggle and is now being revalued against the weakening European currency. It rose by 13% on its first day of freedom, despite imposing a negative interest rate of 0.75% on deposits, such is the enthusiasm for people to switch out of the Euro.

The lawyers were not as clear as some in the press would have you believe. Whilst deciding that the ECB did need considerable autonomy in the field of monetary policy, and implying this could stretch to bond buying programmes on a scale to the Bank’s choice, they struggled more with the clear Treaty requirement that the Bank should not simply print money for European governments to spend.

Their convoluted argument accepted that the Treaty does ban lending money directly to governments in the zone. They then said two conditions had to be met to allow something like it. The first is the ECB cannot be involved in conditions and negotiations over new borrowings. The second is that the Bank cannot buy new bonds issued by a government to cover new spending, but can buy bonds already issued from someone else. This is a nice distinction which can easily break down in practice. If Government A is selling new bonds of ten years duration, and the Bank is buying old bonds also of ten years duration at the same time, there could easily be a simply swap by an intermediary from the older bond to the new one, so the Bank is very close to simply creating money to finance Government A’s expenditure. The lawyers said there had to be some timing differences and there had to be clear price formation on the new bonds before the Bank bought them up, but this still leaves some doubt on the wider issue.

However qualified the judgement may be, the spin is clear. The mood is shifting away from Germany towards allowing quantitative easing, which is an indirect way of printing money to pay for excess public spending over tax revenue by making it much cheaper and easier for government to borrow to spend more.

The loss of Switzerland from the wider area is no surprise. It is good that Switzerland still has the freedom to run its own currency, though unfortunate that it is so attractive to investors that it suffers from runs into it from the Euro with the danger that it drives up the value of the Swiss unit too much. The Swiss can’t win, either by staying within the wider Euro ambit or by leaving, but just as with the ERM the pressures within a managed European system become too great to handle.

A much bigger game is afoot. Germany may be being drawn into a lower value Euro kept going by money printing. Whilst single country currency areas have managed this process, within the Euro area it implies dragging Germany more into the role of paymaster, standing behind more of the debts of the zone. It is not what Germany had in mind. Meanwhile the delay in loosening money and the refusal to break up the zone and have economic policies which work better is dragging Euroland back into low growth and recession, and is generating mass unemployment.